Table of Contents

 

 

 

**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**[Mark One]**

 

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

 

**For the quarterly period ended June 30, 2010**

 

**OR**

 

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

 

**For the transition period from                        to                        **

 

**Commission File Number: 000-53195**

 

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

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

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

(Address of Principal Executive Offices) (ZIP Code)

 

 **(866) 655-3600**

(Registrant’s Telephone Number, Including Area Code)

 

**None**

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

 

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

 

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

 

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

 

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

 

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

 

Asof August 4, 2010, the Registrant had 90,765,274 shares of common stockoutstanding.

 

 

 

----

Table of Contents

 

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

**Form 10-Q**

**Quarter Ended June 30, 2010**

 
| **PART 1**                     |
|-------------------------------------|
| **FINANCIAL INFORMATION**           |
|                                |   |   |   |
| ** **                          | ** ** | ** ** | **Page** |
| **Item 1.**                         | ** ** | **Financial Statements  (unaudited)** | ** ** |
|                                |   |   |   |
|                                |   | Consolidated  Balance Sheets as of June 30, 2010 and December 31, 2009 | 3 |
|                                |   |   |   |
|                                |   | Consolidated  Statements of Operations for the three and six months ended June 30,  2010 and 2009 | 4 |
|                                |   |   |   |
|                                |   | Consolidated Statements of  Stockholders’ Equity for the six months ended June 30, 2010 and the year  ended December 31, 2009 | 5 |
|                                |   |   |   |
|                                |   | Consolidated  Statements of Cash Flows for the six months ended June 30, 2010 and 2009 | 6 |
|                                |   |   |   |
|                                |   | Notes to  Consolidated Financial Statements | 7 |
|                                |   |   |   |
| **Item 2.**                         | ** ** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 29 |
|                                |   |   |   |
| **Item 3.**                         | ** ** | **Quantitative  and Qualitative Disclosures About Market Risk** | 57 |
|                                |   |   |   |
| **Item 4.**                         | ** ** | **Controls and  Procedures** | 58 |
|                                |   |   |   |
| **PART II  OTHER INFORMATION** |
|                                |   |   |   |
| **Item 1.**                         | ** ** | **Legal Proceedings** | 59 |
|                                |   |   |   |
| **Item 1A.**                        | ** ** | **Risk Factors** | 59 |
|                                |   |   |   |
| **Item 2.**                         | ** ** | **Unregistered  Sales of Equity Securities and Use of Proceeds** | 59 |
|                                |   |   |   |
| **Item 3.**                         | ** ** | **Defaults  Upon Senior Securities** | 61 |
|                                |   |   |   |
| **Item 4.**                         | ** ** | **(Removed and Reserved)** | 61 |
|                                |   |   |   |
| **Item 5.**                         | ** ** | **Other Information** | 61 |
|                                |   |   |   |
| **Item 6.**                         | ** ** | **Exhibits** | 62 |
|                                |   |   |   |
| **Signature**                       | ** ** |   | 63 |

 

2

----

Table of Contents

 

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

**Consolidated Balance Sheets**

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

**(Unaudited)**

 
| ** **                                                                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| **Assets**                                                                                                                                                                                        |       |              |       |                  |       |
| Real estate:                                                                                                                                                                                      |       |              |       |                  |       |
| Land                                                                                                                                                                                              |       | $                 | 57,600     |                  | $          | 39,100 |   |
| Buildings and improvements                                                                                                                                                                        |       | 277,304           |       | 121,363               |       |
|                                                                                                                                                                                              |       | 334,904           |       | 160,463               |       |
| Less accumulated depreciation                                                                                                                                                                     |       | (5,564            | )          | (1,484                | )          |
| Total real estate, net                                                                                                                                                                            |       | 329,340           |       | 158,979               |       |
|                                                                                                                                                                                              |       |              |       |                  |       |
| Investments in unconsolidated real estate joint  ventures                                                                                                                                         |       | 357,125           |       | 279,859               |       |
| Cash and cash equivalents                                                                                                                                                                         |       | 86,536            |       | 77,540                |       |
| Note and other receivables                                                                                                                                                                        |       | 4,135             |       | 4,025                 |       |
| Deferred financing costs, net                                                                                                                                                                     |       | 3,760             |       | 834                   |       |
| Receivables from affiliates                                                                                                                                                                       |       | 418               |       | 258                   |       |
| Intangibles, net                                                                                                                                                                                  |       | 20,182            |       | 1,205                 |       |
| Other assets, net                                                                                                                                                                                 |       | 6,666             |       | 3,022                 |       |
| **Total assets**                                                                                                                                                                                  |       | $                 | 808,162    |                  | $          | 525,722 |   |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Liabilities and stockholders’  equity**                                                                                                                                                    |       |              |       |                  |       |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Liabilities**                                                                                                                                                                                   |       |              |       |                  |       |
| Mortgage loans payable                                                                                                                                                                            |       | $                 | 93,652     |                  | $          | 51,300 |   |
| Credit facility payable                                                                                                                                                                           |       | 10,000            |       | —                |       |
| Payables to affiliates                                                                                                                                                                            |       | 641               |       | 2,278                 |       |
| Distributions payable                                                                                                                                                                             |       | 4,882             |       | 3,248                 |       |
| Accrued offering costs payable to affiliates                                                                                                                                                      |       | 1,561             |       | 1,411                 |       |
| Deferred lease revenues and other related  liabilities, net                                                                                                                                       |       | 14,509            |       | 15,197                |       |
| Tenant security deposits and prepaid rent                                                                                                                                                         |       | 664               |       | 405                   |       |
| Accounts payable and other liabilities                                                                                                                                                            |       | 9,864             |       | 866                   |       |
| **Total liabilities**                                                                                                                                                                             |       | 135,773           |       | 74,705                |       |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Commitments and contingencies**                                                                                                                                                                 |       |              |       |                  |       |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Stockholders’ equity**                                                                                                                                                                     |       |              |       |                  |       |
| Preferred stock, $.0001 par value per share;  125,000,000 shares authorized, none outstanding                                                                                                     |       | —            |       | —                |       |
| Non-participating, non-voting convertible stock,  $.0001 par value per share; 1,000 shares authorized, 1,000 shares issued and  outstanding                                                       |       | —            |       | —                |       |
| Common stock, $.0001 par value per share;  875,000,000 shares authorized, 86,743,995 and 57,098,265 shares issued and  outstanding at June 30, 2010 and December 31, 2009, respectively |       | 9                 |       | 5                     |       |
| Additional paid-in capital                                                                                                                                                                        |       | 751,059           |       | 486,880               |       |
| Cumulative distributions and net loss                                                                                                                                                             |       | (78,679           | )          | (35,868               | )          |
| **Total stockholders’ equity**                                                                                                                                                               |       | 672,389           |       | 451,017               |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                                              |       | $                 | 808,162    |                  | $          | 525,722 |   |

 

*See Notes to Consolidated Financial Statements.*

 

3

----

Table of Contents

 

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

**Consolidated Statements of Operations**

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

**(Unaudited)**

 
| ** **                                                                             | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                                             | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                                                                             | ** ** | **2010**                       | ** ** | **2009**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Rental revenues**                                                                    |       | $                              | 6,617      |                         | $          | — |   | $ | 11,763 |   | $ | — |   |
|                                                                                   |       |                           |       |                         |       |   |   |   |   |
| **Expenses**                                                                           |       |                           |       |                         |       |   |   |   |   |
| Property operating expenses                                                            |       | 1,821                          |       | —                       |       | 3,217 |   | — |   |
| Real estate taxes                                                                      |       | 731                            |       | —                       |       | 1,319 |   | — |   |
| Asset management and other fees                                                        |       | 1,438                          |       | 283                          |       | 2,716 |   | 545 |   |
| General and administrative expenses                                                    |       | 1,144                          |       | 613                          |       | 2,160 |   | 1,374 |   |
| Acquisition expenses                                                                   |       | 2,755                          |       | —                       |       | 5,531 |   | — |   |
| Interest expense                                                                       |       | 1,429                          |       | —                       |       | 2,071 |   | — |   |
| Depreciation and amortization                                                          |       | 3,759                          |       | 10                           |       | 7,347 |   | 24 |   |
| **Total expenses**                                                                     |       | 13,077                         |       | 906                          |       | 24,361 |   | 1,943 |   |
|                                                                                   |       |                           |       |                         |       |   |   |   |   |
| Interest income                                                                        |       | 415                            |       | 195                          |       | 741 |   | 275 |   |
| Equity in earnings (loss) of investments in  unconsolidated real estate joint ventures |       | (2,757                         | )          | 1,119                        |       | (5,964 | ) | 2,214 |   |
| **Net income (loss)**                                                                  |       | $                              | (8,802     | )                            | $          | 408 |   | $ | (17,821 | ) | $ | 546 |   |
|                                                                                   |       |                           |       |                         |       |   |   |   |   |
| Weighted average number of common shares  outstanding                                  |       | 79,706                         |       | 26,334                       |       | 72,043 |   | 21,880 |   |
|                                                                                   |       |                           |       |                         |       |   |   |   |   |
| Basic and diluted income (loss) per share                                              |       | $                              | (0.11      | )                            | $          | 0.02 |   | $ | (0.25 | ) | $ | 0.02 |   |

 

*See Notes to Consolidated Financial Statements.*

 

4

----

Table of Contents

 

**BehringerHarvard Multifamily REIT I, Inc.**

**ConsolidatedStatements of Stockholders’ Equity**

**(inthousands)**

**(Unaudited)**

 
| ** **                                                    | ** ** | **Convertible Stock** | ** ** | **Common Stock** | ** ** | **Additional**     | ** ** | **Cumulative** | ** ** | **Total**   | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|--------------------|------------|----------------|------------|-------------|------------|
| ** **                                                    | ** ** | **Number**            | ** ** | **Par**               | ** ** | **Number**         | ** ** | **Par**        | ** ** | **Paid-in** | ** ** | **Distributions and** | ** ** | **Stockholders’** | ** ** |
| ** **                                                    | ** ** | **of Shares**    | ** ** | **Value**             | ** ** | **of Shares** | ** ** | **Value**      | ** ** | **Capital** | ** ** | **Net  Loss** | ** ** | **Equity** | ** ** |
| Balance at January 1, 2009                               |       | 1                     |       | $                     | —     |               | 15,348     |           | $          | 1           |       | $ | 117,268 |   | $ | (4,875 | ) | $ | 112,394 |   |
|                                                          |       |                  |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Net loss                                                      |       | —                |       | —                |       | —             |       | —         |       | —      |       | (8,305 | ) | (8,305 | ) |
| Sales of common stock, net                                    |       | —                |       | —                |       | 41,129             |       | 4              |       | 363,332     |       | — |   | 363,336 |   |
| Redemptions of common stock                                   |       | —                |       | —                |       | (304               | )          | —         |       | (2,512      | )          | — |   | (2,512 | ) |
| Distributions declared on common stock                        |       | —                |       | —                |       | —             |       | —         |       | —      |       | (22,688 | ) | (22,688 | ) |
| Stock issued pursuant to Distribution Reinvestment  Plan, net |       | —                |       | —                |       | 925                |       | —         |       | 8,792       |       | — |   | 8,792 |   |
| Balance at December 31, 2009                             |       | 1                     |       | —                |       | 57,098             |       | 5              |       | 486,880     |       | (35,868 | ) | 451,017 |   |
|                                                          |       |                  |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Net loss                                                      |       | —                |       | —                |       | —             |       | —         |       | —      |       | (17,821 | ) | (17,821 | ) |
| Sales of common stock, net                                    |       | —                |       | —                |       | 28,926             |       | 4              |       | 256,848     |       | — |   | 256,852 |   |
| Redemptions of common stock                                   |       | —                |       | —                |       | (558               | )          | —         |       | (4,812      | )          | — |   | (4,812 | ) |
| Distributions declared on common stock                        |       | —                |       | —                |       | —             |       | —         |       | —      |       | (24,990 | ) | (24,990 | ) |
| Stock issued pursuant to Distribution Reinvestment  Plan, net |       | —                |       | —                |       | 1,278              |       | —         |       | 12,143      |       | — |   | 12,143 |   |
| Balance at June 30, 2010                                 |       | 1                     |       | $                     | —     |               | 86,744     |           | $          | 9           |       | $ | 751,059 |   | $ | (78,679 | ) | $ | 672,389 |   |

 

*See Notes to Consolidated Financial Statements.*

 

5

----

Table of Contents

 

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

**Consolidated Statements of Cash Flows**

**(in thousands)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                | ** ** | **June 30,**            | ** ** |
| ** **                                                                                | ** ** | **2010**                     | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities**                                                 |       |                         |       |   |   |
| Net Income (loss)                                                                         |       | $                            | (17,821    | ) | $ | 546 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                         |       |   |   |
| Equity in (earnings) loss of investments in  unconsolidated real estate joint ventures    |       | 5,964                        |       | (2,214 | ) |
| Distributions received from investments in  unconsolidated real estate joint ventures     |       | 3,028                        |       | 2,766 |   |
| Depreciation                                                                              |       | 4,080                        |       | — |   |
| Amortization of intangibles                                                               |       | 2,733                        |       | 24 |   |
| Amortization of deferred financing costs                                                  |       | 535                          |       | — |   |
| Amortization of deferred lease revenues and other  related liabilities                    |       | (688                         | )          | — |   |
| Changes in operating assets and liabilities:                                              |       |                         |       |   |   |
| Accounts payable and other liabilities                                                    |       | 2,375                        |       | 117 |   |
| Other assets                                                                              |       | 236                          |       | 211 |   |
| Accounts receivable                                                                       |       | (402                         | )          | — |   |
| Payables to affiliates                                                                    |       | —                       |       | 338 |   |
| Accrued interest on note receivable                                                       |       | (110                         | )          | (72 | ) |
| **Cash provided by (used in)  operating activities**                                      |       | (70                          | )          | 1,716 |   |
|                                                                                      |       |                         |       |   |   |
| **Cash flows from investing activities**                                                  |       |                         |       |   |   |
| Acquisition of and additions to real estate                                               |       | (168,425                     | )          | — |   |
| Investments in unconsolidated real estate joint  ventures                                 |       | (116,530                     | )          | (10,241 | ) |
| Issuances of note receivable                                                              |       | —                       |       | (2,183 | ) |
| Escrow deposits                                                                           |       | (3,197                       | )          | (750 | ) |
| Return of investments in unconsolidated real  estate joint ventures                       |       | 29,801                       |       | 3,050 |   |
| Other                                                                                     |       | (159                         | )          | 48 |   |
| **Cash used in investing  activities**                                                    |       | (258,510                     | )          | (10,076 | ) |
|                                                                                      |       |                         |       |   |   |
| **Cash flows from financing  activities**                                                 |       |                         |       |   |   |
| Proceeds from sales of common stock                                                       |       | 288,283                      |       | 164,839 |   |
| Proceeds from financings, net:                                                            |       |                         |       |   |   |
| Mortgage proceeds                                                                         |       | 15,820                       |       | — |   |
| Mortgage principal payments                                                               |       | (243                         | )          | — |   |
| Mortgage financing costs                                                                  |       | (370                         | )          | — |   |
| Proceeds from credit facility, net:                                                       |       |                         |       |   |   |
| Credit facility proceeds                                                                  |       | 30,000                       |       | — |   |
| Credit facility payments                                                                  |       | (20,000                      | )          | — |   |
| Credit facility financing costs                                                           |       | (2,486                       | )          | — |   |
| Offering costs paid                                                                       |       | (31,376                      | )          | (24,715 | ) |
| Distributions on common stock paid in cash                                                |       | (11,213                      | )          | (4,396 | ) |
| Redemptions of common stock                                                               |       | (839                         | )          | (1,184 | ) |
| **Cash provided by financing  activities**                                                |       | 267,576                      |       | 134,544 |   |
|                                                                                      |       |                         |       |   |   |
| Net change in cash and cash equivalents                                                   |       | 8,996                        |       | 126,184 |   |
| Cash and cash equivalents at beginning of period                                          |       | 77,540                       |       | 23,771 |   |
| Cash and cash equivalents at end of period                                                |       | $                            | 86,536     |   | $ | 149,955 |   |

 

*See Notes to Consolidated Financial Statements.*

 

6

----

Table of Contents

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

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

 

***Organization***

 

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

 

Weinvest in and operate high quality multifamily communities. These multifamilycommunities include conventional multifamily assets, such as mid-rise, high-rise,and garden style properties, and may also include student housing andage-restricted properties, typically requiring residents to be age 55 orolder.  Our targeted communities includeexisting “core” properties that are already stabilized and producing rentalincome as well as more opportunistic properties in various phases ofdevelopment, redevelopment, lease up or repositioning.  Further, we may invest in other types ofcommercial real estate, real estate-related securities, mortgage, bridge, mezzanineor other loans and Section 1031 tenant-in-common interests, or in entitiesthat make investments similar to the foregoing. We completed our first investment in April 2007 and, as of June 30,2010, we have made wholly owned or equity investments in 28 multifamilycommunities of which 18 are stabilized operating properties and 10 are invarious stages of lease up.  We have madeand intend to continue making investments both in wholly owned investments andthrough co-investment arrangements with other participants (“Co-InvestmentVentures”).

 

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

 

***Offerings of our Common Stock***

 

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

 

OnSeptember 5, 2008, we commenced our initial public offering (the “InitialPublic Offering”) of up to 200 million shares of common stock offered at aprice of $10.00 per share pursuant to a Registration Statement on Form S-11filed under the Securities Act.   TheInitial Public Offering also covered the registration of up to an additional 50million shares of common stock at a price of $9.50 per share pursuant to ourdistribution reinvestment plan (“DRIP”). We reserve the right to reallocate shares of our common stock betweenthe primary offering and our DRIP.  As ofJune 30, 2010, we have sold a total of approximately 73.4 million sharesof common stock and raised a total of approximately $730.8 million in grossoffering proceeds in the Initial Public Offering. Net proceeds, after sellingcommissions, dealer manager fees, and other offering costs were approximately$643.9 million.  On June 29, 2010,our board of directors approved an extension of the Initial Public Offeringuntil no later than September 2, 2011.

 

7

----

Tableof Contents

 

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

 

**2.****            ****InterimUnaudited Financial Information**

 

Theaccompanying consolidated financial statements should be read in conjunctionwith the consolidated financial statements and notes thereto included in ourAnnual Report on Form 10-K for the year ended December 31, 2009 whichwas filed with the Securities and Exchange Commission (“SEC”) on March 31,2010. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) have been condensedor omitted from this report.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Thereare judgments and estimates involved in determining if an entity in which wewill make an investment or have made an investment will be a VIE and if so, ifwe will be the primary beneficiary. The entity will be evaluated to determineif it is a VIE by, among other things, calculating the percentage of equitybeing risked compared to the total equity of the entity. There are someguidelines as to what the minimum equity at risk should be, but the percentagecan vary depending upon the industry or the type of operations of the entityand it will be up to our Advisor to determine that minimum percentage as itrelates to our business and the facts surrounding each of our acquisitions. Inaddition, even if the entity’s equity at risk is a very low percentage, ourAdvisor will be required to evaluate the equity at risk compared to the entity’sexpected future losses to determine if there could still in fact be sufficientequity in the entity. Determining expected future losses involves assumptionsof various possibilities of the results of future operations of the entity,assigning a probability to each possibility using a discount rate to determinethe net present value of those future losses and allocating those losses betweenthe equity owners, subordinated lenders or other variable interests. Thedetermination will also be based on an evaluation of the voting rights ofpartners in relation to their economic participation in benefits or obligationto absorb losses.  As partnershipagreements have various terms which may change over time or based on futureresults, these 

 

8

----

Table ofContents

 

evaluationsrequire complex analysis and weighting of different factors. A change in thejudgments, assumptions, allocations and estimates outlined above could resultin consolidating an entity that should not be consolidated or accounting for aninvestment on the equity method that should in fact be consolidated, theeffects of which could be material to our results of operations and financialcondition.

 

Forother investments, we must evaluate whether we have control of an entity, wherethere are judgments involved in determining if provisions in governingagreements provide protective or participating rights for us, our Co-InvestmentVentures or other equity owners. This evaluation includes an assessment ofmultiple terms as to their economic effect to the operations of the entity, howrelevant the term is to the recurring operations of the entity and the weighingof each item to determine in the aggregate which owner, if any, has control.These assessments would affect whether an entity should be consolidated or reportedon the equity method, the effects of which could be material to our results ofoperations and financial condition.

 

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

 

For real estate properties acquired by us or our Co-Investment Venturesclassified as business combinations, we allocate the purchase price, afteradjusting for settlement of any pre-existing relationships, to the tangibleassets acquired, consisting of land, inclusive of associated rights, andbuildings, any assumed debt, identified intangible assets and liabilities andasset retirement obligations based on their fair values.  Identified intangible assets and liabilitiesprimarily consist of the fair value of in-place leases and contractual rights.  Goodwill is recognized as of the acquisitiondate and measured as the aggregate fair value of the consideration transferredand any noncontrolling interests in the acquiree over the fair value ofidentifiable net assets acquired. Likewise, a bargain purchase gain is recognized in current earnings whenthe aggregate fair value of the consideration transferred and anynoncontrolling interest in the acquiree are less than the fair value of theidentifiable net assets acquired.

 

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

 

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

 

Wedetermine the value of above-market and below-market in-place leases foracquired properties based on the present value (using an interest rate thatreflects the risks associated with the leases acquired) of the differencebetween (1) the contractual amounts to be paid pursuant to the in-placeleases and (2) estimates 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.

 

Weamortize the value of in-place leases acquired to expense over the remainingterm of the leases. The value of tenant relationship intangibles will beamortized to expense over the initial term and any anticipated renewal periods,but in no event will the 

 

9

----

Table ofContents

 

amortizationperiod for intangible assets exceed the remaining depreciable life of thebuilding.  Intangible lease assets areclassified as intangibles and intangible lease liabilities are recorded withindeferred lease revenues and other related liabilities.

 

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

 

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

 

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

 

Forproperties wholly owned by us or our Co-Investment Ventures, including allrelated intangibles, we monitor events and changes in circumstances indicatingthat the carrying amounts of the real estate assets may not be recoverable.  When such events or changes in circumstancesare present, we assess potential impairment by comparing estimated futureundiscounted operating cash flows expected to be generated over the life of theasset including its eventual disposition, to the carrying amount of theasset.  In the event that the carryingamount exceeds the estimated future undiscounted operating cash flows, werecognize an impairment loss to adjust the carrying amount of the asset toestimated fair value.  In addition, weevaluate indefinite-lived intangible assets for possible impairment at leastannually by comparing the fair values with the carrying values.  Fair value is generally estimated byvaluation of similar assets.

 

Forreal estate we own through an investment in an unconsolidated real estate jointventure or other similar real estate investment structure, at each reportingdate we compare the estimated fair value of our real estate investment to thecarrying value.  An impairment charge isrecorded to the extent the fair value of our real estate investment is lessthan the carrying amount and the decline in value is determined to be otherthan a temporary decline.  We did notrecord any impairment losses for the three or six months ended June 30,2010 or 2009.

