Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**[MarkOne]**

 
| **x**                                                  | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                             | ** **                                                                                               |
| **For  the quarterly period ended June 30, 2009** |
| ** **                                             | ** **                                                                                               |
| **OR**                                                 |
| ** **                                             | ** **                                                                                               |
| **o**                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Forthe transition period from                        to                        **

 

**CommissionFile Number: 000-53195**

 

**BehringerHarvard Multifamily REIT I, Inc.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

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

 

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

(Address ofPrincipal Executive Offices) (ZIP Code)

 

Registrant’sTelephone Number, Including Area Code:  **(866)655-3600**

 

**None**

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

 

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

 

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

 

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

 

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

 

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

 

As of August 7,2009, the Registrant had 35,968341 shares of common stock outstanding.

 

 

 

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

**Form 10-Q**

**Quarter Ended June 30, 2009**

 
|                       |                                                                                                                                             |       | **Page**   |
|----------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART 1**            | ** **                                                                                                                                       |       |
| **FINANCIAL  INFORMATION** | ** **                                                                                                                                       |       |
| ** **                 | ** **                                                                                                                                       | ** ** | ** ** |
| **Item 1.**                | **Financial Statements  (unaudited)**                                                                                                            | ** ** | ** ** |
|                       |                                                                                                                                             |       |       |
|                       | Consolidated  Balance Sheets as of June 30, 2009 and December 31, 2008                                                                 |       | 3          |
|                       |                                                                                                                                             |       |       |
|                       | Consolidated Statements of Operations for the three  and six months ended June 30, 2009 and 2008                                            |       | 4          |
|                       |                                                                                                                                             |       |       |
|                       | Consolidated Statements of Stockholders’ Equity for  the year ended December 31, 2008 and for the six months ended  June 30, 2009 |       | 5          |
|                       |                                                                                                                                             |       |       |
|                       | Consolidated Statements of Cash Flows for the six  months ended June 30, 2009 and 2008                                                      |       | 6          |
|                       |                                                                                                                                             |       |       |
|                       | Notes to Consolidated Financial Statements                                                                                                       |       | 7          |
|                       |                                                                                                                                             |       |       |
| **Item 2.**                | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                                  | ** ** | 26         |
|                       |                                                                                                                                             |       |       |
| **Item 3.**                | **Quantitative  and Qualitative Disclosures About Market Risk**                                                                                  | ** ** | 47         |
|                       |                                                                                                                                             |       |       |
| **Item 4(T).**             | **Controls and  Procedures**                                                                                                                     | ** ** | 48         |
|                       |                                                                                                                                             |       |       |
| **PART II**           |                                                                                                                                             |       |
| **OTHER  INFORMATION**     |                                                                                                                                             |       |
|                       |                                                                                                                                             |       |       |
| **Item 1.**                | **Legal Proceedings**                                                                                                                            | ** ** | 49         |
|                       |                                                                                                                                             |       |       |
| **Item 1A.**               | **Risk Factors**                                                                                                                                 | ** ** | 49         |
|                       |                                                                                                                                             |       |       |
| **Item 2.**                | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                                                 | ** ** | 51         |
|                       |                                                                                                                                             |       |       |
| **Item 3.**                | **Defaults  Upon Senior Securities**                                                                                                             | ** ** | 52         |
|                       |                                                                                                                                             |       |       |
| **Item 4.**                | **Submission  of Matters to a Vote of Security Holders**                                                                                         | ** ** | 52         |
|                       |                                                                                                                                             |       |       |
| **Item 5.**                | **Other Information**                                                                                                                            | ** ** | 52         |
|                       |                                                                                                                                             |       |       |
| **Item 6.**                | **Exhibits**                                                                                                                                     | ** ** | 53         |
|                       |                                                                                                                                             |       |       |
| **Signature**              |                                                                                                                                             |       | 55         |

 

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**PART I**

**FINANCIALINFORMATION**

 

**Item 1. Financial Statements (unaudited)**

 