 

***Cash and Cash Equivalents***

 

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

 

***Notes Receivable***

 

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 of collecting all contractual amounts.If the 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, 

 

10

----

Table ofContents

 

thereis usually no secondary market to evaluate impairments. Accordingly, we mustrely on our subjective judgments and individual weightings of the specificfactors. If notes receivable are considered impaired, then judgments andestimates are required to determine the projected cash flows for the notesreceivable, considering the borrower’s or, if applicable, the guarantor’sfinancial condition and the consideration and valuation of the secured propertyand any other collateral. Changes in these facts or in our judgments andassessments of these facts could result in impairment losses which could bematerial to our consolidated financial statements.

 

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

 

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

 

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

 

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

 

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

 

***Deferred Financing Costs***

 

Deferred financing costsare recorded at cost and are amortized to interest expense using a straight-linemethod that approximates the effective interest method over the life of therelated debt.

 

***Revenue Recognition***

 

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

 

***Acquisition Costs***

 

Acquisitioncosts for business combinations, which are expected to include most whollyowned properties, are expensed when it is probable that the transaction will beaccounted for as a business combination and the purchase will be consummated.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 is obligatedto reimburse us for all investment-related expenses the Company pursues butultimately does not consummate. Prior to the determination of its status,amounts incurred are recorded in other assets. Acquisition costs and expenses include amounts incurred with our Advisorand with third parties.

 

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

 

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

 

***Redemptions of Common Stock***

 

We account for the possibleredemption of our shares by classifying securities that are convertible forcash at the option of the holder outside of equity.  We do not reclassify the shares to beredeemed from equity to other liabilities until such time as the 

 

11

----

Table of Contents

 

redemption has been formallyapproved.  The portion of the redeemedcommon stock in excess of the par value is charged to additional paid-incapital.

 

***Income Taxes***

 

Wehave elected to be taxed as a REIT under Sections 856 through 860 of the Codeand have qualified as a REIT since the year ended December 31, 2007. To qualify as a REIT, we must meet a number of organizational and operationalrequirements, including a requirement that we distribute at least 90% of ourREIT taxable income to our stockholders.  As a REIT, we generally will notbe subject to federal income tax at the corporate level.  We are organizedand operate in such a manner as to qualify for taxation as a REIT under theCode and intend to continue to operate in such a manner, but no assurance canbe given that we will operate in a manner so as to remain qualified as a REIT.

 

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

 

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

 

***Concentration of Credit Risk***

 

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

 

***Income (loss) per Share***

 

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

 

TheBehringer Harvard Multifamily REIT I, Inc. Amended and Restated 2006Incentive Award Plan (“Incentive Award Plan”) authorizes the grant ofnon-qualified and incentive stock options, restricted stock awards, restrictedstock units, stock appreciation rights, dividend equivalents and otherstock-based awards.  A total of 10million shares has been authorized and reserved for issuance under theIncentive Award Plan.  As of June 30,2010, no options have been issued.  As ofJune 30, 2010 and 2009, 6,000 shares of the restricted stock have beenincluded in the basic and dilutive earnings per share calculation.

 

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

 

***Reportable Segments***

 

Ourcurrent business consists of investing in and operating multifamilycommunities. Substantially all of our consolidated net income is from investmentsin real estate properties that we wholly own or own through Co-InvestmentVentures, the latter of which we account for under the equity method ofaccounting. Our management evaluates operating performance on an individualinvestment level. However, as each of our investments has similar economiccharacteristics in our consolidated financial statements, the Company ismanaged on an enterprise-wide basis with one reportable segment.

 

***Fair Value***

 

Inconnection with our assessments and determinations of fair value for many realestate assets and financial instruments, there are generally not availableobservable market price inputs for substantially the same items.  Accordingly, our Advisor makes 

 

12

----

Table of Contents

 

assumptionsand uses various estimates and pricing models, including, but not limited to,the estimated useful lives of the assets, the cost of replacing certain assets,discount and interest rates used to determine present values and marketcapitalization rates and rental rates. Many of these estimates are from theperspective of market participants and will also be obtained from independentthird-party appraisals. However, we will be responsible for the source and useof these estimates. A change in these estimates and assumptions could bematerial to our results of operations and financial condition.

 

As of June 30, 2010,we believe the carrying values of cash and cash equivalents, note receivable,receivables and payables from affiliates and credit facility payableapproximate their fair values.  As of June 30,2010, we estimate the fair value of our mortgage loans payable at $96.4million, compared to its carrying value of $93.7 million.  As of June 30, 2009, we did not have anymortgage loans payable.  As of June 30,2010 and December 31, 2009, we had no significant assets or liabilitiesmeasured at fair value on a recurring or nonrecurring basis.  We estimate fair values for financialinstruments based on interest rates with similar terms and remaining maturitiesthat management believes we could obtain.

 

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

 

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

 

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

 

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

 

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

 

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

 

·      Stabilized / Non-comparable are communities thathave been stabilized or acquired during or after 2nd quarter 2009.

 

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

 

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

 

Completiondates, including estimated future completion dates, are based on the date themultifamily community is substantially complete or renovated and capable ofgenerating all significant revenue sources. Accordingly, the dates provided in the table below may be different fromthe completion dates defined in the various contractual agreements or the finalissuance of any official regulatory recognition of completion related to eachmultifamily community.  Occupancy data ispresented upon stabilization of the property and is as of June 30, 2010.

 

13

----

Table of Contents

 
| ** **                            | ** ** | ** **       | ** ** | ** **            | ** ** | ** ** | ** ** | ** **          | ** ** | **Total Real Estate, net  (in millions)** | ** ** |
|---------------------------------------|------------|------------------|------------|-----------------------|------------|------------|------------|---------------------|------------|-------------------------------------------|------------|
| **Investments  in Real Estate**       | ** ** | **Location**     | ** ** | **Purchase Date**     | ** ** | **Units**  | ** ** | **Occupancy  Rate** | ** ** | **June 30,  2010**                   | ** ** | **December 31,  2009** | ** ** |
| *Stabilized / Non-comparable:*        |       |             |       |                  |       |       |       |                |       |                                      |       |   |   |
| The Gallery at NoHo Commons (1)       |       | Los Angeles, CA  |       | 3rd Quarter 2009 |       | 438        |       | 93                  | %          | $                                         | 104.6      |   | $ | 106.0 |   |
| Mariposa Loft Apartments              |       | Atlanta, GA      |       | 3rd Quarter 2009 |       | 253        |       | 95                  | %          | 27.6                                      |       | 27.9 |   |
| Grand Reserve Orange                  |       | Orange, CT       |       | 4th Quarter 2009 |       | 168        |       | 92                  | %          | 24.6                                      |       | 25.1 |   |
| Acacia on Santa Rosa Creek            |       | Santa Rosa, CA   |       | 1st Quarter 2010 |       | 277        |       | 95                  | %          | 37.1                                      |       | — |   |
| The Lofts at Park Crest (1)  (2) |       | McLean, VA       |       | 1st Quarter 2010 |       | 131        |       | 95                  | %          | 49.0                                      |       | — |   |
| Burnham Pointe (2)                    |       | Chicago, IL |       | 2nd Quarter 2010 |       | 298        |       | 89                  | %          | 86.4                                      |       | — |   |
| ** **                            |       |             |       |                  |       | 1,565      |       |                |       | $                                         | 329.3      |   | $ | 159.0 |   |

 
| ** **                                                                                      | ** ** | ** **          | ** ** | **Acquisition,  Completion, or**           | ** ** | ** ** | ** ** | ** **          | ** ** | **Our Investment in  Unconsolidated Real Estate  Joint Ventures  (in millions)** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------------------------------------|------------|------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|
| **Investments in Unconsolidated Real Estate  Joint Ventures (3)** | ** ** | **Location**        | ** ** | **Estimated Future  Completion Date** | ** ** | **Units**  | ** ** | **Occupancy  Rate** | ** ** | **June 30,  2010**                                                                                        | ** ** | **December 31,  2009** | ** ** |
| **Equity Investments**                                                                          |       |                |       |                                            |       |       |       |                |       |                                                                                                           |       |   |   |
| *Stabilized / Comparable:*                                                                      |       |                |       |                                            |       |       |       |                |       |                                                                                                           |       |   |   |
| The Reserve at Johns Creek Walk (4)                                                             |       | Johns Creek, GA     |       | 3rd Quarter 2007                           |       | 210        |       | 94                  | %          | $                                                                                                              | 3.7        |   | $ | 4.0 |   |
|                                                                                            |       |                |       |                                            |       |       |       |                |       |                                                                                                           |       |   |   |
| *Stabilized / Non-comparable:*                                                                  |       |                |       |                                            |       |       |       |                |       |                                                                                                           |       |   |   |
| The Eclipse (5)                                                                                 |       | Houston, TX         |       | 2nd Quarter 2009                           |       | 330        |       | 90                  | %          | 18.7                                                                                                           |       | 19.7 |   |
| Halstead (5)                                                                                    |       | Houston, TX         |       | 2nd Quarter 2009                           |       | 301        |       | 90                  | %          | 3.1                                                                                                            |       | 3.4 |   |
| Waterford Place (5)                                                                             |       | Dublin, CA          |       | 3rd Quarter 2009                           |       | 390        |       | 96                  | %          | 10.4                                                                                                           |       | 11.0 |   |
| Burrough’s Mill Apartment Homes (5)                                                        |       | Cherry Hill, NJ     |       | 3rd Quarter 2009                           |       | 308        |       | 93                  | %          | 7.4                                                                                                            |       | 8.1 |   |
| Forty55 Lofts (5)                                                                               |       | Marina del Rey, CA  |       | 3rd Quarter 2009                           |       | 140        |       | 90                  | %          | 27.3                                                                                                           |       | 26.2 |   |
| Calypso Apartments and Lofts (5)                                                                |       | Irvine, CA          |       | 4th Quarter 2009                           |       | 177        |       | 91                  | %          | 13.9                                                                                                           |       | 27.4 |   |
| 4550 Cherry Creek (5)                                                                           |       | Denver, CO          |       | 1st Quarter 2010                           |       | 288        |       | 90                  | %          | 12.6                                                                                                           |       | — |   |
| 7166 at Belmar (5)                                                                              |       | Lakewood, CO        |       | 2nd Quarter 2010                           |       | 308        |       | 92                  | %          | 13.4                                                                                                           |       | — |   |
| Briar Forest Lofts (5)                                                                          |       | Houston, TX         |       | 2nd Quarter 2010                           |       | 352        |       | 84                  | %          | 21.2                                                                                                           |       | — |   |
| Fitzhugh Urban Flats (5)                                                                        |       | Dallas, TX          |       | 2nd Quarter 2010                           |       | 452        |       | 94                  | %          | 27.4                                                                                                           |       | — |   |
| Tupelo Alley (2) (5)                                                                       |       | Portland, OR        |       | 2nd Quarter 2010                           |       | 188        |       | 92                  | %          | 21.5                                                                                                           |       | — |   |
|                                                                                            |       |                |       |                                            |       |       |       |                |       |                                                                                                           |       |   |   |
| *Lease ups:*                                                                                    |       |                |       |                                            |       |       |       |                |       |                                                                                                           |       |   |   |
| Cyan/PDX (2) (5)                                                                           |       | Portland, OR        |       | 4th Quarter 2009                           |       | 352        |       | N/A                 |       | 45.3                                                                                                           |       | 46.2 |   |
| San Sebastian (5)                                                                               |       | Laguna Woods, CA    |       | 4th Quarter 2009                           |       | 134        |       | N/A                 |       | 19.8                                                                                                           |       | 19.9 |   |
| 55 Hundred (2) (4) (6)                                                                |       | Arlington, VA       |       | 2nd Quarter 2010                           |       | 234        |       | N/A                 |       | 22.7                                                                                                           |       | 23.6 |   |
| Bailey’s Crossing (4) (6)                                                             |       | Alexandria, VA      |       | 3rd Quarter 2010                           |       | 414        |       | N/A                 |       | 29.6                                                                                                           |       | 29.8 |   |
|                                                                                            |       |                |       |                                            |       |       |       |                |       |                                                                                                           |       |   |   |
| **Equity and Loan Investments**                                                                 |       |                |       |                                            |       |       |       |                |       |                                                                                                           |       |   |   |
| *Lease ups:*                                                                                    |       |                |       |                                            |       |       |       |                |       |                                                                                                           |       |   |   |
| The Venue (4) (6)                                                                          |       | Clark County, NV    |       | 4th Quarter 2009                           |       | 168        |       | N/A                 |       | 4.1                                                                                                            |       | 4.5 |   |
| Satori (2) (4) (6)                                                                    |       | Fort Lauderdale, FL |       | 1st Quarter 2010                           |       | 279        |       | N/A                 |       | 11.6                                                                                                           |       | 12.3 |   |
| Skye 2905 (2) (4) (6)                                                                 |       | Denver, CO          |       | 4th Quarter 2010                           |       | 400        |       | N/A                 |       | 12.5                                                                                                           |       | 12.9 |   |
| Veritas (4) (6)                                                                            |       | Henderson, NV       |       | 1st Quarter 2011                           |       | 430        |       | N/A                 |       | 14.6                                                                                                           |       | 14.9 |   |
|                                                                                            |       |                |       |                                            |       |       |       |                |       |                                                                                                           |       |   |   |
| **Loan Investments**                                                                            |       |                |       |                                            |       |       |       |                |       |                                                                                                           |       |   |   |
| *Lease ups:*                                                                                    |       |                |       |                                            |       |       |       |                |       |                                                                                                           |       |   |   |
| Grand Reserve                                                                                   |       | Dallas, TX          |       | 1st Quarter 2010                           |       | 149        |       | N/A                 |       | 5.3                                                                                                            |       | 5.1 |   |
| The Cameron (2) (6)                                                                        |       | Silver Spring, MD   |       | 3rd Quarter 2010                           |       | 325        |       | N/A                 |       | 11.0                                                                                                           |       | 10.9 |   |
|                                                                                            |       |                |       |                                            |       | 6,329      |       |                |       | $                                                                                                              | 357.1      |   | $ | 279.9 |   |
|                                                                                            |       |                |       | Total Units                                     |       | 7,894      |       |                |       |                                                                                                           |       |   |   |

 

14

----

Table of Contents

 

----

(1)       Purchase prices for TheGallery at NoHo Commons and The Lofts at Park Crest were $96.0 million and$68.2 million, respectively, before closing costs and prorations.  Other amounts from the acquisitions wererecognized as intangible assets or deferred lease revenues and other relatedliabilities.

 

(2)       Includes retail space, where the total approximatesquare footage of retail space of gross leasable area (“GLA”) for all theseinvestments totals approximately 127,500 square feet or approximately 6% oftotal rentable area.  Of the stabilizedcommunities, The Lofts at Park Crest, Tupelo Alley and Burnham Pointe containretail space with approximately 93,000 square feet of GLA, of which 75% wasoccupied as of June 30, 2010.

 

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

 

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

 

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

 

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

 

***Investments in real estate***

 

Forthe six months ended June 30, 2010, we acquired in separate transactionsthree wholly owned multifamily communities, Acacia on Santa Rosa Creek, TheLofts at Park Crest and Burnham Pointe, totaling 706 units, for an aggregatepurchase price of approximately $194.8 million, including the assumption of amortgage loan payable of $26.7 million.

 

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

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

 

·      Contractual rights include land and parking garagerights.

 

·      We are in the process of finalizing our acquisitionallocations, which are subject to change until our information is finalized, nolater than twelve months from the acquisition date.

 

Theamounts recognized for revenues and net losses from the acquisition dates to June 30,2010 related to the operations of The Lofts at Park Crest and Burnham Pointeare as follows (in millions).  Due to thetiming of our acquisitions, the revenue, depreciation and amortization amountsfor Burnham Pointe were not material for the six months ended June 30,2010.

 

15

----

Table of Contents

 
| ** **                    | ** ** | **The Lofts at Park Crest** | ** ** | **Burnham Pointe** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|-------------------------|------------|
| Revenues                      |       | $                                               | 1.9        |                    | $          | — |   |
| Acquisition expenses          |       | $                                               | 0.4        |                    | $          | 1.0 |   |
| Depreciation and amortization |       | $                                               | 1.1        |                    | $          | — |   |
| Net loss                      |       | $                                               | 0.2        |                    | $          | 1.0 |   |

 

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

 
| ** **                    | ** ** | **Pro Forma**                                 | ** ** |
|-------------------------------|------------|-----------------------------------------------|------------|
| ** **                    | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
| ** **                    | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                      |       | $                                             | 8.4        |   | $ | 1.4 |   | $ | 16.1 |   | $ | 2.5 |   |
| Acquisition expenses          |       | $                                             | —     |   | $ | — |   | $ | 1.0 |   | $ | 4.5 |   |
| Depreciation and amortization |       | $                                             | 4.6        |   | $ | 2.5 |   | $ | 9.4 |   | $ | 5.0 |   |
| Net income (loss)             |       | $                                             | (5.9       | ) | $ | (2.6 | ) | $ | (13.3 | ) | $ | (10.2 | ) |
| Net income (loss) per share   |       | $                                             | (0.06      | ) | $ | (0.06 | ) | $ | (0.15 | ) | $ | (0.28 | ) |

 

Depreciationexpense associated with all of our wholly owned buildings and improvements forthe three and six months ended June 30, 2010 was approximately $2.3million and $4.1 million, respectively. We did not have any wholly owned multifamily communities subject todepreciation expense for the three and six months ended June 30, 2009.

 

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

 

| July –  December 2010 |   | $ | 2.1 |   |
|---------------------------------|--------|---|-----|--------|
| 2011                            |   | $ | 0.4 |   |
| 2012                            |   | $ | 0.4 |   |
| 2013                            |   | $ | 0.4 |   |
| 2014                            |   | $ | 0.4 |   |

 

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

*** ***
| ** **                          | ** ** | ** **                      | ** ** | **Intangibles**                 | ** ** |
|-------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **As of  June 30, 2010**       | ** ** | **Buildings and  Improvements** | ** ** | **In-Place Lease  Intangibles** | ** ** | **Other  Contractual** | ** ** |
| Cost                                |       | $                               | 277.3      |                            | $          | 7.8 |   | $ | 16.3 |   |
| Less: depreciation and amortization |       | (5.6                            | )          | (3.9                            | )          | — |   |
| Net                                 |       | $                               | 271.7      |                            | $          | 3.9 |   | $ | 16.3 |   |

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

 

16

----

Table ofContents

 

***Investments in unconsolidated real estate jointventures***

 

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

 

PGGMhas committed to invest up to $300 million in co-investments with affiliates orinvestment programs of our sponsor. Until the current funding commitment from PGGM of $300 million has beenplaced in co-investments with affiliates or investment programs of our sponsor,to the extent that investments fit within the investment parameters agreedbetween the BHMP Co-Investment Partner and our sponsor, we expect a portion ofour future real estate acquisitions will be made through co-investments withthe BHMP Co-Investment Partner.  As of June 30,2010, approximately $29.5 million of the $300 million commitment remainsunfunded; however, in the event that certain investments are refinanced or newproperty debt is placed within two years from the date of the acquisition, theamount of unfunded commitment may be increased.

 

Generally,the BHMP Co-Investment Partner will co-invest with a 45% equity interest, andwe will co-invest with a 55% equity interest, although the BHMP Co-InvestmentPartner may elect smaller allocations. Cash distributions are allocated pro rata based on each partner’scapital investments.

 

Eachof our separate joint ventures with the BHMP Co-Investment Partner is madethrough a separate entity that owns 100% of the voting equity interests andapproximately 99% of the economic interests in one subsidiary REIT, throughwhich substantially all of the joint venture’s business is conducted.  Each separate joint venture entity, togetherwith its respective subsidiary REIT, is referred to herein as a “BHMP CO-JV.”  Each BHMP CO-JV is a separate legal entityformed for the sole purpose of holding its respective investment and obtaininglegally separated debt and equity financing. In certain circumstances the governing documents of the BHMP CO-JV mayrequire the subsidiary REIT to be disposed of via a sale of its capital stockrather than as an asset sale by that subsidiary REIT.

 

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

 

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

 

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

 

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

 

17

----

Table ofContents

 

Duringthe six months ended June 30, 2010, we invested in five newly formed BHMPCO-JVs, each holding a wholly owned multifamily community. The totalacquisition price for these multifamily communities was $219.7 million.  Our total share of the capital contributionfor these BHMP CO-JVs was $127.0 million. Also during the six months ended June 30, 2010, BHMP CO-JVs CalypsoApartments and Lofts, 4550 Cherry Creek and 7166 at Belmar obtained newmortgage financing secured by the respective multifamily community for anaggregate amount of $75.4 million. Substantially all of the net proceeds related to these financings weredistributed to the partners and our share was $44.9 million.

 

Thesummarized financial data shown below presents the combined accounts of each ofthe (i) BHMP CO-JVs and (ii) Property Entities where there is acorresponding BHMP CO-JV equity investment. The Property Entities include 100% of their accounts, where thenoncontrolling interest amounts represent the portion owned by unaffiliatedthird parties.  All inter-entitytransactions, balances and profits have been eliminated in the combinedfinancial data (amounts in millions):

 

**Balance Sheet Data:**

 
| ** **                                                                                                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                          | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Land, buildings and improvements                                                                                                                    |       | $                 | 1,043.9    |                  | $          | 656.0 |   |
| Less: accumulated depreciation and amortization                                                                                                     |       | (20.5             | )          | (6.7                  | )          |
| Land, buildings and improvements, net                                                                                                               |       | 1,023.4           |       | 649.3                 |       |
|                                                                                                                                                |       |              |       |                  |       |
| Construction in progress                                                                                                                            |       | 62.8              |       | 210.2                 |       |
| Notes receivable, net                                                                                                                               |       | 25.6              |       | 25.4                  |       |
| Cash and cash equivalents                                                                                                                           |       | 8.9               |       | 6.2                   |       |
| Intangible assets, net of accumulated amortization  $8.8 million and $4.2 million as of June 30, 2010 as December 31,  2009, respectively |       | 3.8               |       | 2.8                   |       |
| Other assets, including restricted cash                                                                                                             |       | 20.1              |       | 20.1                  |       |
| Total assets                                                                                                                                        |       | $                 | 1,144.6    |                  | $          | 914.0 |   |
| * *                                                                                                                                            | * *   | * *          | * *   | * *              | * *   |
| BHMP CO-JV level mortgage loans payable                                                                                                             |       | $                 | 184.9      |                  | $          | 110.1 |   |
| Property Entity level construction and mortgage  loans payable                                                                                      |       | 319.1             |       | 284.3                 |       |
| Accounts payable, interest payable and other  liabilities                                                                                           |       | 22.4              |       | 30.2                  |       |
| Total liabilities                                                                                                                                   |       | 526.4             |       | 424.6                 |       |
|                                                                                                                                                |       |              |       |                  |       |
| Redeemable, noncontrolling interests                                                                                                                |       | 9.1               |       | 10.4                  |       |
|                                                                                                                                                |       |              |       |                  |       |
| Our members’ equity                                                                                                                            |       | 342.7             |       | 268.5                 |       |
| BHMP Co-Investment Partner’s equity                                                                                                            |       | 256.3             |       | 201.2                 |       |
| Nonredeemable, noncontrolling interests                                                                                                             |       | 10.1              |       | 9.3                   |       |
| Total equity                                                                                                                                        |       | 609.1             |       | 479.0                 |       |
| Total liabilities and equity                                                                                                                        |       | $                 | 1,144.6    |                  | $          | 914.0 |   |

 

18

----

Table of Contents

 

**Operating Data:**

 
| ** **                                                                                          | ** ** | **For the three months ended  June 30,** | ** ** | **For the six months ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2010**                                      | ** ** | **2009**                                    | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                                                                                            |       |                                          |       |                                        |       |   |   |   |   |
| Rental revenues                                                                                     |       | $                                             | 15.3       |                                        | $          | 1.3 |   | $ | 26.6 |   | $ | 2.4 |   |
| Interest income                                                                                     |       | 2.4                                           |       | 3.6                                         |       | 4.8 |   | 6.9 |   |
|                                                                                                |       | 17.7                                          |       | 4.9                                         |       | 31.4 |   | 9.3 |   |
|                                                                                                |       |                                          |       |                                        |       |   |   |   |   |
| Expenses                                                                                            |       |                                          |       |                                        |       |   |   |   |   |
| Property operating expenses                                                                         |       | 6.7                                           |       | 1.0                                         |       | 12.2 |   | 1.9 |   |
| Real estate taxes                                                                                   |       | 2.0                                           |       | 0.3                                         |       | 3.7 |   | 0.5 |   |
| Interest expense                                                                                    |       | 4.4                                           |       | 0.7                                         |       | 8.4 |   | 1.3 |   |
| Acquisition expenses                                                                                |       | 0.5                                           |       | 0.2                                         |       | 0.9 |   | 0.2 |   |
| Depreciation and amortization                                                                       |       | 10.1                                          |       | 0.7                                         |       | 19.1 |   | 1.4 |   |
|                                                                                                |       | 23.7                                          |       | 2.9                                         |       | 44.3 |   | 5.3 |   |
| Net income (loss)                                                                                   |       | (6.0                                          | )          | 2.0                                         |       | (12.9 | ) | 4.0 |   |
|                                                                                                |       |                                          |       |                                        |       |   |   |   |   |
| Net loss attributable to noncontrolling interests                                                   |       | 1.2                                           |       | —                                      |       | 2.5 |   | 0.1 |   |
| Net income (loss) attributable to consolidated  BHMP CO-JVs                                         |       | $                                             | (4.8       | )                                           | $          | 2.0 |   | $ | (10.4 | ) | $ | 4.1 |   |
|                                                                                                |       |                                          |       |                                        |       |   |   |   |   |
| Our share of equity in earnings (loss) of  investments in unconsolidated real estate joint ventures |       | $                                             | (2.8       | )                                           | $          | 1.1 |   | $ | (6.0 | ) | $ | 2.2 |   |

 

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

 
| ** **                                                | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Balance of our member’s equity in the BHMP CO-JVs    |       | $                       | 342.7      |                        | $          | 268.5 |   |
| Other capitalized costs, net of amortization              |       | 14.4                    |       | 11.4                        |       |
| Investments in unconsolidated real estate joint  ventures |       | $                       | 357.1      |                        | $          | 279.9 |   |

 

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

 
| ** **                       | ** ** | **Carrying Amount**     | ** ** | **Fixed**                   | ** ** | ** **         | ** ** | **Option Period** | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------------------|------------|--------------------|------------|-------------------|------------|
| **Name  of Underlying Property** | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** | **Interest  Rate** | ** ** | **Maturity Date** | ** ** | **Commencement  After Construction** | ** ** |
| Grand Reserve                    |       | $                       | 7.5        |                        | $          | 7.5                |       | 10.0              | %          | April 2012 |   | N/A (1) |   |
| The Cameron                      |       | 19.3                    |       | 19.3                        |       | 9.5                | %          | December 2012     |       | 90 days |   |
| Total BHMP CO-JV Notes           |       | 26.8                    |       | 26.8                        |       |               |       |              |       |   |   |
| Less: Deferred Financing Fees    |       | (1.2                    | )          | (1.4                        | )          |               |       |              |       |   |   |
| Net BHMP CO-JV Notes             |       | $                       | 25.6       |                        | $          | 25.4               |       |              |       |   |   |   |   |

 

----

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

 

Inthe combined financial data, the notes receivable and notes payable between theBHMP CO-JVs and their Property Entities in which the BHMP CO-JVs have equityinterests are eliminated.  For thesenotes, all advances have reached their required maximum funding amounts. Otherthan with respect to The Venue, in connection with each of these notesreceivable or their equity investment, the BHMP CO-JVs acquired options topurchase a certain percentage ownership interest in the Property Entity, or to

 

19

----

Table of Contents

 

convertthe notes receivable into equity interests in the Property Entities. Optionsare generally exercisable during defined periods after project completion.Below are the eliminated BHMP CO-JVs’ notes receivable (amounts in millions):

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

 

Asof June 30, 2010 and December 31, 2009, BHMP CO-JVs are also subjectto senior mortgage loans payable as described in the following table. Theseloans are senior to the equity investments by the BHMP CO-JVs.  The lenders for these mortgage loans payablehave no recourse to us or the applicable BHMP CO-JV other than carve-out guaranteesfor certain matters such as environmental conditions, misuse of funds andmaterial misrepresentations. These mortgage loan payables are referred to asBHMP CO-JV level mortgage loans payable (amounts in millions):

 
| **BHMP  CO-JV Level Mortgage Loans Payable** | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** | **Interest Rate** | ** ** | **Maturity Date** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|-------------------|------------|-------------------|------------|
| Halstead                                     |       | $                       | 24.0       |                        | $          | 24.0              |       | 6.17% - Fixed     |       | September 2011(1) |   |
| Waterford Place                              |       | 59.5                    |       | 60.1                        |       | 4.83% - Fixed     |       | May 2013     |       |
| 4550 Cherry Creek                            |       | 28.6                    |       | —                      |       | 4.23% - Fixed     |       | March 2015   |       |
| Calypso Apartments and Lofts                 |       | 24.0                    |       | —                      |       | 4.21% - Fixed     |       | March 2015   |       |
| 7166 at Belmar                               |       | 22.8                    |       | —                      |       | 4.11% - Fixed     |       | June 2015    |       |
| Burrough’s Mill Apartment Homes         |       | 26.0                    |       | 26.0                        |       | 5.29% - Fixed     |       | October 2016 |       |
| Total                                        |       | $                       | 184.9      |                        | $          | 110.1             |       |              |       |   |   |

 

----

(1)         Mortgage may be prepaid atpar beginning September 2010.

 

Asof June 30, 2010 and December 31, 2009, Property Entities are subjectto senior construction and mortgage loans payable as described in the followingtable. These loans are senior to any equity or debt investments by the BHMP CO-JVs.  The lenders for these loans have no recourseto us or the BHMP CO-JVs with recourse only to the applicable Property Entitiesand with respect to Satori, Skye 2905, The Venue and Veritas to affiliates ofthe project developers that have provided completion and repaymentguarantees.  These loans payable arereferred to as Property Entity level construction and mortgage loans payable(amounts in millions and monthly LIBOR at June 30, 2010 was 0.35%):

 
| **Property  Entity Level Construction and  Mortgage Loans Payable** | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** | **Interest Rate**      | ** ** | **Maturity Date**      | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|------------------------|------------|------------------------|------------|
| Satori (1)                                                          |       | $                       | 69.4       |                        | $          | 69.4                   |       | Monthly LIBOR+ 140 bps |       | October 2010 |   |
| Skye 2905 (1)                                                       |       | 58.2                    |       | 42.2                        |       | Monthly LIBOR+ 195 bps |       | May 2011          |       |
| Bailey’s Crossing (1)                                          |       | 67.2                    |       | 61.1                        |       | Monthly LIBOR+ 275 bps |       | November 2011     |       |
| The Venue (1)                                                       |       | 19.6                    |       | 19.2                        |       | Monthly LIBOR+ 225 bps |       | June 2012         |       |
| Veritas (1)                                                         |       | 29.0                    |       | 16.7                        |       | Monthly LIBOR+ 275 bps |       | December 2012     |       |
| The Reserve at Johns Creek Walk                                     |       | 23.0                    |       | 23.0                        |       | 6.46% - Fixed          |       | March 2013        |       |
| 55 Hundred (1)                                                      |       | 52.7                    |       | 52.7                        |       | Monthly LIBOR+ 300 bps |       | November 2013     |       |
| Total                                                               |       | $                       | 319.1      |                        | $          | 284.3                  |       |                   |       |   |   |

 

----

(1)  Each of these Property Entity level construction loans are used to funddevelopment projects and are drawn as construction costs are incurred.  The aggregate total commitment, if fullyfunded, is $330.7 million.  Eachconstruction loan has provisions allowing for prepayment at par and extensions,generally two, one-year options if certain operational performance levels havebeen achieved as of the maturity date. An extension fee, generally 0.25% of the total loan balance, is requiredfor each extension.

 

20

----

Table of Contents

 

Asof June 30, 2010, approximately $786.3 million of the net carrying valueof land, buildings and improvements and construction in progress collateralizedthe combined BHMP CO-JV level and Property Entity level construction andmortgage loans payable.

 

InDecember 2009, Fairfield Residential LLC, a real estate operating company,(“Fairfield Residential”) and certain of its affiliates filed for voluntarybankruptcy.  Certain other affiliates ofFairfield Residential that serve as the general partner for The Cameron andcurrent limited partners of Bailey’s Crossing and 55 Hundred were not part ofthe bankruptcy filing (the “Fairfield Projects”).  The Bailey’s Crossing, 55 Hundred and TheCameron Property Entities were also not a part of the bankruptcy filing. TheBailey’s Crossing and 55 Hundred Property Entity restructurings andrecapitalizations were completed prior to Fairfield Residential’s bankruptcyand were not affected by the bankruptcy filing.

 

BecauseFairfield Residential has guaranteed repayment of The Cameron seniorconstruction loan, as well as completion of the project for the seniorconstruction loan, Fairfield Residential’s bankruptcy gave rise to an event ofdefault under The Cameron senior construction loan agreement.  As a result, The Cameron senior constructionlender sent a default notice to The Cameron Property Entity.  These events in turn gave rise to an event ofdefault under the BHMP CO-JV note receivable. To preserve its rights, the BHMPCO-JV also served a default notice to The Cameron Property Entity related toits $19.3 million mezzanine loan. Through June 2010, the seniorconstruction lender has continued to fund construction draws and has notexercised any of its default remedies. If the senior construction lender does exercise its default remedies, 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. However, there is no assurance that we would be able to restructure thesenior construction loan including associated guarantees on terms that areacceptable to The Cameron Property Entity owners and the Cameron BHMPCO-JV.  Such restructuring could includea pay down of the senior construction loan by The Cameron Property Entityand/or the BHMP CO-JV, which could result in a capital contribution by us toThe Cameron BHMP CO-JV.  In addition, thesenior construction lender’s exercise of default remedies or the results of anyrestructuring negotiations may change our analysis of the accounting for theinvestment, which could result in the BHMP CO-JV accounting for the investmentas joint venture, or if the BHMP CO-JV is viewed as the primary beneficiary, toconsolidate the investment. However, we believe we have sufficient collateral,contractual remedies and other creditor rights for us to recover all of ourinvestment in the development project.

 

Asof June 30, 2010, management’s assessment related to The Cameron BHMPCO-JV is that the loan investment is still properly accounted for as a loan.  The continuation of this accounting treatmentis dependent on the resolution of the issues described above, and there can beno assurance as new facts and circumstances arise that different accountingwould not be required. A change in accounting could affect our recognition ofearnings in future periods.  As of June 30,2010, no impairment charges related to our investments with respect to any ofthe Fairfield Projects have been recorded.

 

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

 

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

 
| ** **                                       | ** ** | **Future Minimum  Lease Payments** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
| July 1, 2010 –  December 31, 2010 |       | $                                  | 1.1        |   |
| 2011                                             |       | 2.1                                |       |
| 2012                                             |       | 2.1                                |       |
| 2013                                             |       | 2.1                                |       |
| 2014                                             |       | 2.1                                |       |
| Thereafter                                       |       | 28.6                               |       |
| Total                                            |       | $                                  | 38.1       |   |

 

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

 

21

----

Table of Contents

 

**7.****                                     ****Noteand Other Receivables**

 

Asof June 30, 2010 and December 31, 2009, we have approximately $2.5million and $2.4 million, respectively, in a note receivable.   The note is secured by the Grand ReserveProperty Entity, bears interest at 10.0%, and is due April 2012.  We have fully funded our loancommitment.  Our note receivable isjunior to a loan made by the BHMP CO-JV to the Grand Reserve Property Entity.

 

Asof June 30, 2010 and December 31, 2009, we have a receivable ofapproximately $1.6 million related to a tax increment receivable from theCommunity Redevelopment Agency of the City of Los Angeles, net of imputeddiscount.  The tax increment receivableis collectable from real estate taxes through 2028 as defined in the agreementwith the Community Redevelopment Agency. This receivable was acquired inconnection with our acquisition of The Gallery at NoHo Commons.

 

**8.****                                     ****MortgageLoans Payable**

 

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

 
| **Mortgage Loans Payable**  | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** | **Loan Type** | ** ** | **Interest  Rate**     | ** ** | **Maturity  Date** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------------|------------|---------------|------------|------------------------|------------|--------------------|------------|
| Acacia on Santa Rosa Creek  |       | $                       | 26.6       |                        | $          | —        |       | Principal and interest |       | 4.63% - fixed      |       | May 2013 |   |
| The Gallery at NoHo Commons |       | 51.3                    |       | 51.3                        |       | Interest-only |       | 4.72% - fixed          |       | November 2016 |       |
| Mariposa Loft Apartments    |       | 15.8                    |       | —                      |       | Interest-only |       | 5.21% - fixed          |       | March 2017    |       |
| Total                       |       | $                       | 93.7       |                        | $          | 51.3          |       |                   |       |               |       |   |   |

 

Asof June 30, 2010, $169.3 million of the net carrying value of real estate collateralizedthe mortgage loans payable.

 

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

 
| July 1, 2010 –  December 31, 2010 |   | $      | 0.3    |   |
|--------------------------------------------------|--------|--------|--------|--------|
| 2011                                             |   | 0.6    |   |
| 2012                                             |   | 0.6    |   |
| 2013                                             |   | 25.1   |   |
| 2014                                             |   | — |   |
| Thereafter                                       |   | 67.1   |   |
| Total                                            |   | $      | 93.7   |   |

 

**9.****                                     ****CreditFacility Payable**

 

OnMarch 26, 2010, we closed on a $150.0 million credit facility.  The credit facility matures on April 1,2017, when all unpaid principal and interest is due.  Borrowing tranches under the credit facilitybear interest at a “base rate” based on either the one-month or three-monthLIBOR rate, selected at our option, plus an applicable margin which adjustsbased on the facility’s debt service requirements. As of June 30, 2010,the applicable margin was 2.08% and the base rate was 2.43% based on one-monthLIBOR.  The credit facility also providesfor fees based on unutilized amounts and minimum usage.  The unused facility fee is equal to 1% perannum of the total commitment less the greater of 75% of the total commitmentor the actual amount outstanding. The minimum usage fee is equal to 75% of thetotal credit facility times the lowest applicable margin less the marginportion of interest paid during the calculation period.  The loan requires monthly interest-onlypayments and monthly or annual payment of fees. We may prepay borrowing tranches at the expiration of the LIBOR interestrate period without any penalty. Prepayments during a LIBOR interest rate period are subject to a prepaymentpenalty generally equal to the interest due for the remaining term of the LIBORinterest rate period.

 

Drawsunder the credit facility are secured by a pool of certain multifamilycommunities directly owned by our wholly owned subsidiaries, where we may addand remove multifamily communities from the collateral pool in compliance withthe requirements under the credit facility agreement.   As of June 30, 2010, $73.6 million ofthe net carrying value of real estate

 

22

----

Table of Contents

 

collateralizedthe credit facility.   The aggregateborrowings under the credit facility are limited to 70% of the value of thecollateral pool, which may be different than the carrying value for financialstatement reporting.  As of June 30,2010, available but undrawn amounts under the credit facility are approximately$32.9 million.

 

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

 

**10.****                              ****Stockholders’Equity**

 

***Capitalization***

 

Asof June 30, 2010 and December 31, 2009, we had 86,743,995 and57,098,265 shares of common stock outstanding, respectively, including 6,000shares of restricted stock issued to our independent directors for no cash, and24,969 shares issued to Behringer Harvard Holdings, LLC for cash ofapproximately $0.2 million.

 

Asof June 30, 2010 and December 31, 2009, we had 1,000 shares ofconvertible stock owned by our Advisor issued for cash of $1,000.  The convertible stock has no voting rights,other than for certain limited exceptions, and prior to conversion, does notparticipate in any earnings or distributions. The convertible stock generally is convertible into shares of commonstock with a value equal to 15% of the amount by which (1) our enterprisevalue at the time of conversion, including the total amount of distributionspaid to our stockholders, exceeds (2) the sum of the aggregate capitalinvested by our stockholders plus a 7% cumulative, non-compounded, annualreturn on such capital at the time of conversion, on a cash-on-cash basis.  The convertible stock can be converted whenthe excess value described above is achieved and distributed to stockholders orour common stock is listed on a national securities exchange.  The conversion may also be prorated in theevent of a termination or non-renewal of the Advisory Management Agreement(defined below) other than for cause. Management has determined that therequirements for conversion have not been met as of June 30, 2010.  Management reviewed the terms of theunderlying convertible stock and determined the fair value approximated thenominal value paid for the shares at issuance.

 

Asof June 30, 2010 and December 31, 2009, we had no shares of preferredstock issued and outstanding. Our board of directors has no present plans toissue preferred stock but may do so with terms established at its discretionand at any time in the future without stockholder approval.

 

***Share Redemption Program***

 

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

 

Forthe six months ended June 30, 2010, our board of directors approved theredemption of 558,235 shares of common stock for approximately $4.8million.  For the six months ended June 30,2009, we redeemed 144,299 shares of common stock for approximately $1.2million.  As of June 30, 2010, wehad approximately $4.0 million of redemptions authorized but unpaid.  As of December 31, 2009, we did not haveany unpaid redemptions.

 

***Distributions***

 

Wepaid our first distribution effective July 1, 2007.

 

23

----

Table ofContents

 

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

 
| ** **     | ** ** | **Distributions** | ** ** |
|----------------|------------|-------------------|------------|
| **2010**       | ** ** | **Declared**      | ** ** | **Paid** | ** ** |
| Second Quarter |       | $                 | 13.9       |   | $ | 13.1 |   |
| First Quarter  |       | 11.1              |       | 10.2 |   |
| Total          |       | $                 | 25.0       |   | $ | 23.3 |   |
|           |       |              |       |   |   |
| **2009**       | ** ** | ** **        | ** ** | ** ** | ** ** |
| Fourth Quarter |       | $                 | 8.7        |   | $ | 7.8 |   |
| Third Quarter  |       | 6.5               |       | 5.9 |   |
| Second Quarter |       | 4.6               |       | 4.1 |   |
| First Quarter  |       | 2.9               |       | 2.5 |   |
| Total          |       | $                 | 22.7       |   | $ | 20.3 |   |

 

OnJune 1, 2010, our board of directors declared distributions payable to thestockholders of record each day for June 1, 2010 through August 31,2010 at a daily amount of $0.0019178 per share of common stock, an annualizedrate of 7%.  On June 16, 2010, ourboard of directors declared distributions at a daily amount of $0.0001643 pershare of common stock, an annualized rate of 6% for the period of September 1,2010 to September 30, 2010.  Wecalculate the annualized rate as if the shares were outstanding for a full yearbased on a $10 per share price.

 

**11.          Commitments and Contingencies**

 

Weand/or our Co-Investment Ventures contract with unaffiliated commercialmultifamily property development companies and provide equity and/or loans fora particular project (our “Project Commitments”).  We generally fund aninitial amount under our Project Commitments at contract inception and fundadditional amounts as construction progresses, typically spanning one to threeyears.  As of June 30, 2010, ourCo-Investment Ventures, all of which are BHMP CO-JVs, have unfunded ProjectCommitments of approximately $19.8 million.

 

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

 

The Bailey’s Crossing BHMP CO-JV may become obligated to purchase alimited partnership interest in the Bailey’s Crossing BHMP CO-JV at a price setthrough an appraisal process. The obligation is for a one-year periodcommencing November 2011.  As thisamount is based on future events and valuations, we are not able to estimatethis amount if exercised; however the limited partner’s invested capital as of June 30,2010 is approximately $11.8 million.  Ourshare would be approximately $6.5 million.

 

The Cameron BHMP CO-JV may become obligated to purchase a limitedpartnership interest in The Cameron BHMP CO-JV at a price set through anappraisal process. The obligation is for a three-year period after completionof the development.  As this amount isbased on future events and valuations, we are not able to estimate this amountif exercised; however the limited partner’s invested capital as of June 30,2010 is approximately $10.3 million.  Ourshare would be approximately $5.7 million.

 

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

 

24

----

Table of Contents

 

housingauthority on a straight line basis, recognizing a portion of the collections asdeferred lease revenues and other related liabilities. As of June 30, 2010and December 31, 2009, we have approximately $0.8 million and $1.3million, respectively, of carrying value for deferred lease revenues and otherrelated liabilities. For the three and six months ended June 30, 2010, werecognized approximately $0.2 million and $0.5 million, respectively, ofdeferred revenue amortization related to The Gallery at NoHo Commons affordablehousing obligations.  We did notrecognize any deferred revenue amortization for the three and six months ended June 30,2009.

 

**12.          Related PartyArrangements**

 

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

 

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

 

Weare required to reimburse the Advisor for organization and offering expensesrelated to a public offering of shares (other than pursuant to a distributionreinvestment plan) and any organization and offering expenses previouslyadvanced by the Advisor related to a prior offering of shares to the extent notpreviously reimbursed by us out of proceeds from the prior offering (“O&OReimbursement”). However, the Advisor is obligated to reimburse us after thecompletion of the public offering to the extent that O&O Reimbursement paidby the Company exceeds 1.5% of the gross proceeds of the completed publicoffering. The Company’s reimbursement of organization and offering expensesrelated to subsequent public offerings of shares also will not be capped as ofthe date of reimbursement, unless the terms are amended by the parties uponrenewal of the Advisory Management Agreement. In April 2009, in connectionwith an amendment to the Advisory Management Agreement, a payment of $6.9million was made to the Advisor for prior O&O Reimbursement incurred butnot previously paid. For the three months ended June 30, 2010 and 2009, weincurred O&O Reimbursement of approximately $2.7 million and $2.3 million,respectively.  For the six months ended June 30,2010 and 2009, we incurred O&O Reimbursement of approximately $5.0 millionand $4.3 million, respectively.  As of June 30,2010, the amount by which our O&O Reimbursement exceeded 1.5% of the grossproceeds of our Initial Public Offering was approximately $10.2 million ofwhich $1.6 million was accrued and unpaid.

 

BehringerSecurities serves as the dealer manager for the Initial Public Offering andreceives selling commissions of up to 7% of gross offering proceeds beforereallowance of commissions earned by participating broker-dealers.  Inconnection with the Initial Public Offering, up to 2.5% of gross proceedsbefore reallowance to participating broker-dealers are paid to BehringerSecurities as a dealer manager fee. No selling commissions or dealer managerfee is paid on purchases made pursuant to our DRIP.  In the Initial PublicOffering, 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.