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

**Consolidated Balance Sheets**

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

**(Unaudited)**

** **
| ** **                                                                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2009**          | ** ** | **2008**              | ** ** |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Assets**                                                                                                                                                                                        |       |              |       |                  |       |
| Investments in unconsolidated real estate joint  ventures                                                                                                                                         |       | $                 | 102,684    |                  | $          | 96,505 |   |
| Cash and cash equivalents                                                                                                                                                                         |       | 149,955           |       | 23,771                |       |
| Notes receivable                                                                                                                                                                                  |       | 2,300             |       | 1                     |       |
| Escrow deposits                                                                                                                                                                                   |       | 750               |       | —                |       |
| Receivables from affiliates                                                                                                                                                                       |       | 54                |       | 299                   |       |
| Other assets, net                                                                                                                                                                                 |       | 312               |       | 318                   |       |
| **Total assets**                                                                                                                                                                                  |       | $                 | 256,055    |                  | $          | 120,894 |   |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Liabilities and stockholders’  equity**                                                                                                                                                    |       |              |       |                  |       |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Liabilities**                                                                                                                                                                                   |       |              |       |                  |       |
| Payables to affiliates                                                                                                                                                                            |       | $                 | 760        |                  | $          | 627 |   |
| Distributions payable                                                                                                                                                                             |       | 1,737             |       | 832                   |       |
| Accrued offering costs payable to affiliates                                                                                                                                                      |       | 1,670             |       | 6,918                 |       |
| Accounts payable and other liabilities                                                                                                                                                            |       | 331               |       | 123                   |       |
| **Total liabilities**                                                                                                                                                                             |       | 4,498             |       | 8,500                 |       |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Commitments and contingencies**                                                                                                                                                                 |       |              |       |                  |       |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Stockholders’ equity**                                                                                                                                                                     |       |              |       |                  |       |
| Preferred stock, $.0001 par value per share;  125,000,000 shares authorized, none outstanding                                                                                                     |       | —            |       | —                |       |
| Non-participating, non-voting convertible stock,  $.0001 par value per share; 1,000 shares authorized, 1,000 shares issued and  outstanding (see Note 6)                                          |       | —            |       | —                |       |
| Common stock, $.0001 par value per share;  875,000,000 shares authorized, 31,939,965 and 15,347,792 shares issued and  outstanding at June 30, 2009 and December 31, 2008, respectively |       | 3                 |       | 1                     |       |
| Additional paid-in capital                                                                                                                                                                        |       | 263,379           |       | 117,268               |       |
| Cumulative distributions and net loss                                                                                                                                                             |       | (11,825           | )          | (4,875                | )          |
| **Total stockholders’ equity**                                                                                                                                                               |       | 251,557           |       | 112,394               |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                                              |       | $                 | 256,055    |                  | $          | 120,894 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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

**Consolidated Statements of Operations**

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

**(Unaudited)**

 
| ** **                                                                      | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                                      | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                                                                      | ** ** | **2009**                       | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                            |       |                           |       |                         |       |   |   |   |   |
| **Rental revenue**                                                              |       | $                              | —     |                         | $          | — |   | $ | — |   | $ | — |   |
| ** **                                                                      |       |                           |       |                         |       |   |   |   |   |
| **Expenses**                                                                    |       |                           |       |                         |       |   |   |   |   |
| Asset management and other fees                                                 |       | 283                            |       | 230                          |       | 545 |   | 405 |   |
| General and administrative                                                      |       | 613                            |       | 245                          |       | 1,374 |   | 541 |   |
| Depreciation and amortization                                                   |       | 10                             |       | 8                            |       | 24 |   | 30 |   |
| **Total expenses**                                                              |       | 906                            |       | 483                          |       | 1,943 |   | 976 |   |
|                                                                            |       |                           |       |                         |       |   |   |   |   |
| Interest income                                                                 |       | 195                            |       | 225                          |       | 275 |   | 650 |   |
| Equity in earnings of investments in unconsolidated  real estate joint ventures |       | 1,119                          |       | 1,093                        |       | 2,214 |   | 1,858 |   |
| **Net income**                                                                  |       | $                              | 408        |                         | $          | 835 |   | $ | 546 |   | $ | 1,532 |   |
|                                                                            |       |                           |       |                         |       |   |   |   |   |
| Weighted average number of common shares  outstanding                           |       | 26,334                         |       | 14,267                       |       | 21,880 |   | 14,269 |   |
|                                                                            |       |                           |       |                         |       |   |   |   |   |
| Basic and diluted income per share                                              |       | $                              | 0.02       |                         | $          | 0.06 |   | $ | 0.02 |   | $ | 0.11 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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