 

25

----

Table of Contents

 

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

 
| ** **                | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|---------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **Sale  of common stock** | ** ** | **2010**                                                          | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Gross proceeds            |       | $                                                                 | 148.8      |                                                            | $          | 111.5 |   | $ | 288.3 |   | $ | 164.8 |   |
| Less offering costs:      |       |                                                              |       |                                                            |       |   |   |   |   |
| O&O Reimbursement     |       | (2.7                                                              | )          | (2.3                                                            | )          | (5.0 | ) | (4.3 | ) |
| Dealer manager fees       |       | (3.7                                                              | )          | (2.8                                                            | )          | (7.2 | ) | (4.1 | ) |
| Selling commissions       |       | (9.9                                                              | )          | (7.6                                                            | )          | (19.3 | ) | (11.3 | ) |
| Total offering costs      |       | (16.3                                                             | )          | (12.7                                                           | )          | (31.5 | ) | (19.7 | ) |
| Sale of common stock, net |       | $                                                                 | 132.5      |                                                            | $          | 98.8 |   | $ | 256.8 |   | $ | 145.1 |   |

 

Includedin general and administrative expenses are accounting and legal personnel costsincurred on our behalf by our Advisor for the three months ended June 30,2010 and 2009 is approximately $0.6 million and $0.3 million,respectively.  For the six months ended June 30,2010 and 2009, general and administrative expenses incurred is approximately$1.1 million and $0.6 million, respectively.

 

OurAdvisor and its affiliates receive acquisition and advisory fees of 1.75% of(1) the contract purchase price paid or allocated in respect of thedevelopment, construction or improvement of each asset acquired directly by us,including any debt attributable to these assets, or (2) when we make aninvestment indirectly through another entity, our pro rata share of the grossasset value of real estate investments held by that entity. Our Advisor and itsaffiliates also receive 1.75% of the funds advanced in respect of a loan orother investment.

 

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

 

Forthe three months ended June 30, 2010 and 2009, our Advisor earnedacquisition and advisory fees, including the acquisition expense reimbursement,of approximately $3.7 million and $0.3 million, respectively. For the sixmonths ended June 30, 2010 and 2009, our Advisor earned acquisition andadvisory fees of approximately $6.4 million and $0.4 million, respectively. Forthe three months ended June 30, 2010 and 2009, $2.0 million and $0.3million, respectively, were capitalized to investments in unconsolidated realestate joint ventures.   For the sixmonths ended June 30, 2010 and 2009, $2.5 million and $0.4 million,respectively, were capitalized to investments in unconsolidated real estatejoint ventures.

 

OurAdvisor receives debt financing fees of 1% of the amount available to us underdebt financing which was originated, assumed or refinanced by or for us. OurAdvisor may pay some or all of these fees to third parties with whom itsubcontracts to coordinate financing for us. For the three and six months endedJune 30, 2010, our Advisor has earned debt financing fees of

 

26

----

Table ofContents

 

approximately$0.2 million and $2.1 million, respectively. For both the three and six months ended June 30, 2009, our Advisorhas earned debt financing fees of $0.2 million, respectively.

 

On September 2, 2008,the Company entered into an Amended and Restated Property Management Agreement(the “Property Management Agreement”) with our operating partnership and ourproperty manager, BHM Management. The Property Management Agreement has a termof two years from the effective date of the original property managementagreement and will terminate on November 21, 2010. If no party giveswritten notice of termination to the other parties at least thirty days priorto the expiration date of the agreement, then it will automatically continuefor consecutive two-year periods. The Property Management Agreement alsoprovides that, in the event we terminate the advisory management agreement withour Advisor, BHM Management will have the right to terminate the agreement uponat least thirty days prior written notice.

 

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

 

TheProperty Management Agreement applies where we have control over the selectionof property management.  As of June 30,2010, 19 multifamily communities were managed under the Property ManagementAgreement.  For the three and six monthsended June 30, 2010, BHM Management or its affiliates earned propertymanagement fees of $0.1 million and $0.2 million, respectively.   For the three and six months ended June 30,2009, BHM Management or its affiliates earned minimal property managementfees.   For all other multifamilycommunities, the unaffiliated third-party partner has selected the propertymanager or the property is still in development.

 

OurAdvisor receives a monthly asset management fee for each asset held by us.Through June 30, 2010, this amount is one-twelfth of 0.75% of the higherof the total cost of the investment or value of the investment. For the three monthsended June 30, 2010 and 2009, our Advisor earned asset management fees ofapproximately $1.4 million and $0.3 million, respectively.  For the six months ended June 30, 2010and 2009, our Advisor earned asset management fees of approximately $2.7 millionand $0.5 million, respectively.

 

EffectiveJuly 1, 2010, the Advisory Management Agreement was amended and restatedchanging the fees associated with asset management.  As modified, rather than being a monthly feeequal to one-twelfth of 0.75% of the sum of the higher of the cost or value ofour assets, effective July 1, 2010, the asset management fee will be amonthly fee equal to one-twelfth of the “Applicable Asset Management FeePercentage” of the sum of the higher of the cost or value of such assets.  The Applicable Asset Management FeePercentage starting July 1, 2010 will initially be 0.50%, reduced from0.75% prior to that time. The percentage will increase to 0.75% following twoconsecutive fiscal quarters during which our Modified Funds From Operations (“MFFO”as defined below) per share of common stock equals or exceeds $0.12. Thepercentage will increase further to 1.0% following two consecutive fiscalquarters during which our MFFO for each such fiscal quarter equals or exceeds$0.15.  Finally, the percentage willreturn to 0.75% upon the first day following the fiscal quarter during whichour Advisor has, since July 1, 2010, earned asset management fees equal tothe amount of asset management fees our Advisor would have earned if theApplicable Asset Management Fee Percentage had been 0.75% every day since July 1,2010. Once the Applicable Asset Management Fee Percentage increases above the0.50% described above, it will not decrease during the term of the agreement,except as described, regardless of our MFFO in any subsequent period. In noevent will our Advisor receive more than the asset management fee at the 0.75%rate originally contracted for.  As usedabove, MFFO means, with respect to any fiscal quarter, our funds fromoperations, or FFO (as defined by the National Association of Real EstateInvestment Trusts), during such quarter, plus acquisition expenses, impairmentcharges and adjustments to fair value for derivatives not qualifying for hedgeaccounting during such quarter. However, if a trade or industry grouppromulgates a different definition of MFFO applicable to listed or non-listedREITs that we adopt in our periodic reports filed with the SEC, MFFO will havethe meaning of such different definition.

 

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

 

27

----

Table ofContents

 

**13.****         ****SupplementalDisclosures of Cash Flow Information**

 

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

 
| ** **                                                         | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                         | ** ** | **2010**                                    | ** ** | **2009** | ** ** |
| **Supplemental disclosure of cash  flow information:**             |       |                                        |       |   |   |
| Interest paid, net of amounts capitalized of $0.9  million in 2010 |       | $                                           | 1.2        |   | $ | — |   |
|                                                               |       |                                        |       |   |   |
| **Non-cash investing and  financing activities:**                  |       |                                        |       |   |   |
| Assumption of mortgage note payable                                |       | $                                           | 26.7       |   | $ | — |   |
| Stock issued pursuant to our DRIP                                  |       | $                                           | 10.5       |   | $ | 2.2 |   |
| Distributions payable                                              |       | $                                           | 4.9        |   | $ | 1.7 |   |
| Redemptions payable                                                |       | $                                           | 4.0        |   | $ | — |   |
| Accrued offering costs and dealer manager fees                     |       | $                                           | 1.6        |   | $ | 1.9 |   |

 

**14.****         ****Subsequent Events**

 

***Status of the Offering***

 

Forthe period July 1, 2010 through August 4, 2010, we sold approximately4.0 million shares of common stock for gross proceeds of approximately $39.8million including issuances through our DRIP.

 

***Distributions Paid***

 

OnJuly 2, 2010, we paid total distributions of approximately $4.9 million,of which $2.3 million was cash distributions and $2.6 million was funded byissuing shares pursuant to our DRIP, relating to distributions declared eachday in the month of June 2010. On August 2, 2010, we paid totaldistributions of approximately $5.3 million, of which $2.5 million was cashdistributions and $2.8 million was funded by issuing shares pursuant to ourDRIP, relating to distributions declared each day in the month of July 2010.

 

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

 

OnAugust 3, 2010, we acquired a wholly owned multifamily community, locatedin Houston, TX, from an unaffiliated seller. The purchase price wasapproximately $65.5 million, excluding closing costs. On August 4, 2010,we acquired a wholly owned multifamily community, located in San Bruno,California, from an unaffiliated seller. The purchase price was approximately $55.0 million, excluding closingcosts. Acquisition expenses of approximately $2.4 million were recognized forboth acquisitions.  Due to the timing ofthese acquisitions, we are unable to provide the other acquisition disclosuresor finalize the acquisition allocations.

 

***Financings***

 

OnJuly 23, 2010, the Fitzhugh Urban Flats BHMP CO-JV in which we hold a 55%ownership interest closed on a $28.0 million mortgage loan payable. Themortgage loan payable bears interest at approximately 4.35% and matures in August 2017.The mortgage loan payable is secured with BHMP CO-JV assets that as of June 30,2010 had a carrying value of approximately $48.3 million.

 

OnAugust 9, 2010, the Eclipse BHMP CO-JV in which we hold a 55% ownershipinterest closed on a $20.8 million mortgage loan payable. The mortgage loanpayable bears interest at approximately 4.46% and matures in September 2017.  The mortgage loan payable is secured withBHMP CO-JV assets that as of June 30, 2010 had a carrying value ofapproximately $32.5 million.

 

OnAugust 9, 2010, the Briar Forest Lofts BHMP CO-JV in which we hold a 55%ownership interest closed on a $21.0 million mortgage loan payable. The mortgageloan payable bears interest at approximately 4.46% and matures in September 2017.  The mortgage loan payable is secured withBHMP CO-JV assets that as of June 30, 2010 had a carrying value ofapproximately $37.2 million.

 

28

----

Table of Contents

 

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

 

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

 

**Forward-LookingStatements**

 

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

 

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

 

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

 

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

 

·              the availability of cash flow from operatingactivities for distributions;

 

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

 

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

 

·              our ability to secure resident leases at favorablerental rates;

 

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

 

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

 

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

 

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

 

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

 

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

 

**CautionaryNote**

 

Therepresentations, warranties, and covenants made by us in any agreement filed asan exhibit to this Quarterly Report are made solely for the benefit of theparties to the agreement, including, in some cases, for the purpose ofallocating risk among the

 

29

----

Table of Contents

 

partiesto the agreement, and should not be deemed to be representations, warranties,or covenants to or with any other parties.  Moreover, theserepresentations, warranties or covenants should not be relied upon asaccurately describing or reflecting the current state of our affairs.

 

**Overview**

 

Wewere incorporated on August 4, 2006 as a Maryland corporation and operateas a REIT for federal income tax purposes. We make investments in and operatehigh quality multifamily communities. In particular, we were organized toinvest in and operate high quality multifamily communities that we believe havedesirable locations, personalized amenities, and high quality construction. Webegan acquiring interests in multifamily communities in April 2007. As of June 30,2010, all of our investments have been in high quality development andoperating multifamily communities located in the top 50 metropolitanstatistical areas (“MSAs”) in the United States.  We have made and intend to continue makinginvestments both in wholly owned investments and through co-investmentarrangements with other participants (“Co-Investment Ventures”).

 

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

 

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

 

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

 

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

 

Asof June 30, 2010 all of our Co-Investment Ventures have been made throughjoint ventures with Behringer Harvard Master Partnership I LP (the “BHMPCo-Investment Partner”) through entities in which we are the manager. The 1%general partner of the BHMP Co-Investment Partner is Behringer HarvardInstitutional GP LP, which is an affiliate of our Advisor and is indirectlyowned by our sponsor, Behringer Harvard Holdings, LLC. The 99% limited partnerof the BHMP Co-Investment Partner is Stichting Depositary PGGM Private RealEstate Fund, a Dutch foundation acting in its capacity as depositary of and forthe account and risk of PGGM Private Real Estate Fund, an investment vehiclefor Dutch pension funds (“PGGM”). Substantially all of the capital provided to the BHMP Co-InvestmentPartner is from PGGM. We have no ownership or other direct financial interestsin either of these entities.

 

PGGM’scommitment under the partnership agreement of the BHMP Co-Investment Partner is$300 million. Until the funding commitment from PGGM of $300 million has beenplaced in investments with us or investment programs of our sponsor, to theextent that investments fit within the investment parameters agreed betweenPGGM and our sponsor, we expect a portion of our future real estateacquisitions and real estate under development activities will be made throughBHMP CO-JVs.  As of June 30, 2010,approximately $29.5million of the $300 million commitment remains unfunded;however, in the event that certain of the investments

 

30

----

Table of Contents

 

refinanceor new property debt is placed within two years from the date of theacquisition, the amount of unfunded commitment may be increased.

 

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

 

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

 

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

 

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

 

Twoof our 22 BHMP CO-JVs have made only mezzanine or mortgage loan investments inProperty Entities that are developing multifamily communities. 13 investmentsare indirectly wholly owned by the BHMP CO-JVs. The remaining seven BHMP CO-JVshave made equity investments with third-party partners in, and/or have madenotes receivable to, Property Entities that own one real estate operatingproperty or development project. The partners of these Property Entities arethe applicable BHMP CO-JV and unaffiliated third parties, which serve asgeneral or limited partners and are generally subsidiaries of multifamilydevelopers which were organized to own, construct, and finance only oneparticular real estate project. Each of these seven BHMP CO-JV investments in aProperty Entity is evaluated for consolidation at the BHMP CO-JV level usingour principles of consolidation and three investments are reported on aconsolidated basis by the BHMP CO-JV.  The remaining four investments are recorded as unconsolidated realestate joint ventures and reported with the equity method of accounting by therespective BHMP CO-JVs.

 

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

 

For13 of our 22 BHMP CO-JV investments, the only equity partners are us and theBHMP Co-Investment Partner. In the remaining investments, the Property Entityincludes other unaffiliated partners and participants, usually in situationswhere the multifamily community was undergoing development at the time of ourinitial investment and the other party serves as a developer

 

31

----

Table of Contents

 

partner.  Each Property Entity arrangement with anunaffiliated developer is unique and heavily negotiated, but we will generallyseek the following provisions:

 

Fordevelopment stage investments:

 

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

 

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

 

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

 

Foroperating and development stage investments:

 

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

 

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

 

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

 

Inaddition, most of these joint venture agreements provide the applicable BHMPCO-JV with options to increase its equity ownership percentage and/or acquiredirect ownership of the multifamily community. These options are generallyavailable at completion of the development and for some period thereafter. Asof June 30, 2010, individual BHMP CO-JVs have acquired a direct ownershipin one Property Entity, The Eclipse, and increased their ownership in twoothers, Bailey’s Crossing and 55 Hundred. Of the remaining four equityinvestments with developer partners (Satori, Skye 2905, Veritas and The Venue),the option periods have not commenced. However, all of these multifamily communities are in the lease up stageof development and we continue to evaluate our investment options.

 

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

 

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

 

32

----

Table of Contents

 

Investmentsin multifamily communities have benefited from the changing demographic andresidential finance trends of the last ten years. These trends includecontinued growth in non-traditional households, the echo-boomer generationcoming of age and entering the rental market, baby-boomers or retirees whodesire freedom from the costs and expenses of entering and maintaining a home,increased immigration and recently higher credit standards for home buyers.Changes in domestic financial markets can affect the stability and direction ofthese historical trends and can significantly affect our strategy, bothfavorably and unfavorably.  Demand formultifamily communities is also affected by changes in financial markets wherechanges in underwriting have affected the cost, availability and affordabilityof financing for purchase of single family homes. In the near term, we believethese trends will be favorable for multifamily demand as the key demographicpopulation increases and single family housing options become more restrictive.

 

**MarketOutlook**

 

Duringthe second quarter of 2010, the general economy continued a slow and unevenrecovery.  GDP has increased for the lastfour quarters, up 2.4% for the second quarter but down from an increase of 3.7%in the first quarter.  Employment, asignificant driver for multifamily communities, has also been inconsistent.Although unemployment fell throughout the second quarter of 2010, a portion ofthe decline was attributable to fewer workers seeking employment, andaccordingly not included in the labor force, and temporary government censusworkers. Nonetheless, private-sector hiring averaged 119,000 during the secondquarter, compared to approximately 78,700 in the first quarter and a negative270,000 during the fourth quarter of 2009. While employment is still weakacross many sectors, a significant employment category for our higher qualitycommunities, professional services and retail employment, is positive for 2010.In the broader multifamily sector, fundamentals have improved.  National research firms have reportedincreases in effective rents and occupancies across many markets, significantimprovements in ratios of property offerings of sales to closings and compressionin capitalization rates for high quality communities.  During the second quarter, average nationalrents showed their biggest gains in two years, further evidence that rentconcessions are slowing  and that somerenter demand may advance prior to employment improvements.  So-called shadow rental alternatives fromunsold condominiums and single-family residences will continue to be a factorand will likely slow the rate of improvement. Accordingly, we still believe the recovery to be gradual and uneven formost of 2010 with greater and more sustainable improvements thereafter.

 

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

 

Inthe multifamily capital markets sector, we continue to experience favorablefinancing options, particularly for high quality, well-capitalizedinvestments.  Specifically,government-sponsored entities such as Fannie Mae and Freddie Mac (“GSEs”) haveand may continue to provide needed financing, refinancing and creditenhancement to the multifamily sector. In the last 12 months, we and three of our BHMP CO-JVs completed six newloan originations with GSEs totaling approximately $292.5 million at aweighted-average interest rate of 3.48%. This includes a $150 millionLIBOR-based credit facility at a current rate of 2.43%. We are also seeingevidence that other lenders, particularly life insurance companies, areaggressively bidding for market share in the multifamily sector.  Although there can be no assurance that theGSEs or comparable financing will continue to be available or available atthese rates, particularly in light of recent financial reform legislation andcontinued political scrutiny over their operations,  the aforementioned are positive factors inour investment strategy.  Further, marketinterest rates continue to be at historical lows. Short term rates, as measuredby 30-day LIBOR, are at historical lows and have been relatively unchangedduring the first and second quarters of 2010. As of June 30, 2010, 30-day LIBOR is 0.35%.  During the same period, longer term rateshave fallen significantly. Five-year and ten-year treasuries started the yearat approximately 2.6% and 3.8%, respectively. As of June 30, 2010, thefive-year treasury rate dropped below 2% and during July 2010 the ten-yeartreasury rate dropped below 3%. At these base rates, overall financing ratesfor multifamily communities are very attractive and provide leveraged returnsin excess of our distribution rate. However, it is doubtful that these levelscan be sustained and we do see the potential for rates to increase. Accordinglya component of our finance strategy is to obtain fixed-rate financing forstabilized multifamily communities with maturities ranging from five to tenyears.

 

Inthis investing environment, we will continue to monitor the interplay fromthese changing capitalization rates, growth rates and financing interestrates.  While in 2008 and parts of 2009the multifamily sector experienced increasing capitalization rates, the

 

33

----

Table of Contents

 

sectoris currently experiencing a contraction in capitalization rates as investors,especially institutional investors, re-enter the market for high qualitymultifamily communities. We would expect such a contraction in capitalization ratesto increase the valuation of our existing portfolio, especially when coupledwith increasing rental and occupancy rates. In this environment leverage on our portfolio investments can enhancethe equity value increases of our existing portfolio.  On the other hand, compressing capitalizationrates could decrease the going-in returns on new investments. However,capitalization rates usually do not change independent of other real estatefundamentals. Based on our analysis and as reported by national analysts, theseincreases are coupled with higher rental and net operating income growthexpectations as a consequence of forecasted demand and supply factors.  If these expectations are met, capitalizationrates will normalize over time based on higher net operating incomes.  Although not perfectly correlated, we wouldalso expect a relationship between future interest rates and capitalizationrates, where capitalization rates would move up as interest rates adjust to higher,historical levels. However, with the long-term financing we have already placedand currently available as discussed above, we believe new investments canstill meet our total return expectations.  Accordingly, we believe we have the capital resources, relationships andexperience to continue to execute our strategy of investing in high qualitymultifamily communities in fundamentally sound, diversified long-term markets.

 

Withthese market fundamentals, we believe our strategy of focusing on institutionalhigh quality market sectors with low housing affordability and high barriers toentry will benefit from the combination of low supply and pent up demand.  The stabilized multifamily communities in ourportfolio have an average occupancy of 92% as of June 30, 2010 compared to89% as of March 31, 2010, and we have begun to see improvements in leasingvelocity and resident renewals across the portfolio. In our newly openedcommunities, which are those multifamily communities that either were recentlycompleted or were acquired during or prior to initial lease up, we areexperiencing high leasing demand.  All ofthese newly opened communities are highly amenitized and were built withcondominium construction and finish quality in highly desired locations.  In addition, three of these newly openedcommunities, Forty55 Lofts in Marina del Rey, which began lease up in thefourth quarter of 2009, Satori in Fort Lauderdale, which was completed in thefirst quarter 2010 and The Venue in metropolitan Las Vegas, which was completedin the fourth quarter 2009,  have nowexceeded 90% occupancy.   In addition, weexpect that the following newly opened communities located in urban locations,Skye 2905 in Denver and Cyan/PDX in Portland, a LEED gold certified community,will soon reach stabilization. We expect the remaining multifamily communitiesthat are in lease up in our portfolio to reach stabilization by the end of 2010or early 2011.

 

Weexpect to use the proceeds from our Initial Public Offering as the primaryfunding source for the execution of our investment strategy and the expansionof our portfolio.  As of June 30,2010, we sold a total of approximately 73.4 million shares (including DRIP) ofcommon stock and raised a total of $730.8 million in gross proceeds from ourInitial Public Offering.  On June 29,2010, our board of directors approved an extension of our initial publicoffering until no later than September 2, 2011. Under rules promulgatedby the SEC, we could extend our offering until February 29, 2012. Ourboard of directors has the discretion to extend the offering period for theshares being sold pursuant to our DRIP up to the sixth anniversary of thetermination of the primary offering until we have sold all shares availablepursuant to the DRIP.

 

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

 

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

 

**Property Portfolio**

 

Ourmultifamily investments include wholly owned multifamily communities,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 arestabilized (the earlier of 90% occupancy or one year after completion ofconstruction) for both the current and prior reporting period.

 

·      Stabilized / Non-comparable are communities thathave been stabilized or acquired during or after 2nd quarter 2009.

 

34

----

Table of Contents

 

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

 

·      Developments are communities currently underconstruction for which leasing activity has not commenced.