**Consolidated Statements of Stockholders’ Equity**

**(in thousands)**

**(Unaudited)**

 
| ** **                                                    | ** ** | **Convertible Stock** | ** ** | **Common Stock** | ** ** | **Additional**     | ** ** | **Cumulative** | ** ** | **Total**   | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|--------------------|------------|----------------|------------|-------------|------------|
| ** **                                                    | ** ** | **Number**            | ** ** | **Par**               | ** ** | **Number**         | ** ** | **Par**        | ** ** | **Paid-in** | ** ** | **Distributions and** | ** ** | **Stockholders’** | ** ** |
| ** **                                                    | ** ** | **of Shares**    | ** ** | **Value**             | ** ** | **of Shares** | ** ** | **Value**      | ** ** | **Capital** | ** ** | **Net Income (Loss)** | ** ** | **Equity** | ** ** |
|                                                          |       |                  |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Balance  at January 1, 2008                              |       | —                |       | $                     | —     |               | 14,273     |           | $          | 1           |       | $ | 114,567 |   | $ | (1,148 | ) | $ | 113,420 |   |
|                                                          |       |                  |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Net  income                                                   |       | —                |       | —                |       | —             |       | —         |       | —      |       | 2,630 |   | 2,630 |   |
| Issuance  of convertible stock                                |       | 1                     |       | —                |       | —             |       | —         |       | 1           |       | — |   | 1 |   |
| Issuances  of common stock under:                             |       |                  |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Sale  of common stock, net                                    |       | —                |       | —                |       | 1,074              |       | —         |       | 2,647       |       | — |   | 2,647 |   |
| Incentive  award plan                                         |       | —                |       | —                |       | —             |       | —         |       | 22          |       | — |   | 22 |   |
| Redemptions  of common stock                                  |       | —                |       | —                |       | (17                | )          | —         |       | (140        | )          | — |   | (140 | ) |
| Distributions  declared on common stock                       |       | —                |       | —                |       | —             |       | —         |       | —      |       | (6,357 | ) | (6,357 | ) |
| Stock  issued pursuant to Distribution Reinvestment Plan, net |       | —                |       | —                |       | 18                 |       | —         |       | 171         |       | — |   | 171 |   |
| Balance  at December 31, 2008                            |       | 1                     |       | —                |       | 15,348             |       | 1              |       | 117,268     |       | (4,875 | ) | 112,394 |   |
|                                                          |       |                  |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Net  income                                                   |       | —                |       | —                |       | —             |       | —         |       | —      |       | 546 |   | 546 |   |
| Issuances  of common stock under:                             |       |                  |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Sale  of common stock, net                                    |       | —                |       | —                |       | 16,505             |       | 2              |       | 145,100     |       |   |   | 145, 102 |   |
| Redemptions  of common stock                                  |       | —                |       | —                |       | (144               | )          | —         |       | (1,184      | )          |   |   | (1,184 | ) |
| Distributions  declared on common stock                       |       | —                |       | —                |       | —             |       | —         |       | —      |       | (7,496 | ) | (7,496 | ) |
| Stock  issued pursuant to Distribution Reinvestment Plan, net |       | —                |       | —                |       | 231                |       | —         |       | 2,195       |       | — |   | 2,195 |   |
| Balance  at June 30, 2009                                |       | 1                     |       | $                     | —     |               | 31,940     |           | $          | 3           |       | $ | 263,379 |   | $ | (11,825 | ) | $ | 251,557 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**BehringerHarvard Multifamily REIT I, Inc.**