 

Presentedbelow are the carrying amounts for our wholly owned real estate investments,individual BHMP CO-JV investments and our note receivables as of June 30,2010 and December 31, 2009.  For theinvestments in unconsolidated real estate joint ventures in BHMP CO-JVs, weprovide information describing the underlying investment.  Also presented are the occupancy rates as of June 30,2010 and December 31, 2009, which for stabilized multifamily communitiesis based on the number of individual units and for rental areas is based ongross leasable area (“GLA”) (amounts in millions):

 
| ** **                                                 | ** ** | ** ** | ** ** | **Occupancy Rates**     | ** ** | **Total Real Estate, net  (in millions)** | ** ** |
|------------------------------------------------------------|------------|------------|------------|-------------------------|------------|-------------------------------------------|------------|
| **Investments  in Real Estate**                            | ** ** | **Units**  | ** ** | **June 30,  2010** | ** ** | **December 31,  2009**               | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
| *Stabilized / Non-comparable:*                             |       |       |       |                    |       |                                      |       |   |   |   |   |
| The Gallery at NoHo Commons / Los Angeles,  California (1) |       | 438        |       | 93                      | %          | 90                                        | %          | $ | 104.6 |   | $ | 106.0 |   |
| Mariposa Loft Apartments / Atlanta, Georgia                |       | 253        |       | 95                      | %          | 91                                        | %          | 27.6 |   | 27.9 |   |
| Grand Reserve Orange / Orange, Connecticut                 |       | 168        |       | 92                      | %          | 92                                        | %          | 24.6 |   | 25.1 |   |
| Acacia on Santa Rosa Creek / Santa Rosa,  California       |       | 277        |       | 95                      | %          | N/A                                       |       | 37.1 |   | — |   |
| The Lofts at Park Crest / McLean, Virginia  (1) (2)   |       | 131        |       | 95                      | %          | N/A                                       |       | 49.0 |   | — |   |
| Burnham Pointe / Chicago, Illinois (2)                |       | 298        |       | 89                      | %          | N/A                                       |       | 86.4 |   | — |   |
| Total wholly owned investments                             |       | 1,565      |       |                    |       |                                      |       | $ | 329.3 |   | $ | 159.0 |   |

 
| ** **                                                                                                       | ** ** | ** ** | ** ** | **Occupancy Rates**     | ** ** | **Our Investment in  Unconsolidated Real Estate  Joint Ventures  (in millions)** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Investments  in Unconsolidated Real Estate Joint Ventures (3)**                                                | ** ** | **Units**  | ** ** | **June 30,  2010** | ** ** | **December 31,  2009**                                                      | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
| *Stabilized / Comparable:*                                                                                       |       |       |       |                    |       |                                                                             |       |   |   |   |   |
| The Reserve at Johns Creek Walk / Johns Creek,  Georgia (4)                                                      |       | 210        |       | 94                      | %          | 93                                                                               | %          | $ | 3.7 |   | $ | 4.0 |   |
|                                                                                                             |       |       |       |                    |       |                                                                             |       |   |   |   |   |
| *Stabilized / Non-comparable:*                                                                                   |       |       |       |                    |       |                                                                             |       |   |   |   |   |
| The Eclipse / Houston, Texas (5)                                                                                 |       | 330        |       | 90                      | %          | N/A                                                                              |       | 18.7 |   | 19.7 |   |
| Halstead / Houston, Texas (5)                                                                                    |       | 301        |       | 90                      | %          | 90                                                                               | %          | 3.1 |   | 3.4 |   |
| Waterford Place / Dublin, California (5)                                                                         |       | 390        |       | 96                      | %          | 92                                                                               | %          | 10.4 |   | 11.0 |   |
| Burrough’s Mill Apartment Homes / Cherry Hill, New  Jersey (5)                                              |       | 308        |       | 93                      | %          | 92                                                                               | %          | 7.4 |   | 8.1 |   |
| Forty55 Lofts / Marina del Rey, California (5)                                                                   |       | 140        |       | 90                      | %          | N/A                                                                              |       | 27.3 |   | 26.2 |   |
| Calypso Apartments and Lofts / Irvine, California  (5)                                                           |       | 177        |       | 91                      | %          | 89                                                                               | %          | 13.9 |   | 27.4 |   |
| 4550 Cherry Creek / Denver, Colorado (5)                                                                         |       | 288        |       | 90                      | %          | N/A                                                                              |       | 12.6 |   | — |   |
| 7166 at Belmar / Lakewood, Colorado (5)                                                                          |       | 308        |       | 92                      | %          | N/A                                                                              |       | 13.4 |   | — |   |
| Briar Forest Lofts / Houston, Texas (5)                                                                          |       | 352        |       | 84                      | %          | N/A                                                                              |       | 21.2 |   | — |   |
| Fitzhugh Urban Flats / Dallas, Texas (5)                                                                         |       | 452        |       | 94                      | %          | N/A                                                                              |       | 27.4 |   | — |   |
| Tupelo Alley / Portland, Oregon (2) (5)                                                                     |       | 188        |       | 92                      | %          | N/A                                                                              |       | 21.5 |   | — |   |
|                                                                                                             |       |       |       |                    |       |                                                                             |       |   |   |   |   |
| *Lease ups:*                                                                                                     |       |       |       |                    |       |                                                                             |       |   |   |   |   |
| Cyan/PDX / Portland, Oregon (2) (5)                                                                         |       | 352        |       | N/A                     |       | N/A                                                                              |       | 45.3 |   | 46.2 |   |
| San Sebastian / Laguna Woods, California (5)                                                                     |       | 134        |       | N/A                     |       | N/A                                                                              |       | 19.8 |   | 19.9 |   |
| 55 Hundred / Arlington, Virginia  (2) (4) (6)                                                          |       | 234        |       | N/A                     |       | N/A                                                                              |       | 22.7 |   | 23.6 |   |
| Bailey’s Crossing / Alexandria, Virginia  (4) (6)                                                      |       | 414        |       | N/A                     |       | N/A                                                                              |       | 29.6 |   | 29.8 |   |
| The Venue / Clark County, Nevada  (4) (6) (7)                                                          |       | 168        |       | N/A                     |       | N/A                                                                              |       | 4.1 |   | 4.5 |   |
| Satori / Fort Lauderdale, Florida  (2) (4) (6) (7)                                                |       | 279        |       | N/A                     |       | N/A                                                                              |       | 11.6 |   | 12.3 |   |
| Skye 2905 / Denver, Colorado  (2) (4) (6) (7)                                                     |       | 400        |       | N/A                     |       | N/A                                                                              |       | 12.5 |   | 12.9 |   |
| Veritas / Henderson, Nevada (4) (6) (7)                                                                |       | 430        |       | N/A                     |       | N/A                                                                              |       | 14.6 |   | 14.9 |   |
| Grand Reserve / Dallas, Texas (8)                                                                                |       | 149        |       | N/A                     |       | N/A                                                                              |       | 5.3 |   | 5.1 |   |
| The Cameron / Silver Spring, Maryland  (2) (6) (8)                                                     |       | 325        |       | N/A                     |       | N/A                                                                              |       | 11.0 |   | 10.9 |   |
| Total investments in unconsolidated real estate  joint ventures                                                  |       | 6,329      |       |                    |       |                                                                             |       | $ | 357.1 |   | $ | 279.9 |   |
| ** **                                                                                                       |       | 7,894      |       |                    |       |                                                                             |       |   |   |   |   |
| **Note and Other Receivables**                                                                                   |       |       |       |                    |       |                                                                             |       |   |   |   |   |
| Grand Reserve / Dallas, Texas                                                                                    |       |       |       |                    |       |                                                                             |       | $ | 2.5 |   | $ | 2.4 |   |
| Tax Increment Receivable                                                                                         |       |       |       |                    |       |                                                                             |       | 1.6 |   | 1.6 |   |
| Due from Community Redevelopment Agency, Los  Angeles, California in connection with The Gallery at NoHo Commons | * *   | * *   |       |                    |       |                                                                             |       |   |   |   |   |
| Total note and other receivables                                                                                 | * *   | * *   |       |                    |       |                                                                             |       | $ | 4.1 |   | $ | 4.0 |   |

 

35

----

Tableof Contents

 

----

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

 

(2)       Includes retail space, where the total approximatesquare footage of retail space of gross leasable area (“GLA”) for all theseinvestments totals approximately 127,500 square feet or approximately 6% oftotal rentable area.  Of the stabilizedcommunities, The Lofts at Park Crest, Tupelo Alley and Burnham Pointe contain retailspace with approximately 93,000 square feet of GLA, of which 75% was occupiedas of June 30, 2010.

 

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

 

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

 

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

 

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

 

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

 

(8)   Loan investment by a BHMPCO-JV.

 

Theincreased carrying amounts on our wholly owned investments as of June 30,2010 are largely due to acquiring three wholly owned multifamily communitiesduring the six months ended June 30, 2010 for an aggregate purchase priceof approximately $194.8 million. During the six months ended June 30,2010, we also invested in five newly formed BHMP CO-JVs, each holding a whollyowned multifamily community. The total acquisition price for these multifamilycommunities was $219.7 million and our total share of the capital contributionfor these BHMP CO-JVs was $127.0 million. Also during the six months ended June 30, 2010, BHMP CO-JVs CalypsoApartments and Lofts,  4550 Cherry Creekand 7166 at Belmar obtained new mortgage financing secured by the respectiveproperty for an aggregate amount of $75.4 million.  Substantially all of the net proceeds relatedto these financings were distributed to the partners and our share was $44.9 million,which decreased our investment in the unconsolidated joint ventures.

 

**Results of Operations**

 

Forthe three months ended June 30, 2010, we are reporting a net loss of $8.8million compared to net income of $0.4 million for the three months ended June 30,2009. For the six months ended June 30, 2010, we are reporting a net lossof $17.8 million compared to net income of $0.5 million for the six monthsended June 30, 2009. The overall decrease in net income is primarily dueto our acquisitions made in the past 12 months of six wholly owned multifamilycommunities, 11 acquisitions by BHMP CO-JVs and the treatment of theseacquisition activities.  Our share ofacquisition costs related to our acquisitions is expensed.  For the three and six months ended June 30,2010, our share of acquisition expenses was approximately $3.1 million and $6.1million, respectively, including our share of acquisition expenses forunconsolidated real estate joint ventures. For the three and six months ended June 30,2009, we made one new acquisition and our share of acquisition expense wasapproximately $0.1 million. Acquisition accounting also requires that weallocate a portion of the purchase price to in-place lease intangibles.  These lease intangibles are amortized overremaining lease terms, generally a term of less than one year. Accordingly,amortization expense is higher in the period immediately following anacquisition for both our wholly owned investments and our investments inunconsolidated real estate joint ventures. Further, several of the multifamily communities we have made investmentsin are in lease up.  During theseperiods, holding costs,

 

36

----

Table of Contents

 

amortizationand depreciation expense may exceed the pre-stabilization revenues.  We expect that as we complete the investmentsof the proceeds from our Initial Public Offering that earnings on ourstabilized real estate investments will have a higher contribution to our netincome while pre-stabilized investments will be proportionally less significantto our overall operating results. However, acquisition and amortization expenses during this acquisitionand development stage could be significant, resulting in net losses until wehave substantially invested the proceeds from our Initial Public Offering.

 

Becausewe did not own any wholly owned multifamily communities as of June 30,2009, coupled with the activity noted above, many of our results for the threeand six months ended June 30, 2010 are not directly comparable to thethree and six months ended June 30, 2009, where our results of operationsfor each period presented reflect significant increases in substantially allreporting categories for the current period. This will likely be the case untilwe substantially invest the proceeds from the Initial Public Offering.

 

***The three months ended June 30, 2010 as compared to thethree months ended June 30, 2009***

 

*Rental Revenues. *Rental revenues for the three monthsended June 30, 2010 were approximately $6.6 million. These rentalrevenues are from our six wholly owned multifamily communities acquired in thepast twelve months.  We expect continuedincreases in these revenues as a result of owning these six communities for afull reporting period and our expected acquisitions of additional real estateinvestments.  We did not have any whollyowned real estate assets as of June 30, 2009 and consequently did not haveany rental revenue during such period.

 

*Property Operating and Real Estate Tax Expenses. * Property operationsand real estate tax expenses for the three months ended June 30, 2010 wereapproximately $2.6 million and are from our wholly owned multifamilycommunities acquired in the past twelve months. We expect continued increases in these expenses as a result of owningthese six communities for a full reporting period and our expected acquisitionsof additional real estate investments. We did not have any wholly owned real estate assets as of June 30,2009 and consequently did not have such expenses.

 

*Asset Management and Other Fees.*Assetmanagement fees for the three months ended June 30, 2010 and 2009 wereapproximately $1.4 million and $0.3 million, respectively. These fees arebased on the amount of our gross real estate investments, the time period inplace and the asset management fee rate. Accordingly, the increase is due to the timing and funded amounts of ourinvestments during the past twelve months. We expect continued increases in the amount of our gross real estateinvestments as a result of owning and acquiring additional real estateinvestments; however, effective July 1, 2010 the asset management fee ratewill decrease. Accordingly, we expect an increase in our asset management feesbut the rate of increase is expected to be less than previously expected.

 

*General and Administrative Expenses*. General and administrativeexpenses for the three months ended June 30, 2010 and 2009 wereapproximately $1.1 million and $0.6 million, respectively, and includedincreased costs for corporate general and administrative expenses incurred andreimbursed to our Advisor, as well as compensation of our board of directors,audit and tax fees, and legal fees. We expect further increases as a result ofowning and acquiring additional real estate investments and other joint ventureinterests.

 

*Acquisition Expenses. *Acquisitionexpenses for the three months ended June 30, 2010 were approximately $2.8million which included expenses incurred with third parties, incurred with ouradvisor and our amortization of acquisition costs related to our BHMP CO-JVinvestments.  As we make additionalwholly owned and joint venture investments, we expect acquisition expenses toincrease and to have a significant effect on our operating results. We did notincur any acquisition expenses for the three months ended June 30,2009.  Prior to 2009, Generally AcceptedAccounting Principles (“GAAP”) provided for the capitalization of acquisitioncosts.  See the section below entitled “Fundsfrom Operations and Modified Funds from Operations” for additional discussion.

 

*Interest Expense.*Interest expense for thethree months ended June 30, 2010 was approximately $1.4 million, relatingto permanent mortgages on our wholly owned multifamily communities and ourcredit facility.  As of June 30,2010, our mortgage loans payable were $93.7 million and the weighted averageinterest rate was approximately 4.78%. During the three months ended June 30, 2010, our borrowings underthe credit facility ranged between $10 million and $30 million with an averageannual interest rate of 2.43%. Also included in interest expense are creditfacility fees related to minimum usage and unused commitments. These fees were$0.6 million during the three months ended June 30, 2010. Interest expensefor the three months ended June 30, 2010 is net of capitalization of $0.4million.  We did not have any whollyowned multifamily communities or a credit facility for the three months ended June 30,2009.

 

37

----

Table of Contents

 

*Depreciation and Amortization. *Depreciationand amortization expense for the three months ended June 30, 2010 wasapproximately $3.8 million, primarily relating to our wholly owned real estateacquired in the past twelve months. Depreciation and amortization expenseprimarily includes 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. We did not have any wholly owned investments as of June 30,2009. See the section below entitled “Funds from Operations and Modified Fundsfrom Operations” for additional discussion.

 

*Interest Income.*Interest income, which primarily includedinterest earned on our cash equivalents, for the three months ended June 30,2010 and 2009 was approximately $0.4 million and $0.2 million,respectively.  We had higher average cashequivalent balances for the three months ended June 30, 2010 as comparedto three months ended June 30, 2009. Our cash equivalent balance is primarily a function of the timing andmagnitude of the proceeds raised from our Initial Public Offering and ourexpenditures for investment activities. Accordingly, our cash equivalent balances are subject to significantchanges.  Due to our primary emphasis onproviding liquidity for future real estate investments, our cash equivalentsare substantially held in daily liquidity bank deposits.  In the current environment, these cashequivalents continue to have low earnings rates, where our average weightedinterest rate for the three months ended June 30, 2010 was approximately0.80%, less than the comparable period in 2009. For the three months ended June 30, 2010 and 2009 interest incomealso included earnings on a direct, wholly owned note receivable ofapproximately $0.1 million for both periods.

 

*Equity in Earnings (Loss) of Investments in Unconsolidated Real EstateJoint Ventures.*Equity in loss of joint venture investments for thethree months ended June 30, 2010 was approximately $2.8 million comparedto equity in earnings of approximately $1.1 million for the three months ended June 30,2009.  A breakdown of our approximateequity in earnings by type of underlying investments is as follows (amounts inmillions):

 
| ** **                  | ** ** | **For the Three Months Ended  June 30, 2010** | ** ** | **For the Three Months Ended  June 30, 2009** | ** ** |
|-----------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                  | ** ** | **Equity in  Earnings (Loss)**                     | ** ** | **Cash Provided  by Operating  Activities**        | ** ** | **Equity in  Earnings (Loss)** | ** ** | **Cash Provided  by Operating  Activities** | ** ** |
| Loan investments            |       | $                                                  | 1.3        |                                               | $          | 0.6 |   | $ | 1.9 |   | $ | 1.5 |   |
|                        |       |                                               |       |                                               |       |   |   |   |   |
| Equity investments:         |       |                                               |       |                                               |       |   |   |   |   |
| Stabilized / Comparable     |       | (0.1                                               | )          | —                                             |       | (0.1 | ) | — |   |
| Stabilized / Non-comparable |       | (1.6                                               | )          | 0.5                                                |       | (0.1 | ) | — |   |
| Lease ups                   |       | (2.4                                               | )          | 0.4                                                |       | (0.6 | ) | — |   |
|                        |       | (4.1                                               | )          | 0.9                                                |       | (0.8 | ) | — |   |
| Total                       |       | $                                                  | (2.8       | )                                                  | $          | 1.5 |   | $ | 1.1 |   | $ | 1.5 |   |

 

Earningsfrom underlying loan investments decreased for the three months ended June 30,2010 as compared to the three months ended June 30, 2009 primarily due tothe BHMP CO-JV conversion of mezzanine notes to additional equity interests forBailey’s Crossing, The Eclipse and 55 Hundred during the fourth quarter of2009. As a result, these BHMP CO-JVs did not have any interest income for thethree months ended June 30, 2010. These BHMP CO-JVs had interest income of approximately $0.7 million forthe three months ended June 30, 2009. Most of the remaining mezzanine notes held by the BHMP CO-JVs also haveconversion options.  If these mezzaninenotes are also converted we would expect further decreases in equity earningsand distributions classified as cash provided by operating activities relatedto loan investments.  Cash provided byoperating activities may also decrease for loan investments due to loanprovisions which provide for full or partial accrual of interest untilmaturity.

 

Equityin loss from stabilized/non-comparable investments increased for the threemonths ended June 30, 2010 compared to the comparable period in 2009,primarily due to our share of depreciation and amortization expense andone-time charges for acquisition expenses exceeding net operating income.During the past twelve months, we added nine new stabilized/non-comparablecommunities as well as reclassified The Eclipse and Forty55 Lofts from a leaseup to a stabilized/non-comparable investment. For the three months ended June 30,2010, we incurred approximately $0.3 million of one-time acquisition expensesrelated to the acquisition of four operating BHMP CO-JVs. While all ourstabilized/non-comparable investments produced an overall loss, primarily dueto non-cash expenses for depreciation and amortization, these investmentsprovided cash flow for operating activity of approximately $0.5 million duringthe three months ended June 30, 2010. There were no distributionsclassified as operating activity for the corresponding period in 2009. Theseacquisitions noted above were substantially completed in the second half of2009 and the first 

 

38

----

Table of Contents

 

halfof 2010, and therefore do not provide us with a full year of operating results.We expect to continue to receive distributions from these investments but dueto non-cash charges for depreciation and amortization, we expect a loss inreported equity earnings.

 

Equityin loss from lease up equity investments increased for the three months ended June 30,2010 compared to the comparable period in 2009, primarily due to an increase inthe number of properties underlying our investments that were in lease up.  All of the investments in propertiesundergoing lease up produced losses as operating, interest, depreciation andamortization expenses exceeded unstabilized rental revenue. Subsequent to June 30,2009, 55 Hundred, The Venue, Satori, Skye 2905 and Veritas moved fromdevelopment status to lease up where substantially all costs were capitalized.These investments produced equity losses for the three months ended June 30,2010 of approximately $1.8 million. These properties are in the early stages oflease up and we expect losses from these investments to increase during 2010.  In addition, we made equity investmentsrelated to acquisitions of Cyan/PDX, San Sebastian and Bailey’s Crossingsubsequent to June 30, 2009. These investments produced losses ofapproximately $0.6 million.

 

***The six months ended June 30, 2010 as compared to thesix months ended June 30, 2009***

 

*Rental Revenues. *Rental revenues for the six monthsended June 30, 2010 were approximately $11.8 million. These rentalrevenues are from our six wholly owned multifamily communities acquired in thepast twelve months, three of which were acquired in 2010.  We expect continued increases in theserevenues as a result of owning these six communities for a full reportingperiod and our expected acquisitions of additional real estateinvestments.  We did not have any whollyowned real estate assets as of June 30, 2009 and consequently did not haveany rental revenue during such period.

 

*Property Operating and Real Estate Tax Expenses.  *Property operations and realestate tax expenses for the six months ended June 30, 2010 wereapproximately $4.5 million and are from our wholly owned multifamilycommunities acquired in the past twelve months, three of which were acquired in2010.  We expect continued increases inthese expenses as a result of owning these six communities for a full reportingperiod and our expected acquisitions of additional real estate investments.  We did not have any wholly owned real estateassets as of June 30, 2009 and consequently did not have such expenses.

 

*Asset Management and Other Fees.*Assetmanagement fees for the six months ended June 30, 2010 and 2009 wereapproximately $2.7 million and $0.5 million, respectively. These fees arebased on the amount of our gross real estate investments, the time period inplace and the asset management fee rate. Accordingly, the increase is due to the timing and funded amounts of ourinvestments during the past twelve months. We expect continued increases in the amount of our gross real estateinvestments as a result of owning and acquiring additional real estateinvestments; however, effective July 1, 2010 the asset management fee ratewill decrease.  Accordingly, we expect anincrease in our asset management fees but the rate of increase is expected tobe less than previously expected.

 

*General and Administrative Expenses*. General and administrativeexpenses for the six months ended June 30, 2010 and 2009 wereapproximately $2.2 million and $1.4 million, respectively, and includedincreased costs for corporate general and administrative expenses incurred andreimbursed to our Advisor, as well as compensation of our board of directors,audit and tax fees, and legal fees.  Weexpect further increases as a result of owning and acquiring additional realestate investments and other joint venture interests.

 

*Acquisition Expenses. *Acquisitionexpenses for the six months ended June 30, 2010 were approximately $5.5million which included expenses incurred with third parties, incurred with ouradvisor and our amortization of acquisition costs related to our BHMP CO-JVinvestments.  Acquisition expensesprimarily related to our acquisitions of Acacia on Santa Rosa Creek, The Loftsat Park Crest and Burnham Pointe Apartments. As we make additional wholly owned and joint venture investments, weexpect acquisition expenses to increase and to have a significant effect on ouroperating results. We did not incur any acquisition expenses for the six monthsended June 30, 2009.  Prior to 2009,GAAP provided for the capitalization of acquisition costs.  See the section below entitled “Funds fromOperations and Modified Funds from Operations” for additional discussion.

 

*Interest Expense.*Interest expense for the sixmonths ended June 30, 2010 was approximately $2.1 million, relating topermanent mortgages on our wholly owned multifamily communities and our creditfacility.  As of June 30, 2010, ourmortgage loans payable were $93.7 million and the weighted average interest ratewas approximately 4.78%.  During the sixmonths ended June 30, 2010, our borrowings under the credit facilityranged between $10 million and $30 million with an average annual interest rateof 2.38%. Also included in interest expense are credit facility fees related tominimum usage and unused commitments. These fees were $0.6 million during thesix months ended June 30, 2010. Interest expense for the six months ended June 30,2010 is net of capitalization of $0.9 million. We did not have any wholly owned multifamily communities or a creditfacility for the six months ended June 30, 2009.

 

39

----

Table of Contents

 

*Depreciation and Amortization. *Depreciationand amortization expense for the six months ended June 30, 2010 wasapproximately $7.3 million, primarily relating to our wholly owned real estateacquired in the past twelve months. Depreciation and amortization expenseprimarily includes 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. We did not have any wholly owned investments as of June 30,2009. See the section below entitled “Funds from Operations and Modified Fundsfrom Operations” for additional discussion.

 

*Interest Income.*Interest income, which primarily includedinterest earned on our cash equivalents, for the six months ended June 30,2010 and 2009 was approximately $0.7 million and $0.3 million,respectively.  We had higher average cashequivalent balances for the six months ended June 30, 2010 as compared tosix months ended June 30, 2009.  Ourcash equivalent balance is primarily a function of the timing and magnitude ofthe proceeds raised from our Initial Public Offering and our expenditures forinvestment activities.  Accordingly, ourcash equivalent balances are subject to significant changes.  Due to our primary emphasis on providingliquidity for future real estate investments, our cash equivalents aresubstantially held in daily liquidity bank deposits.  In the current environment, these cash equivalentscontinue to have low earnings rates, where our average weighted interest ratefor the six months ended June 30, 2010 was approximately 0.85%, less thanthe comparable period in 2009.  For thesix months ended June 30, 2010 and 2009 interest income also includedearnings on a direct, wholly owned note receivable of approximately $0.1million for both periods.

 

*Equity in Earnings (Loss) of Investments in Unconsolidated Real EstateJoint Ventures.*Equity in loss of joint venture investments for the sixmonths ended June 30, 2010 was approximately $6.0 million compared toequity in earnings of approximately $2.2 million for the six months ended June 30,2009.  A breakdown of our approximateequity in earnings by type of underlying investments is as follows (amounts inmillions):

 
| ** **                  | ** ** | **For the Six Months Ended  June 30, 2010** | ** ** | **For the Six Months Ended  June 30, 2009** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                  | ** ** | **Equity in  Earnings (Loss)**                   | ** ** | **Cash Provided  by Operating  Activities**      | ** ** | **Equity in  Earnings (Loss)** | ** ** | **Cash Provided  by Operating  Activities** | ** ** |
| Loan investments            |       | $                                                | 2.5        |                                             | $          | 1.2 |   | $ | 3.7 |   | $ | 2.8 |   |
|                        |       |                                             |       |                                             |       |   |   |   |   |
| Equity investments:         |       |                                             |       |                                             |       |   |   |   |   |
| Stabilized / Comparable     |       | (0.3                                             | )          | —                                           |       | (0.3 | ) | — |   |
| Stabilized / Non-comparable |       | (3.0                                             | )          | 1.0                                              |       | (0.1 | ) | — |   |
| Lease ups                   |       | (5.2                                             | )          | 0.8                                              |       | (1.1 | ) | — |   |
|                        |       | (8.5                                             | )          | 1.8                                              |       | (1.5 | ) | — |   |
| Total                       |       | $                                                | (6.0       | )                                                | $          | 3.0 |   | $ | 2.2 |   | $ | 2.8 |   |

 

Earningsfrom underlying loan investments decreased for the six months ended June 30,2010 as compared to the six months ended June 30, 2009 primarily due tothe BHMP CO-JV conversion of mezzanine notes to additional equity interests forBailey’s Crossing, The Eclipse and 55 Hundred during the fourth quarter of2009. As a result, these BHMP CO-JVs did not have any interest income for thesix months ended June 30, 2010. These BHMP CO-JVs had interest income of approximately $1.3 million forthe six months ended June 30, 2009.  Most of the remaining mezzanine notes held bythe BHMP CO-JVs also have conversion options. If these mezzanine notes are alsoconverted we would expect further decreases in equity earnings anddistributions classified as cash provided by operating activities related toloan investments.  Cash provided byoperating activities may also decrease for loan investments due to loanprovisions which provide for full or partial accrual of interest untilmaturity.

 

Equityin loss from stabilized/non-comparable investments increased for the six monthsended June 30, 2010 compared to the comparable period in 2009, primarilydue to our share of depreciation and amortization expense and one-time chargesfor acquisition expenses exceeding net operating income. During the past twelvemonths, we added eight new stabilized/non-comparable communities as well asreclassified The Eclipse and Forty55 Lofts from a lease up to astabilized/non-comparable investment. For the six months ended June 30,2010, we incurred approximately $0.5 million of one-time acquisition expensesrelated to the acquisition of five operating BHMP CO-JVs. While all ourstabilized/non-comparable investments produced an overall loss, primarily dueto non-cash expenses for depreciation and amortization, these investmentsprovided cash flow for operating activity of approximately $1.0 million duringthe six months ended June 30, 2010. There were no distributions classifiedas operating activity for the corresponding period in 2009.  These acquisitions noted above weresubstantially completed in the second half of 2009 and the first half of 2010,and 

 

40

----

Table of Contents

 

thereforedo not provide us with a full year of operating results. We expect to continueto receive distributions from these investments but due to non-cash charges fordepreciation and amortization, we expect a loss in reported equity earnings.

 

Equityin loss from lease up equity investments increased for the six months ended June 30,2010 compared to the comparable period in 2009, primarily due to an increase inthe number of properties underlying our investments that were in lease up.  All of the investments in propertiesundergoing lease up produced losses as operating, interest, depreciation andamortization expenses exceeded unstabilized rental revenue. Subsequent to June 30,2009, 55 Hundred, The Venue, Satori, Skye 2905 and Veritas moved fromdevelopment status to lease up where substantially all costs were capitalized.These investments produced equity losses during 2010 of approximately $3.5million. These properties are in the early stages of lease up and we expectlosses from these investments to increase during 2010.  In addition, we made equity investmentsrelated to the acquisitions of Cyan/PDX, San Sebastian and Bailey’s Crossingsubsequent to June 30, 2009. These investments produced losses ofapproximately $1.4 million.

 

Wereview our investments for impairments in accordance with our accountingpolicies. For the three and six months ended June 30, 2010 and 2009, wehave not recorded any impairment losses. However, this conclusion could changein future periods based on changes in certain factors, primarily:

 

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

 

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

 

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

 

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

 

InDecember 2009, Fairfield Residential LLC, a real estate operating company,(“Fairfield Residential”) and certain of its affiliates filed for voluntarybankruptcy.  Certain other affiliates ofFairfield Residential that serve as the general partner for The Cameron andcurrent limited partners of Bailey’s Crossing and 55 Hundred were not part ofthe bankruptcy filing (the “Fairfield Projects”).  The Bailey’s Crossing, 55 Hundred and TheCameron Property Entities were also not a part of the bankruptcy filing. TheBailey’s Crossing and 55 Hundred Property Entity restructurings andrecapitalizations were completed prior to Fairfield Residential’s bankruptcyand were not affected by the bankruptcy filing.

 

BecauseFairfield Residential has guaranteed repayment of The Cameron seniorconstruction loan, as well as completion of the project for the seniorconstruction loan, Fairfield Residential’s bankruptcy gave rise to an event ofdefault under The Cameron senior construction loan agreement.  As a result, The Cameron senior constructionlender sent a default notice to The Cameron Property Entity.  These events in turn gave rise to an event ofdefault under the BHMP CO-JV note receivable. To preserve its rights, the BHMPCO-JV also served a default notice to The Cameron Property Entity related to its$19.3 million mezzanine loan. Through June 2010, the senior constructionlender has continued to fund construction draws and has not exercised any ofits default remedies.  If the seniorconstruction lender did exercise its default remedies, we expect to have anopportunity to (a) cure the default, (b) purchase the seniorconstruction loan or (c) otherwise negotiate a solution acceptable to thesenior construction lender.  However,there is no assurance that we would be able to restructure the seniorconstruction loan including associated guarantees on terms that are acceptableto The Cameron Property Entity owners and the Cameron BHMP CO-JV.  Such restructuring could include a pay down 

 

41

----

Table of Contents

 

ofthe senior construction loan by The Cameron Property Entity and/or the BHMPCO-JV, which could result in a capital contribution by us to The Cameron BHMPCO-JV.  In addition, the seniorconstruction lender’s exercise of default remedies or the results of anyrestructuring negotiations may change our analysis of the accounting for theinvestment, which could result in the BHMP CO-JV accounting for the investmentas a joint venture, or if the BHMP CO-JV is viewed as the primary beneficiary,to consolidate the investment. However, we believe we have sufficientcollateral, contractual remedies and other creditor rights for us to recoverall of our investment in the development project.

 

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

 

**Cash Flow Analysis**

 

Cashand cash equivalents increased for the six months ended June 30, 2010 byapproximately $9.0 million as compared to an increase in cash and cashequivalents for the six months ended June 30, 2009 of approximately $126.2million.  During 2010, the Companyinvested $284.9 million in multifamily acquisitions and investments inunconsolidated real estate joint ventures, essentially employing most of theproceeds from sales of common stock. In 2009, the Company invested $10.2million in investments in unconsolidated real estate joint ventures with nowholly owned acquisitions while raising $164.8 million in proceeds from salesof common stock. We expect that acquisition expenditures and proceeds from ourInitial Public Offering will continue to be significant factors in our overallcash flow.

 

***For the six months ended June 30, 2010 ascompared to the six months ended June 30, 2009***

 

Asof June 30, 2010, we had made investments in 28 multifamily communities,10 in various stages of lease up or development and 18 in operating multifamilycommunities. During the past 12 months, we made six wholly owned multifamilyacquisitions, where cash flows are reported on a consolidated basis rather thanas equity investments. In addition, our proceeds from our Initial PublicOffering have increased in 2010 as compared to 2009.  As a result, our cash flows for the sixmonths ended June 30, 2010 reflect significant differences from the cashflows for the six months ended June 30, 2009.

 

Cashflows used in operating activities for the six months ended June 30, 2010were $0.1 million as compared cash flows provided by operating activities of$1.7 million for the same period in 2009. A substantial portion of our GAAP netloss is due to non-cash charges, primarily related to depreciation andamortization, including amounts recognized from our investments inunconsolidated real estate joint ventures. We expect that that these non-cashcharges will continue to be significant adjustments to net cash provided byoperating activities. During 2010, these adjustments for equity losses inunconsolidated joint ventures, depreciation and amortization totaled $13.3million compared to $2.2 million deduction in the comparable prior period in2009. Also during 2010, we recognized approximately $6.1 million of acquisitionexpenses, approximately $5.5 million related to wholly owned acquisitions andapproximately $0.6 million related to acquisitions included within ourinvestments in unconsolidated real estate joint ventures. For the comparableperiod in 2009, there was approximately $0.1 million of acquisition expensesrelated to acquisitions included within our investments in unconsolidated realestate joint ventures and prior to 2009, acquisition expenses were capitalizedand not included in cash flows from operating activities.  Distributions received from our investmentsin unconsolidated real estate joint ventures were $3.0 million for the sixmonths ended June 30, 2010, compared to $2.8 million for the comparableperiod in 2009. The increase was primarily due to additional investments andimproved operations for certain of the BHMP CO-JVs, offset by decreases in theamounts of interest income earned by the applicable BHMP CO-JVs, primarily as aresult of the conversion of loan receivables at The Eclipse, 55 Hundred andBailey’s Crossing BHMP CO-JVs. Cash flow from operating activities for the sixmonths ended June 30, 2010 also benefited from increases in payables,primarily related to our wholly owned multifamily communities. We did not ownany wholly owned multifamily communities for the comparable period in 2009.

 

Cashflows used in investing activities for the six months ended June 30, 2010and 2009 were $258.5 million and $10.1 million, respectively.  For the six months ended June 30, 2010,we acquired three wholly owned multifamily communities and invested in five newBHMP CO-JVs.  In connection with one ofour wholly owned acquisitions, we assumed debt financing.  For the six months ended June 30, 2009,our primary investments in unconsolidated real estate joint ventures related tofulfilling our loan and equity fundings of our 11 BHMP CO-JV investments aswell as funding for our wholly owned note receivable.  As our Initial Public Offering continues in2010, we would expect our new acquisitions to increase.  Providing a source of investing cash flow forthe six months ended June 30, 2010 were BHMP CO-JV distributions relatedto financings for the Calypso Apartments and Lofts and 4550 

 

42

----

Table of Contents

 

CherryCreek BHMP CO-JVs which were returns of investments in unconsolidated realestate joint ventures of $28.3 million. These investments were initially funded entirely with cash, and during2010, financing was obtained for the communities. During the comparable periodin 2009, returns of investments in unconsolidated real estate joint venturesprimarily related to reimbursements of excess capital contributions andnon-operating cash flows.

 

Cashflows provided by financing activities for the six months ended June 30,2010 and 2009 were $267.6 million and $134.5 million, respectively.  For the six months ended June 30, 2010,net proceeds from our Initial Public Offering were approximately $256.9million, compared to $140.1 million for the comparable period in 2009.  Additionally, financing activities increaseddue to obtaining new financing for one of our wholly owned multifamilycommunities from our credit facility as well as for another one of our whollyowned multifamily communities through a mortgage loan. The acquisition of thesecommunities was initially funded entirely with cash and then financed, resultingin net proceeds of approximately $25.8 million. For the six months ended June 30, 2010, distributions increased dueto higher distribution rates and increased common stock outstanding from ourInitial Public Offering as compared to the six months ended June 30,2009.  Our board of directors increasedthe distribution rate from an effective annual rate of 6.5% to 7.0% (based on a$10 share price) in March 2009, resulting in increased distributions.

 

Ourboard of directors has declared an annual distribution rate of 7.0% for theperiod through August 31, 2010, and an annualized distribution rate of6.0% for the period from September 1, 2010 to September 30, 2010. Theannual distribution rate, in each case, is based upon a $10 share price. Weexpect our total distributions declared to continue to rise, even with thelower distribution rate, because of the growing number of shares outstanding aswe make continued sales under our Initial Public Offering; though the lowerdistribution rate will allow a higher proportion of our distribution to befunded from earnings or cash flow from operating activities than would be thecase with the prior distribution rate. We expect to fund increaseddistributions from earnings and cash flow on the increased amount of investmentsand, to the extent necessary, from the proceeds of our Initial Public Offering.

 

In accordance with the Statement of Policy RegardingReal Estate Investment Trusts published by the North American SecuritiesAdministrators Association, also known as the NASAA REIT Guidelines, ourcharter requires that we monitor our total operating expenses (as defined inour charter) on a trailing twelve-month basis.  Our charter defines thefollowing terms and requires that our Total Operating Expenses (“TOE”) aredeemed to be excessive if at the end of any quarter they exceed for the priortrailing twelve month period the greater of 2% of our Average Invested Assets (“AIA”)or 25% of our Net Income (“NI”).  For the trailing twelve months ended June 30,2010, our TOE did not exceed 2% of our AIA (which was greater than 25% of ourNI).  To the extent that our TOE does notexceed the greater of 2% of AIA or 25% of NI, we anticipate not making similardisclosure in future reporting periods.

 

**Liquidity and Capital Resources**

 

***General***

 

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

 

InJune 2010, our board of directors reduced our distribution rate from anannual rate of 7.0% to 6.0% (based on a $10 share price) for the month of September 2010.  Although there continues to be strongfundamentals in our targeted multifamily investments, the board took thisaction in light of compression in capitalization rates due mainly fromincreased demand from multifamily investors. As noted above, the lower distribution rate will allow a higherproportion of our distribution to be funded from earning or cash flow fromoperating activities than would be the case with the prior distribution rate.

 

43

----

Table of Contents

 

***Short-Term Liquidity***

 

Currently,our primary indicators of short-term liquidity are our cash and cashequivalents, the proceeds from our Initial Public Offering and our creditfacility. As of June 30, 2010, our cash and cash equivalents balance was$86.5 million, compared to $77.5 million as of December 31, 2009. On adaily basis, cash is primarily affected by our net proceeds from our InitialPublic Offering.  As of June 30,2010, we sold approximately 73.4 million shares (including DRIP) of our commonstock with gross proceeds of approximately $730.8 million.  Although there can be no assurance, we expectour sales of shares of common stock in our Initial Public Offering to increase in2010 as compared to 2009. For the three and six months ended June 30,2010, we received gross proceeds from our Initial Public Offering, includingour DRIP, of approximately $155.7 million and $300.4 million,respectively.  For the three and sixmonths ended June 30, 2009, we received gross proceeds of approximately$113.0 million and $167.0 million, respectively.  We also expect our operating cash flows toincrease from a full year of operations from our 2009 acquisitions and asadditional investments are added to our portfolio.

 

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

 

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

 

OnMarch 26, 2010, we closed on a $150 million credit facility. We intend touse the facility to provide greater flexibility in our cash management. Ifcircumstances provide us with incentives to acquire investments in all-cashtransactions, we may draw on the credit facility for the fundings. When we haveexcess cash, we have the option to pay down the facility. As of June 30,2010, we have drawn $10 million with a peak utilization of $30 million underthe credit facility. Based on the value of the collateral currently pledgedunder the facility, we may draw approximately $32.9 million more as of June 30,2010; however, future borrowings under the credit facility are subject to periodicrevaluations, either increasing or decreasing available borrowings. Also, weintend to increase the borrowing capacity by adding future wholly ownedacquisitions to the facility’s collateral pool.

 

***Long-Term Liquidity, Acquisition and Property Financing***

 

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

 

Wemay increase the number and diversity of our investments by entering into jointventures with partners such as the BHMP Co-Investment Partner. Through June 30,2010, we and the BHMP Co-Investment Partner have contributed approximately$270.5 million and $361.0 million, respectively, to the BHMP CO-JVs foracquisition of investments, primarily equity investments and mezzanine loans inmultifamily communities. As of June 30, 2010, approximately $29.5 millionof the $300 million commitment remains unfunded; however, in the event thatcertain investments are refinanced or new property debt is placed within twoyears from the date of the acquisition, the amount of unfunded commitment maybe increased.  PGGM is an investmentvehicle for Dutch pension funds.  Weunderstand PGGM has assets that exceed over 4 billion euro. Accordingly, webelieve PGGM has adequate financial resources to meet its funding commitmentsand its BHMP CO-JV obligations.

 

Asof June 30, 2010, if the remaining BHMP Co-Investment Partner fundingcommitment is drawn on, our share would be approximately**$19.8million to BHMP CO-JVs. We anticipate raising this capital and capital forfuture investments in BHMP CO-JVs from the proceeds of our Initial PublicOffering. There is no assurance that we will be able to raise sufficient capitalto meet these requirements, and consequently, all or portions of the BHMPCo-Investment Partner commitment may not be available to us.  See the following section below entitled “Off-BalanceSheet Arrangements and Contractual Obligations” for further discussion of ourcontractual contingencies.

 

44

----

Table of Contents

 

Weand our BHMP CO-Investment Partner have made seven equity investments inProperty Entities that include other third party partners. These PropertyEntities have property debt and/or other joint venture obligations, includingguarantees by affiliates of the third party partners. Except for FairfieldResidential as related to the Fairfield Properties as described above, webelieve these parties have the resources to meet their share of theseobligations. However, in the event that these parties are unable to meet theirshare of joint venture obligations, there could be adverse consequences to theoperations of the respective multifamily community and we and our BHMPCo-Investment Partner may have to fund any deficiency.  Our share of such deficiency could besignificant but we believe would be funded from the sources described underthis heading.

 

Foreach equity investment, we will also evaluate the use of new or existingproperty debt, including our $150 million credit facility. Accordingly,depending on how the investment is structured, we may utilize financing at ourparent company level (primarily related to our wholly owned investments), atthe BHMP CO-JV level or at the Property Entity level, where there areunaffiliated third-party partners.  Basedon current market conditions and our investment and borrowing policies, wewould expect our share of property debt financing to be approximately 50% to60% following the investment of the proceeds raised from the Initial PublicOffering and upon stabilization of our portfolio.  If property debt is used on wholly ownedproperties, we expect it to be secured by the property (either individually orpooled for the credit facility), including rents and leases. BHMP CO-JV andProperty Entity level debt, which is also secured by the property, includingrents and leases, has been used as construction financing for six PropertyEntities and for six operating communities. Property Entity debt or BHMP CO-JV level debt is not an obligation orcontingency for us but does allow us to increase our access to capital.  Lenders for these mortgage loans payable haveno recourse to us or the applicable BHMP CO-JV other than carve-out guaranteesfor certain matters such as environmental conditions, misuse of funds andmaterial misrepresentations. We will generally seek non-recourse financing, particularlyfor stabilized communities.  As of June 30,2010, all of our debt, other than borrowings under our credit facility, isindividually secured property debt.

 

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

 
| ** **                                        | ** ** | **Total Carrying  Amount** | ** ** | **Weighted Average  Interest Rate** | ** ** | **Maturity Dates** | ** **   | **Our Approximate  Share** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|-------------------------------------|------------|--------------------|--------------|----------------------------|------------|
| *Company Level:*                                  |       |                       |       |                                |       |               |         |                       |       |
| Permanent mortgages – fixed interest rates   |       | $                          | 93.7       |                                | 4.78%      |               | 2013 to 2017 |                       | $          | 93.7 |   |
| Credit facility                                   |       | 10.0                       |       | Monthly LIBOR + 2.08%               |       | 2017               |         | 10.0                       |       |
| * *                                          |       |                       |       |                                |       |               |         |                       |       |
| *BHMP CO-JV Level:*                               |       |                       |       |                                |       |               |         |                       |       |
| Permanent mortgages – fixed interest rates   |       | 184.9                      |       | 4.99%                               |       | 2011 to 2016       |         | 105.1                      |       |
|                                              |       |                       |       |                                |       |               |         |                       |       |
| *Property Entity Level:*                          |       |                       |       |                                |       |               |         |                       |       |
| Construction loans – variable interest rates |       | 296.1                      |       | Monthly LIBOR + 2.28%               |       | 2010 to 2013       |         | 99.0                       |       |
| Permanent mortgages – fixed interest rates   |       | 23.0                       |       | 6.46%                               |       | 2013               |         | 11.8                       |       |
| Total                                             |       | $                          | 607.7      |                                |       |               |         |                       | $          | 319.6 |   |

 

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

 

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

 

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

 

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

 

45

----

Table of Contents

 

Contractualprincipal payments for each of the five years from June 30, 2010 are asfollows (in millions):

 
| ** **                           | ** ** | **Parent  Company Level** | ** ** | **BHMP CO-JV  Level** | ** ** | **Property Entity  Level** | ** ** |
|--------------------------------------|------------|---------------------------|------------|-----------------------|------------|----------------------------|------------|
| July –  December 2010 |       | $                         | 0.3        |                  | $          | 0.6                        |       | $ | 69.4 |   |
| 2011                                 |       | $                         | 0.6        |                  | $          | 25.3                       |       | $ | 125.4 |   |
| 2012                                 |       | $                         | 0.6        |                  | $          | 1.7                        |       | $ | 49.4 |   |
| 2013                                 |       | $                         | 25.1       |                  | $          | 56.7                       |       | $ | 74.9 |   |
| 2014                                 |       | $                         | —     |                  | $          | 0.4                        |       | $ | — |   |
| 2015 and thereafter                  |       | $                         | 67.1       |                  | $          | 100.2                      |       | $ | — |   |

 

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

 

Inrelation to historical averages, favorable financing terms are currentlyavailable for high quality multifamily communities. As of June 30, 2010,the weighted average interest rate on our wholly owned communities fixedinterest financings was 4.78%.  Duringthe six months ended June 30, 2010, we assumed or closed on $42.5 millionof financing collateralized by our real estate investment in Acacia on SantaRosa Creek and Mariposa Loft Apartments. The mortgage loans payable have a term of three and seven years withprincipal and interest or interest-only payments at a weighted average fixedinterest rate of 4.85%.  As of June 30,2010, the weighted average interest rate on BHMP CO-JV fixed interestfinancings was 4.88%.  During the sixmonths ended June 30, 2010, three BHMP CO-JVs assumed or closed mortgagefinancings of $75.4 million. These mortgage loan payables have an initial termof five to six years with a weighted average fixed interest rate of 4.37%.  Subsequent to June 30, 2010, we haveentered into  three new BHMP CO-JV fixedinterest financings of $69.8 million with a weighted average fixed interestrate of 4.42%.

 

We also evaluate existingfinancing terms in light of current market terms.  If more favorable terms can be obtained,considering prepayment costs and availability and costs of refinancing, we mayalso prepay existing debt.  In July 2010,the Halstead BHMP CO-JV gave notice to the mortgage lender of its intent topayoff its mortgage loan in full payable at a par price of $24 million withoutpenalty.  The mortgage loan payablecarried a face rate of 6.17%, which we believe can be financed at lowereffective interest rates.  Our share ofthe pay off, approximately $13.2 million will be funded from existing cashbalances and short-term liquidity sources until refinanced.  If other opportunities become available, weexpect to use proceeds from our Initial Public Offering and other sources describedin this section to fund any such refinancing.

 

As of June 30, 2010, wecurrently have one wholly owned community with a purchase price ofapproximately $88.0 million that is not encumbered by any secured debt. Wecurrently intend to include this asset in the collateral pool for the creditfacility, increasing our borrowing capacity to a total of approximately $55million.  In addition, seven BHMP CO-JVshave wholly owned communities with total carrying values of approximately$301.8 million that are not encumbered by any secured debt.  We currently intend to obtain securedfinancing for each of these multifamily communities.  Subsequent to June 30, 2010, financingswere closed on three of these multifamily communities for $69.8 million.  Our share of the proceeds was approximately$38.4 million. Additionally, we may use our credit facility to provide bridgeor long-term financing for wholly owned acquisitions.  Where the credit facility is used as bridgefinancing, we would use proceeds on a temporary basis until we could securepermanent financing. The proceeds of such permanent financing would then beavailable to repay borrowings under the credit facility. However, the creditfacility may be used on a longer term basis, similar to permanent financing.

 

Other potential futuresources of capital may include proceeds from arrangements with other jointventure partners, proceeds from the sale of our investments, if and when theyare sold, and undistributed cash flow from operating activities.

 

Foreach equity investment made by us or by the applicable BHMP CO-JV or PropertyEntity, we will also evaluate requirements for capital expenditures.  Of the 28 multifamily communities in which wehave invested as of June 30, 2010, four are BHMP CO-JV constructionprojects in Property Entities still requiring construction expenditures whichare anticipated to be funded from existing construction financing. We also haveinvested through BHMP CO-JVs in two multifamily communities in lease up thatare not encumbered with debt.  We expectto place permanent mortgage financing on these multifamily communities after

 

46

----

Table of Contents

 

stabilization.  Until then, we and our BHMP Co-InvestmentPartner will be required to fund certain construction costs.  Our share of contractual costs is currentlyestimated to be $0.6 million and could increase in the range of $1 to 3million.  Also related to our recentinvestment in the 4550 Cherry Creek BHMP CO-JV, we expect to make deferredmaintenance expenditures of $1 to 2 million. We substantially funded our share of these expenditures at the inceptionof the BHMP CO-JVs.  For the remainingmultifamily communities, due to their recent construction, property capitalexpenditures are not expected to be significant in the near term. When they dooccur, we would expect recurring capital expenditures to be funded from theBHMP CO-JV or the Property Entities’ cash flow from operating activities. Fornon-recurring capital expenditures, we would look to the capital sources notedabove. As of June 30, 2010, neither we nor any of the BHMP CO-JVs have anyother significant commitments for property capital expenditures for operatingmultifamily communities.

 

**Distributions**

 

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

 

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

 

Thecash distributions paid for the six months ended June 30, 2010 and 2009 wereapproximately $11.2 million and $4.4 million, respectively.  Distributions funded through the issuance ofshares under our DRIP for the six months ended June 30, 2010 and 2009 wereapproximately $12.1 million and $2.2 million, respectively.  For the six months ended June 30, 2010 and2009, cash flow from operating activities was ($0.1) million and $1.7 million,respectively. For the six months ended June 30, 2010 and 2009, cash amountsdistributed to stockholders exceeded cash flow from operating activities by$11.3 million and $2.7 million, respectively. Such differences were funded fromproceeds from our Initial Public Offering.

 

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

 
| ** **     | ** ** | **Distributions Paid** | ** ** | ** **                            | ** ** | ** ** | ** ** | ** **                                | ** ** |
|----------------|------------|------------------------|------------|---------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| **2010**       | ** ** | **Cash**               | ** ** | **Distributions  Reinvested  (DRIP)** | ** ** | **Total**  | ** ** | **Cash Flow  from Operating  Activities** | ** ** | **Total  Distributions  Declared** | ** ** | **Declared  Distributions  Per Share** | ** ** |
| Second Quarter |       | $                      | 6.2        |                                  | $          | 6.9        |       | $                                         | 13.1       |   | $ | 0.4 |   | $ | 13.9 |   | $ | 0.175 |   |
| First Quarter  |       | 5.0                    |       | 5.2                                   |       | 10.2       |       | (0.5                                      | )          | 11.1 |   | 0.173 |   |
| Total          |       | $                      | 11.2       |                                  | $          | 12.1       |       | $                                         | 23.3       |   | $ | (0.1 | ) | $ | 25.0 |   | $ | 0.348 |   |

 
| ** **     | ** ** | **Distributions Paid** | ** ** | ** **                            | ** ** | ** ** | ** ** | ** **                                | ** ** |
|----------------|------------|------------------------|------------|---------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| **2009**       | ** ** | **Cash**               | ** ** | **Distributions  Reinvested  (DRIP)** | ** ** | **Total**  | ** ** | **Cash Flow  from Operating  Activities** | ** ** | **Total  Distributions  Declared** | ** ** | **Declared  Distributions  Per Share** | ** ** |
| Second Quarter |       | $                      | 2.5        |                                  | $          | 1.6        |       | $                                         | 4.1        |   | $ | 1.1 |   | $ | 4.6 |   | $ | 0.175 |   |
| First Quarter  |       | 1.9                    |       | 0.6                                   |       | 2.5        |       | 0.6                                       |       | 2.9 |   | 0.165 |   |
| Total          |       | $                      | 4.4        |                                  | $          | 2.2        |       | $                                         | 6.6        |   | $ | 1.7 |   | $ | 7.5 |   | $ | 0.340 |   |

 

The amount by which ourdistributions paid exceeded cash flow from operating activities for the sixmonths ended June 30, 2010 increased from the six months ended June 30, 2009,due to (a) increased acquisition activity coupled with acquisition expensesincluded in cash flow from operating activities, (b) a higher distributionrate, (c) increased investments in multifamily communities in 

 

47

----

Table of Contents

 

lease up and (d) increased proceedsraised from our Initial Public Offering (which resulted in additional shares onwhich distributions are paid). Acquisition expenses included in cash flow from operating activities forsix months ended June 30, 2010 and 2009 were approximately $3.1 million and$0.1 million, respectively. Acquisition expenses are funded from the proceedsfrom our Initial Public Offering.  Seethe section above entitled “Results of Operations” for our discussion ofoperating results and trends related to multifamily communities in lease up.

 

Over the long term, as we raisecapital and invest in income producing multifamily communities, we expect thatmore of our distributions (except with respect to distributions related tosales of our assets) will be paid from cash flow from operating activities,including distributions from Co-Investment Ventures in excess of their reportedearnings and our operations from wholly owned multifamily communities prior todeductions for acquisition expenses. In addition to these projected resultsfrom increased investments, in June 2010, our board of directors reduced ourdistribution rate from an annual rate of 7.0% to 6.0% (based on a $10 shareprice) for the period from September 1, 2010 to September 30, 2010 and amendedour advisory management agreement effective July 1, 2010, reducing the current asset management fee rate(with the potential for increases in the fee depending on achieving certainMFFO per share thresholds). Each of these changes will increase the proportionof our distributions to be paid from cash flows from operating activities inthe future than would otherwise be the case without these changes.  However, operating performance cannot beaccurately predicted due to numerous factors, including our ability to raiseand invest capital at favorable accretive yields, the financial performance ofour investments, the types and mix of investments in our portfolio, favorablefinancing terms and the accounting treatment of our investments in accordancewith our accounting policies. As a result, future distribution rates may changeover time and future distributions declared and paid may continue to exceedcash flow from operating activities.

 

**Off-BalanceSheet Arrangements**

 

Ourprimary off-balance sheet arrangements relate to investments in unconsolidatedreal estate joint ventures.  As of June30, 2010, we have 22 investments in unconsolidated joint ventures, all of whichare BHMP CO-JVs and are recorded on the equity basis of accounting.  None of these investments are variableinterest entities and are reported on the equity basis of accounting because wedo not have a controlling interest in the entity.  See the “Critical Accounting Policies and Estimates”section below for additional discussions of our consolidation polices andcritical assumptions.

 

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

 
| **BHMP CO-JV Level Borrowings**       | ** ** | **Loan Amount** | ** ** | **Loan Type**            | ** **    | **Interest  Rate** | ** **    | **Maturity  Date** | ** **        |
|---------------------------------------|------------|-----------------|------------|--------------------------|---------------|--------------------|---------------|--------------------|-------------------|
| Halstead                              |       | $               | 24.0       |                     | Interest-only |               | 6.17% - Fixed |               | September 2011(1) |   |
| Waterford Place                       |       | 59.5            |       | Interest & principal |          | 4.83% - Fixed      |          | May 2013 (1) (2)   |              |
| 4550 Cherry Creek                     |       | 28.6            |       | Interest-only            |          | 4.23% - Fixed      |          | March 2015 (1)     |              |
| Calypso Apartments and Lofts          |       | 24.0            |       | Interest-only            |          | 4.21% - Fixed      |          | March 2015 (1)     |              |
| 7166 at Belmar                        |       | 22.8            |       | Interest-only            |          | 4.11% - Fixed      |          | June 2015 (1)      |              |
| Burroughs’s Mill Apartment Homes |       | 26.0            |       | Interest-only (3)        |          | 5.29% - Fixed      |          | October 2016 (1)   |              |
| Total                                 |       | $               | 184.9      |                     |          |               |          |               |              |   |

 

Asof June 30, 2010, Property Entities reported by BHMP CO-JVs on the consolidatedbasis of accounting are subject to construction and mortgage loans as describedin the following table. These loans are senior to any equity or debtinvestments by the BHMP CO-JVs. The lenders for these loans have no recourse tous or the BHMP CO-JVs with recourse only to the applicable Property Entitiesand to affiliates of the project developers that have provided completion andrepayment guarantees.  These loanspayable are referred to as Property Entity level borrowings (amounts in millions):

 
| **Property Entity Level  Borrowings** | ** ** | **Loan Amount** | ** ** | **Loan Type** | ** **    | **Interest  Rate**      | ** **              | **Maturity  Date**        | ** **                |
|---------------------------------------|------------|-----------------|------------|---------------|---------------|-------------------------|-------------------------|---------------------------|---------------------------|
| Bailey’s Crossing                |       | $               | 67.2       |          | Interest-only |                    | Monthly LIBOR + 275 bps |                      | November 2011 (2) (3) (4) |   |
| The Reserve at Johns Creek Walk       |       | 23.0            |       | Interest-only |          | 6.46% - fixed           |                    | March 2013 (1)            |                      |
| 55 Hundred                            |       | 52.7            |       | Interest-only |          | Monthly LIBOR + 300 bps |                    | November 2013 (2) (3) (4) |                      |
| Total                                 |       | $               | 142.9      |          |          |                    |                    |                      |                      |   |

 

----

(1)                     These loans may generally not be prepaid without theconsent of the lender and/or payment of a prepayment penalty.

 

48

----

Table of Contents

 

(2)                     These loans may be eligible for extension periods of up totwo years, subject to certain conditions that may include certain fees and thecommencement of monthly principal payments.

 

(3)                     These loans may generally be prepaid in full or in partwithout penalty.

 

(4)                     Construction loan.

 

A total of $47.0 million of theborrowings require maintenance of certain operating performance levels.  As of June 30, 2010, we believe all the BHMPCO-JVs were in compliance with all such requirements.

 

As of June 30, 2010, six of theBHMP CO-JVs had mezzanine or mortgage loan investments outstanding in PropertyEntities.  These Property Entities andtheir affiliates have provided the BHMP CO-JVs with collateral interests in theunderlying properties, development projects, improvements, their interests inthe Property Entities and/or financial and performance guarantees of thedeveloper and certain of its affiliates. These PropertyEntities have also obtained additional financing that is senior to the BHMPCO-JV mezzanine or mortgage loan investments, including for certain BHMPCO-JVs, their equity investment. The senior loans with respect to theseProperty Entities, as well as other senior loans in other Property Entities,are secured by the developments and improvements and may be further securedwith repayment and completion guarantees from the unaffiliated developers ortheir affiliates. We or the BHMP CO-JVs have no contractual obligations onthese senior level financings obtained by the Property Entities. These seniorlevel financings have rates and terms that are different from our loaninvestment rates and terms.  In addition,the financial institutions providing these loans have, in some cases,independent unfunded obligations under the loan terms.

 

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

 

**ContractualObligations**

 

Weand/or Co-Investment Ventures (all of which were BHMP CO-JVs as of June 30,2010) contract with unaffiliated multifamily development companies and provideequity 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.  The BHMPCO-JVs may require additional capital from us and the BHMP Co-InvestmentPartner in order to fund the remaining commitments. Our share of the unfundedcommitments is approximately $19.8 million.

 

Wehave contractual obligations related to our mortgage loan payable and creditfacility.  The following table summarizesour primary contractual obligations as of June 30, 2010 (amounts in millions):

 
| ** **                | ** ** | **Total** | ** ** | **July –  December  2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **Thereafter** | ** ** |
|---------------------------|------------|-----------|------------|---------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| **Mortgage loan**         |       |      |       |                            |       |     |       |     |       |     |       |     |       |           |       |
| Principal payments        |       | $         | 93.7       |                            | $          | 0.3      |       | $        | 0.6        |     | $          | 0.6      |       | $              | 25.1       |   | $ | — |   | $ | 67.1 |   |
| Interest expense          |       | 24.4      |       | 2.2                             |       | 4.5      |       | 4.4      |       | 3.6      |       | 3.2      |       | 6.5            |       |
|                      |       | 118.1     |       | 2.5                             |       | 5.1      |       | 5.0      |       | 28.7     |       | 3.2      |       | 73.6           |       |
| **Credit Facility (1)**   |       |      |       |                            |       |     |       |     |       |     |       |     |       |           |       |
| Principal payments        |       | 10.0      |       | —                          |       | —   |       | —   |       | —   |       | —   |       | 10.0           |       |
| Interest expense and fees |       | 18.2      |       | 1.3                             |       | 2.7      |       | 2.7      |       | 2.7      |       | 2.7      |       | 6.1            |       |
|                      |       | 28.2      |       | 1.3                             |       | 2.7      |       | 2.7      |       | 2.7      |       | 2.7      |       | 16.1           |       |
| Total                     |       | $         | 146.3      |                            | $          | 3.8      |       | $        | 7.8        |     | $          | 7.7      |       | $              | 31.4       |   | $ | 5.9 |   | $ | 89.7 |   |

 

----

(1)  Theprincipal amounts provided for our credit facility are based on amountsoutstanding as of June 30, 2010, which are currently not due until finalmaturity of the credit facility.  If weare able to include additional collateral, we expect to increase thecontractual principal obligations in future periods. The interest expense andfees for the credit facility are based on the minimum interest and fees due asof June 30, 2010 under the credit facility. Amounts are included through thecurrent stated maturity date of April 2017.

 

49

----

Table of Contents

 

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

 

The Bailey’s Crossing BHMP CO-JV may become obligated to purchase alimited partnership interest in the Bailey’s Crossing Property Entity at aprice set through an appraisal process. The obligation is for a one-year periodcommencing November 2011.  As this amountis based on future events and valuations, we are not able to estimate thisamount if exercised; however, the limited partner’s invested capital as of June30, 2010 is approximately $11.8 million. Our approximate share is $6.5 million.

 

The Cameron BHMP CO-JV may become obligated to purchase a limitedpartnership interest in The Cameron BHMP CO-JV at a price set through anappraisal process. The obligation is for a three-year period after completionof the development.  As this amount isbased on future events and valuations, we are not able to estimate this amountif exercised; however the limited partner’s invested capital as of June 30,2010 is approximately $10.3 million.  Ourshare would be approximately $5.7 million.

 

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

 

See the section above entitled “Long-Term Liquidity, Acquisitions andProperty Financing” for a description of purchase and sales agreements thatwere executed subsequent to June 30, 2010 that have not closed.

 

The multifamily communities in which we have investments may havecommitments to provide affordable housing. Under these arrangements, wegenerally receive from the resident a below-market rent, which is determined bya local or national authority. In certain arrangements, a local or nationalhousing authority makes payments covering some or substantially all of thedifference between the restricted rent paid by residents and market rents. Inconnection with our acquisition of The Gallery at NoHo Commons, we assumed anobligation to provide affordable housing through 2048. As partial reimbursementfor this obligation, the housing authority will make level annual payments ofapproximately $2.0 million through 2028 and no reimbursement for the remaining20-year period. We may also be required to reimburse the housing authority ifcertain operating results are achieved on a cumulative basis during the term ofthe agreement. At the acquisition, we recorded a liability of $14.0 millionbased on the fair value of terms over the life of the agreement.  We will record rental revenue from thehousing authority on a straight line basis, recognizing a portion of thecollections from deferred lease revenues. As of June 30, 2010 and December 31,2009, we have approximately $0.8 million and $1.3 million, respectively, ofcarrying value for deferred lease revenues and other related liabilities. Forthe three and six months ended June 30, 2010, we have recognized approximately$0.2 million and $0.5 million, respectively, of deferred revenue amortizationrelated to our The Gallery at NoHo Commons affordable housing obligations.

 

Ourboard of directors has authorized a share redemption program. During the threemonths ended June 30, 2010, our board of directors approved redemptions for461,419 shares of common stock for approximately $4.0 million. During the sixmonths ended June 30, 2010, our board of directors approved redemptions for558,235 shares of common stock for approximately $4.8 million. We have fundedand intend to continue funding these redemptions from the proceeds from ourInitial Public Offering.

 

**Fundsfrom Operations and Modified Funds from Operations**

 

Fundsfrom operations (“FFO”) is a non-GAAP performance financial measure that iswidely recognized as a measure of REIT operating performance.  We use FFO as defined by the NationalAssociation of Real Estate Investment Trusts to be net income (loss), computedin accordance with GAAP excluding extraordinary items, as defined by GAAP, andgains (or losses) from sales of property (including deemed sales andsettlements of pre-existing relationships), plus depreciation and amortizationon real estate assets, and after related adjustments for unconsolidatedpartnerships, joint ventures and subsidiaries and noncontrollinginterests.  We believe that FFO ishelpful to our investors and our management as a measure of operatingperformance because it excludes real estate-related depreciation andamortization, gains and losses from property dispositions, and extraordinaryitems, and as a result, when compared year to year, reflects the impact onoperations from trends in occupancy rates, rental rates, operating costs,development activities, general and administrative expenses, and interestcosts, which are not immediately apparent from net income.  Historical cost accounting for real estateassets in accordance with GAAP implicitly assumes that the value of real estateand intangibles 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, is helpful for ourinvestors in understanding our performance. Factors that impact FFO include start-up costs, fixed 

 

50

----

Table of Contents

 

costs,delay in buying assets, lower yields on cash held in accounts, income fromportfolio properties and other portfolio assets, interest rates on acquisitionfinancing and operating expenses.  Inaddition, FFO will be affected by the types of investments in our and/or our Co-InvestmentVentures’ portfolios, which include, but are not limited to, equity andmezzanine, mortgage and bridge loan investments in existing operatingproperties and properties in various stages of development and the accountingtreatment of the investments in accordance with our accounting policies.

 

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

 

·                                          *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 both of these types ofinvestments were capitalized; however, beginning in 2009, acquisition costsrelated to business combinations are expensed. Both of these acquisition costshave been and will continue to be funded from the proceeds of our InitialPublic Offering and not from operations. We believe by excluding expensed acquisition costs, MFFO provides usefulsupplemental information that is comparable for each type of our real estateinvestments and is consistent with management’s analysis of the investing andoperating performance of our properties. Acquisition expenses include those incurred with our Advisor or thirdparties.

 

·                                          *Impairmentcharges.*   An impairmentcharge represents a downward adjustment to the carrying amount of a long-livedasset to reflect the current valuation of the asset even when the asset is heldfor the long-term.  Such adjustment, whenproperly recognized under GAAP, may lag the underlying consequences related torental rates, occupancy and other operating performance trends.  The valuation is also based, in part, on theimpact of current market fluctuations and estimates of future capital requirementsand long-term operating performance that may not be directly attributable tocurrent operating performance.   BecauseMFFO excludes impairment charges, management believes MFFO provides usefulsupplemental information by focusing on the changes in our core operatingfundamentals rather than changes that may reflect only anticipated losses.

 

·                                          *Adjustmentsto fair value for derivatives not qualifying for hedge accounting.* Managementintends to use derivatives in the management of our debt and our interest rateexposure. We do not intend to speculate in these interest rate derivatives, andaccordingly, period to period changes in derivative valuations are not theprimary factors in management’s decision making process. We believe 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.

 

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

 

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

 

Our total MFFO increased by$1.9 million and $3.5 million for the three and six months ended June 30, 2010,respectively, as compared to the comparable periods in 2009.  These increases are due to our acquisitionsof six wholly owned communities and 10 

 

51

----

Table of Contents

 

investments in BHMP CO-JVsthat own stabilized communities, and improved occupancy and operatingperformances in lease up properties, primarily Forty55 Lofts, The Eclipse,Satori and The Venue.

 

For the three and six monthsended June 30, 2010, MFFO per share was impacted by the increase in netproceeds realized from our existing offering of shares. For the three monthsended June 30, 2010, we issued 15.7 million shares of our common stock,increasing our outstanding shares by 22%. For the six months ended June 30, 2010, we issued 30.2 million shares ofour common stock, increasing our outstanding shares by 53%.  A portion of the proceeds from this issuancewere temporarily invested in short-term cash equivalents until they could beinvested in multifamily communities.  Dueto lower interest rates on cash equivalent investments, interest earnings wereminimal.  We expect to invest theseproceeds in higher-earning multifamily community investments consistent withour investment policies.

 

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

 

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

 
| ** **                                | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2010**                                 | ** ** | **2009**                               | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income (loss)                         |       | $                                        | (8.8       | )                                      | $          | 0.4 |   | $ | (17.8 | ) | $ | 0.5 |   |
| Real estate depreciation and amortization |       | 8.5                                      |       | 0.4                                    |       | 16.5 |   | 0.7 |   |
| FFO                                       |       | (0.3                                     | )          | 0.8                                    |       | (1.3 | ) | 1.2 |   |
|                                      |       |                                     |       |                                   |       |   |   |   |   |
| Acquisition expenses                      |       | 3.1                                      |       | 0.1                                    |       | 6.1 |   | 0.1 |   |
| MFFO                                      |       | $                                        | 2.8        |                                   | $          | 0.9 |   | $ | 4.8 |   | $ | 1.3 |   |
|                                      |       |                                     |       |                                   |       |   |   |   |   |
| GAAP weighted average common shares       |       | 79.7                                     |       | 26.3                                   |       | 72.0 |   | 21.9 |   |
| MFFO per share                            |       | $                                        | 0.04       |                                   | $          | 0.03 |   | $ | 0.07 |   | $ | 0.06 |   |

 

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

 

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

 

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

 

**Critical Accounting Policies and Estimates**

 

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

 

Management’sdiscussion and analysis of financial condition and results of operations isbased upon our consolidated financial statements, which have been prepared inaccordance with GAAP. The preparation of these financial statements requiresour management to make judgments, assumptions and estimates that affect thereported amounts of assets, liabilities, revenues and 

 

52

----

Table of Contents

 

expenses,and related disclosure of contingent assets and liabilities. We evaluate thesejudgments, assumptions and estimates for changes which would affect thereported amounts. These estimates are based on management’s historical industryexperience and on various other judgments and assumptions that are believed tobe reasonable under the circumstances. Actual results may differ from thesejudgments, assumptions and estimates. Our significant judgments, assumptionsand estimates include the consolidation of variable interest entities (“VIEs”),accounting for notes receivable, the allocation of the purchase price ofacquired properties and evaluating our real estate-related investments forimpairment.

 

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

 

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

 

Thereare judgments and estimates involved in determining if an entity in which wewill make an investment or have made an investment will be a VIE and if so, ifwe will be the primary beneficiary. The entity will be evaluated to determineif it is a VIE by, among other things, calculating the percentage of equitybeing risked compared to the total equity of the entity. There are someguidelines as to what the minimum equity at risk should be, but the percentagecan vary depending upon the industry or the type of operations of the entityand it will be up to our Advisor to determine that minimum percentage as itrelates to our business and the facts surrounding each of our acquisitions. Inaddition, even if the entity’s equity at risk is a very low percentage, ourAdvisor will be required to evaluate the equity at risk compared to the entity’sexpected future losses to determine if there could still in fact be sufficientequity in the entity. Determining expected future losses involves assumptions ofvarious possibilities of the results of future operations of the entity,assigning a probability to each possibility using a discount rate to determinethe net present value of those future losses and allocating those lossesbetween the equity owners, subordinated lenders or other variable interests.The determination will also be based on an evaluation of the voting rights ofpartners in relation to their economic participation in benefits or obligationto absorb losses.  As partnershipagreements have various terms which may change over time or based on futureresults, these evaluations require complex analysis and weighting of differentfactors. A change in the judgments, assumptions, allocations and estimatesoutlined above could result in consolidating an entity that should not beconsolidated or accounting for an investment on the equity method that shouldin fact be consolidated, the effects of which could be material to our resultsof operations and financial condition.

 

Forother investments, we must evaluate whether we have control of an entity, wherethere are judgments involved in determining if provisions in governingagreements provide protective or participating rights for us, our Co-InvestmentVentures or other equity owners. This evaluation includes an assessment ofmultiple terms including their economic effect to the operations of the entity,how relevant the term is to the recurring operations of the entity and theweighing of each item to determine in the aggregate which owner, if any, hascontrol. These assessments would affect whether an entity should beconsolidated or reported on the equity method, the effects of which could bematerial to our results of operations and financial condition.

 

***Notes Receivable***

 

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 BHMP CO-JVs contain a right to participate in expectedresidual profits. In addition, the Property Entities or project borrowersremain obligated to pay principal and interest due on the loans with sufficientcollateral, reserves or qualifying guarantees to account for the investments asloans.

 

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. Wethen assess the impairment 

 

53

----

Table of Contents

 

basedon the probability to collect all contractual amounts including factors such asthe general or market-specific economic conditions for the project; thefinancial conditions of the borrower and guarantors, if any; the degree of anydefaults by the borrower on any of its obligations; the assessment of theunderlying project’s financial viability and other collateral; the length oftime and extent of the condition; and our or the Co-Investment Venture’s intentand ability to retain its investment in the issuer for a period sufficient toallow for any anticipated recovery in the market value. If the impairment isprobable, we recognize an impairment loss equal to the difference between ouror the Co-Investment Venture’s (all of which have been made through BHMPCO-JVs) investment in the loan and the present value of the estimated cashflows discounted at the loan’s effective interest rate. Where we have theintent and the ability to foreclose on our security interest in the property,we will use the property’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 loans are generally investmentspecific based on the particular loan terms and the underlying projectcharacteristics, there is usually not any secondary market to evaluateimpairments. Accordingly, we must rely on our subjective judgments andindividual weightings of the specific factors. If loans are consideredimpaired, then judgments and estimates are required to determine the projectedcash flows for the loan, considering the borrower’s or, if applicable, theguarantor’s financial condition and the consideration and valuation of thesecured property and any other collateral.

 

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

 

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

 

Asof June 30, 2010, 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 generallyapprove or disapprove on behalf of the BHMP CO-JV certain major decisionsaffecting the BHMP CO-JV, such as (i) selling or otherwise disposing ofthe investment or any other property having a value in excess of $100,000,(ii) selling any additional interests in the BHMP CO-JV, (iii) approvinginitial and annual operating plans and capital expenditures or (iv) incurringor materially modifying any indebtedness of the BHMP CO-JV in excess of$100,000.  As a result of the equalsubstantive participating rights possessed by each partner in the ordinarycourse of business, no single party controls each venture; accordingly, weaccount for each BHMP CO-JV using the equity method of accounting.  The equity method of accounting requiresthese investments to be initially recorded at cost and subsequently increased(decreased) for our share of net income (loss), including eliminations for ourshare of inter-company transactions, and reduced when distributions arereceived.

 

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

 

Whenwe or a BHMP CO-JV acquire a controlling interest in a business previouslyaccounted for as a noncontrolling investment, a gain or loss is recorded forthe difference between the fair value and the carrying value of the investmentin the real estate joint venture and in some instances pre-existingrelationships.  This analysis, which is fromthe perspective of market participants, requires determination of fair valuesfor investments and contractual relationships where there are no secondarymarkets.  Accordingly, we must rely onour subjective judgments using models with the best available information.  Changes in these judgments couldsignificantly impact our results of operations and the carrying amount of ourassets and liabilities.

 

***Real Estate and Other RelatedIntangibles***

 

For real estate properties acquired by us or our Co-Investment Venturesclassified as business combinations, we allocate the purchase price, afteradjusting for settlement of any pre-existing relationships, to the tangibleassets acquired, consisting of land, inclusive of associated rights, andbuildings, any assumed debt, identified intangible assets and liabilities andasset retirement obligations based on their fair values.  Identified intangible assets and liabilitiesconsist of the fair value of above-market and below-market leases, in-placeleases and contractual rights.  Goodwillis recognized as of the acquisition date and measured as the aggregate 

 

54

----

Table of Contents

 

fairvalue of the consideration transferred and any noncontrolling interests in theacquiree over the fair value of identifiable net assets acquired.  Likewise, a bargain purchase gain isrecognized in current earnings when the aggregate fair value of theconsideration transferred and any noncontrolling interests in the acquiree isless than the fair value of the identifiable net assets acquired.

 

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

 

Wedetermine the value of above-market and below-market in-place leases foracquired properties based on the present value (using an interest rate thatreflects the risks associated with the leases acquired) of the differencebetween (1) the contractual amounts to be paid pursuant to the in-placeleases and (2) estimates 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 expected leaseup periods for the respective spaces considering then current marketconditions. In estimating the carrying costs that would have otherwise beenincurred had the leases not been in place, we include such items as real estatetaxes, insurance and other operating expenses as well as projected 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 on a tenant-by-tenant basis.

 

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

 

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

 

Wemake assumptions and estimates in determining these allocations, includingmarket rental rates, physical and economic obsolescence, lease-up periods anddiscount rates.  A change in theirassumptions could result in the various categories of our real estate assets orrelated intangibles being overstated or understated which could result in anoverstatement or understatement of depreciation or amortization expense orrental income.

 

***Investment Impairments***

 

Forproperties wholly owned by us or our Co-Investment Ventures, including allrelated intangibles, we monitor events and changes in circumstances indicatingthat the carrying amounts of the real estate assets may not berecoverable.  When such events or changesin circumstances are present, we assess potential impairment by comparingestimated future undiscounted operating cash flows expected to be generatedover the life of the asset including its eventual disposition, to the carryingamount of the asset.  In the event thatthe carrying amount exceeds the estimated future undiscounted operating cashflows, we recognize an impairment loss to 

 

55

----

Table of Contents

 

adjustthe carrying amount of the asset to estimated fair value.  In addition, we evaluate indefinite-livedintangible assets for possible impairment at least annually by comparing thefair values with the carrying values. Fair value is generally estimated by valuation of similar assets.

 

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

 

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

 

***Fair Value***

 

In connection with our assessments anddeterminations of fair value for many real estate assets and financialinstruments, there are generally not available observable market price inputsfor substantially the same items. Accordingly, we make assumptions and use various estimates and pricingmodels, including, but not limited to, the estimated useful lives of theassets, the cost of replacing certain assets, discount and interest rates usedto determine present values and market rental rates. Many of these estimatesare from the perspective of market participants and will also be obtained fromindependent third-party appraisals. However, we will be responsible for thesource and use of these estimates. A change in these estimates and assumptionscould be material to our results of operations and financial condition.

 

**New Accounting Pronouncements**

 

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

 

**Inflation**

 

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

 

**REIT Tax Election**

 

Wehave elected to be taxed as a REIT under Sections 856 through 860 of the Codeand have qualified as a REIT since the year ended December 31, 2007. To qualify as a REIT, we must meet a number of organizational and operationalrequirements, including a requirement that we distribute at least 90% of ourREIT taxable income to our stockholders.  As a REIT, we generally will notbe subject to federal income tax at the corporate level.  We are organizedand operate in such a manner as to qualify for taxation as a REIT under theCode, and we intend to continue to operate in such a manner, but no assurancecan be given that we will operate in a manner so as to remain qualified as aREIT.

 

56

----

Table ofContents

 

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

 

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

 

Asof June 30, 2010, we had approximately $93.7 million of outstanding debt on ourwholly owned communities at a weighted average, fixed interest rate ofapproximately 4.78%. Our BHMP CO-JVs with wholly owned communities and our BHMPCO-JVs with equity in Property Entities had borrowed aggregate senior debt ofapproximately $184.9 million and $319.1 million, respectively (which amountconsists of third-party first mortgages and construction loans and excludesloans made to the Property Entities by the BHMP CO-JVs or us).  Of this amount, approximately $207.9 millionwas at fixed interest rates with a weighted average of approximately 5.06% and$296.1 million was at variable interest rates with a weighted average ofmonthly LIBOR plus 2.3%*.*

 

Asof June 30, 2010, we have only one wholly owned note receivable with a carryingvalue of approximately $2.5 million and a fixed interest rate of 10%.  Our BHMP CO-JVs had notes receivable fromProperty Entities of approximately $83.2 million, all of which were at fixedrates, with a weighted average interest rate of approximately 10.6%.

 

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

 

Conversely, movements in interestrates on variable rate debt, loans receivable and real estate securities wouldchange our future earnings and cash flows, but not significantly affect thefair value of those instruments.  As ofJune 30, 2010, we did not have any loans receivable or real estate securitieswith variable interest rates.  We are exposedto interest rate changes primarily as a result of our variable rate debt usedto acquire or hold our wholly owned multifamily communities, which as of June30, 2010 related only to our credit facility, and our wholly owned cashinvestments. We quantify our exposure to interest rate risk based on howchanges in interest rates affect our net income.  We consider changes in the 30-day LIBOR rateto be most indicative of our interest rate exposure as it is a function of thebase rate for our credit facility and is reasonably correlated to changes inour earnings rate on our cash investments. We consider increases of 0.5%, 1.0%and 1.5% in the 30-day LIBOR rate to be reflective of reasonable changes we mayexperience in the current interest rate environment. The table below reflectsthe annual effect of an increase in the 30-day LIBOR to our net income relatedto our significant variable interest rate exposures for our wholly owned assetsand liabilities as of June 30, 2010 (amounts in millions, where positiveamounts reflect an increase in income and bracketed amounts reflect a decreasein income):

 
| ** **                        | ** ** | **Increases in Interest Rates** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **1.5%**                        | ** ** | **1.0%** | ** ** | **0.5%** | ** ** |
| Credit facility interest  expense |       | $                               | (0.2       | ) | $ | (0.1 | ) | $ | (0.1 | ) |
| Cash investments                  |       | 1.3                             |       | 0.9 |   | 0.4 |   |
| Total                             |       | $                               | 1.1        |   | $ | 0.8 |   | $ | 0.3 |   |

 

There is no assurance that we would realize such incomeor expense as such changes in interest rates could alter our asset or liabilitypositions or strategies in response to such changes. The table also does notreflect changes in operations related to our unconsolidated investments in realestate joint ventures, where we do not have control over financing matters andsubstantial portions of variable rate debt related to multifamily developmentprojects where interest is capitalized.

 

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

 

57

----

Table of Contents

 

**Item 4.  Controls and Procedures.**

 

**Evaluationof Disclosure Controls and Procedures**

 

Asrequired by Rule 13a-15(b) and Rule 15d-15(b) of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), ourmanagement, including our Chief Executive Officer and Chief Financial Officer,evaluated, as of June 30, 2010, the effectiveness of our disclosure controlsand procedures as defined in Exchange Act Rule 13a-15(e) andRule 15d-15(e).  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of June 30, 2010 to provide reasonable assurancethat information required to be disclosed by us in this report is recorded,processed, summarized and reported within the time periods specified by therules and forms of the Exchange Act and is accumulated and communicated tomanagement, including the Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosures.

 

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

 

**Changesin Internal Control over Financial Reporting**

 

Therehave been no changes in internal control over financial reporting during thequarter ended June 30, 2010 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

58

----

Table of Contents

 

**PART II**

**OTHER INFORMATION**

 

**Item 1.  LegalProceedings.**

 

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

 

**Item 1A.  Risk Factors.**

 

There have been no material changes to the riskfactors contained in Item 1A set forth in our Annual Report on Form 10-K, filedwith the Securities and Exchange Commission (“SEC”) on March 31, 2010.

 

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

 

**Use of Proceeds from Registered Securities**

 

OnSeptember 2, 2008, our Registration Statement on Form S-11 (FileNo. 333-148414), covering a public offering (our “Initial Public Offering”)of up to 250,000,000 shares of common stock, was declared effective under theSecurities Act of 1933. Our Initial Public Offering commenced on September 5,2008 and is ongoing.  On June 29, 2010, our board of directors approved anextension of our offering of 250,000,000 shares of our common stock pursuant toour initial public offering until no later than September 2, 2011.  Under rules promulgated by the SEC, we couldextend our offering until February 29, 2012. Our board of directors has thediscretion to extend the offering period for the shares offered under the DRIPup to the sixth anniversary of the termination of the primary offering. We may reallocate the shares of common stock being offered between the primaryoffering and the distribution reinvestment plan.

 

Weare offering a maximum of 200 million shares in our primary offering at anaggregate offering price of up to $2 billion, or $10.00 per share withdiscounts available to certain categories of purchasers.  The 50 millionshares offered under the DRIP are initially being offered at an aggregateoffering price of $475 million, or $9.50 per share.  Behringer SecuritiesLP, an affiliate of our advisor, is the dealer manager of the Initial PublicOffering.  As of June 30, 2010, we had sold approximately 73.4 millionshares of our common stock in our Initial Public Offering on a best effortsbasis pursuant to the offering for gross offering proceeds of approximately$730.8 million.

 

Fromthe commencement of the Initial Public Offering through June 30, 2010, weincurred expenses of approximately $87.0 million in connection with theissuance and distribution of the registered securities pursuant to the offeringall of which was paid to our advisor.

 

Fromthe commencement of the Initial Public Offering through June 30, 2010, the netoffering proceeds to us from the Initial Public Offering, including thedistribution reinvestment plan, after deducting the total expenses incurreddescribed above, were approximately $643.9 million.  From the commencementof the Initial Public Offering through June 30, 2010, we had used approximately$550.5 million of such net proceeds to purchase interests in real estate, netof notes payable.  Of the amount used for the purchase of theseinvestments, $14.4 million was paid to our advisor, Behringer HarvardMultifamily Advisors I, as acquisition and advisory fees and acquisitionexpense reimbursement.

 

**Recent Shares of Unregistered Securities**

 

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

 

**Share Redemption Program**

 

Ourboard of directors has adopted a share redemption program that permitsstockholders to sell their shares back to us after they have held them for atleast one year, subject to the significant conditions and limitations of theprogram.  Our board of directors

 

59

----

Table of Contents

 

canamend the provisions of our share redemption program without the approval ofour stockholders.  The terms on which weredeem shares may differ between redemptions upon a stockholder’s death, “qualifyingdisability” (as defined in the share redemption program) or confinement to along-term care facility (collectively referred to herein as “ExceptionalRedemptions”) and all other redemptions (referred to herein as “OrdinaryRedemptions”).  The purchase price forshares redeemed under the redemption program is set forth below.

 

Inthe case of Ordinary Redemptions, the purchase price per share will equal 90%of (i) the most recently disclosed estimated value per share as determined inaccordance with our valuation policy, less (ii) the aggregate distributions pershare of any net sale proceeds from the sale of one or more of our assets, orother special distributions so designated by our board of directors,distributed to stockholders after the valuation was determined (the “ValuationAdjustment”); provided, however, that the purchase price per share shall notexceed: (1) prior to the first valuation conducted by the board of directors,or a committee thereof (the “Initial Board Valuation”), under the valuationpolicy, 90% of (i) average price per share the original purchaser or purchasersof shares paid to us for all of his or her shares (as adjusted for any stockdividends, combinations, splits, recapitalizations and the like with respect toour common stock) (the “Original Share Price”) 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 the board ofdirectors, distributed to stockholders prior to the redemption date (the “SpecialDistributions”); or (2) on or after the Initial Board Valuation, the OriginalShare Price less any Special Distributions.

 

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

 

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

 

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

 

Duringthe three months ended June 30, 2010, our board of directors approved theredemption of shares as follows:

 
| **2010** | ** ** | **Total Number of  Shares Redeemed** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of Shares  Purchased as Part of  Publicly Announced Plans  or Programs** | ** ** | **Maximum Number of  Shares That May Be  Purchased Under the  Plans or Programs** | ** ** |
|----------|------------|--------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| April    |       | —                               |       | $                                 | —     |                                                                                    | —     |                                                                              |       |   |
| May      |       | —                               |       | —                            |       | —                                                                                  |       |                                                                              |       |
| June (1) |       | 461,419                              |       | 8.61                              |       | 461,419                                                                                 |       |                                                                              | (2)        |
|     |       | 461,419                              |       | $                                 | 8.61       |                                                                                    | 461,419    |                                                                              |       |   |

 

----

(1)         The June 2010 redemptionswere paid in July 2010.

 

(2)         A description of the maximumnumber of shares that may be purchased under our redemption program is includedin the narrative preceding this table.

 

60

----

Table of Contents

 

**Item 3.   DefaultsUpon Senior Securities.**

 

None.

 

**Item 4.   (Removedand Reserved)**

 

**Item 5.   OtherInformation.**

 

61

----

Table of Contents

 

**Item 6.      Exhibits.**

 
| **Ex.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                 |
|---------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1     |       | Articles  of Restatement, incorporated by reference to Exhibit 3.1.2 to the Company’s  Form 8-K filed on September 8, 2008                                                                                                                                                                                                                                                 |
| 3.2     |       | Fourth  Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to the  Company’s Form 8-K filed on March 1, 2010                                                                                                                                                                                                                                            |
| 4.1     |       | Subscription  Agreement, incorporated by reference to Exhibit A to the Company’s  Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 7 to its  Registration Statement on Form S-11 filed on August 10, 2010, Commission File  No. 333-148414                                                                                                               |
| 4.2     |       | Amended  and Restated Distribution Reinvestment Plan, incorporated by reference to  Exhibit B to the Company’s Pre-Effective Amendment No. 1 to  Post-Effective Amendment No. 7 to its Registration Statement on Form S-11  filed on August 10, 2010, Commission File No. 333-148414                                                                                  |
| 4.3     |       | Amended  and Restated Automatic Purchase Plan, incorporated by reference to  Exhibit C to the Company’s Pre-Effective Amendment No. 1 to  Post-Effective Amendment No. 7 to its Registration Statement on Form S-11  filed on August 10, 2010, Commission File No. 333-148414                                                                                         |
| 4.4     |       | Amended  and Restated Share Redemption Program, incorporated by reference to Exhibit  4.4 to the Company’s Form 10-Q filed on November 13, 2009                                                                                                                                                                                                                            |
| 4.5     |       | Statement  regarding restrictions on transferability of shares of common stock (to  appear on stock certificate or to be sent upon request and without charge to  stockholders issued shares without certificates), incorporated by reference  to Exhibit 4.5 to the Company’s Registration Statement on Form S-11/A filed  on May 9, 2008, Commission File No. 333-148414 |
| 10.1    |       | Fourth  Amended and Restated Advisory Management Agreement, dated June 14, 2010,  incorporated by reference to Exhibit 10.1 to the Company’s Post-Effective  Amendment No. 7 to its Registration Statement on Form S-11 filed on July 19,  2010, Commission File No. 333-148414                                                                                            |
| 10.2    |       | Contract  for Purchase and Sale by and between Fitzhugh Apartments Limited Partnership  as seller and Behringer Harvard Multifamily OP I LP as buyer dated May 19,  2010, incorporated by reference to Exhibit 10.46 to the Company’s  Post-Effective Amendment No. 7 to its Registration Statement on Form S-11 filed  on July 19, 2010, Commission File No. 333-148414   |
| 10.3    |       | Contract  for Purchase and Sale by and between Mississippi Ave Apartments LLC as seller  and Behringer Harvard Multifamily OP I LP as buyer dated May 19, 2010,  incorporated by reference to Exhibit 10.47 to the Company’s Post-Effective  Amendment No. 7 to its Registration Statement on Form S-11 filed on July 19,  2010, Commission File No. 333-148414            |
| 10.4    |       | Real  Estate Sale Agreement by and between Stark Burnham Pointe LLC as seller and  Behringer Harvard Multifamily OP I LP as buyer dated June 18, 2010,  incorporated by reference to Exhibit 10.48 to the Company’s Post-Effective  Amendment No. 7 to its Registration Statement on Form S-11 filed on July 19,  2010, 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**                                                                                                                                                                                                          |

 

----

*Filedherewith.

 

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

 

62

----

Table of Contents

 

**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: August 13, 2010 |                                            | /s/  Howard S. Garfield |
|                   |                                            | Howard  S. Garfield |
|                   |                                            | Chief  Financial Officer |
|                   |                                            | (Principal  Financial Officer) |

 

63

----