**ConsolidatedStatements of Cash Flows**

**(inthousands)**

**(Unaudited)**

** **
| ** **                                                                         | ** ** | **For the Six Months  Ended June 30, 2009** | ** ** | **For the Six Months  Ended June 30, 2008** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| **Cash flows from operating  activities**                                          |       |                                             |       |                                             |       |
| Net income                                                                         |       | $                                                | 546        |                                             | $          | 1,532 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                             |       |                                             |       |
| Equity in earnings of investments in unconsolidated  real estate joint ventures    |       | (2,214                                           | )          | (1,858                                           | )          |
| Distributions received from unconsolidated real  estate joint ventures             |       | 2,766                                            |       | 1,858                                            |       |
| Depreciation and amortization                                                      |       | 24                                               |       | 30                                               |       |
| Stock-based compensation                                                           |       | —                                           |       | 12                                               |       |
| Changes in operating assets and liabilities:                                       |       |                                             |       |                                             |       |
| Accrued interest on notes receivable                                               |       | (72                                              | )          | —                                           |       |
| Accounts payable and other liabilities                                             |       | 117                                              |       | (77                                              | )          |
| Other assets                                                                       |       | 211                                              |       | (30                                              | )          |
| Payables to affiliates                                                             |       | 338                                              |       | 101                                              |       |
| Accounts receivables                                                               |       | —                                           |       | (20                                              | )          |
| **Cash provided by operating  activities**                                         |       | 1,716                                            |       | 1,548                                            |       |
|                                                                               |       |                                             |       |                                             |       |
| **Cash flows from investing  activities**                                          |       |                                             |       |                                             |       |
| Investments in unconsolidated real estate joint  ventures                          |       | (10,241                                          | )          | (18,227                                          | )          |
| Issuances of notes receivable                                                      |       | (2,183                                           | )          | —                                           |       |
| Funding of escrow deposits                                                         |       | (750                                             | )          | —                                           |       |
| Return of investments in unconsolidated real  estate joint ventures                |       | 3,050                                            |       | 831                                              |       |
| Other                                                                              |       | 48                                               |       | 45                                               |       |
| **Cash used in investing  activities**                                             |       | (10,076                                          | )          | (17,351                                          | )          |
|                                                                               |       |                                             |       |                                             |       |
| **Cash flows from financing  activities**                                          |       |                                             |       |                                             |       |
| Proceeds from sales of common stock                                                |       | 164,839                                          |       | —                                           |       |
| Offering costs paid                                                                |       | (24,715                                          | )          | —                                           |       |
| Distributions on common stock paid                                                 |       | (4,396                                           | )          | (2,610                                           | )          |
| Redemption of common stock                                                         |       | (1,184                                           | )          | (50                                              | )          |
| Change in payables to affiliates                                                   |       | —                                           |       | (222                                             | )          |
| Change in subscriptions for common stock                                           |       | —                                           |       | 53                                               |       |
| Change in subscription cash received                                               |       | —                                           |       | (53                                              | )          |
| **Cash provided by (used in)  financing activities**                               |       | 134,544                                          |       | (2,882                                           | )          |
| ** **                                                                         |       |                                             |       |                                             |       |
| Net change in cash and cash equivalents                                            |       | 126,184                                          |       | (18,685                                          | )          |
| Cash and cash equivalents at beginning of period                                   |       | 23,771                                           |       | 53,378                                           |       |
| Cash and cash equivalents at end of period                                         |       | $                                                | 149,955    |                                             | $          | 34,693 |   |

 

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

 

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**Behringer HarvardMultifamily REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**1.**                                      Organization and Business

** **

***Organization***

 

Behringer Harvard MultifamilyREIT I, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”)was organized in Maryland on August 4, 2006 and has elected to be taxed,and currently qualifies, as a real estate investment trust (“REIT”) for federalincome tax purposes. As a REIT, we generally are not subject to corporate-levelincome taxes.  To maintain our REITstatus, we are required, among other requirements, to distribute annually atleast 90% of our “REIT taxable income,” as defined by the Internal Revenue Codeof 1986, as amended (the “Code”), to our stockholders.  If we fail to qualify as a REIT in anytaxable year, we would be subject to federal income tax on our taxable incomeat regular corporate tax rates.  As of June 30,2009, we believe we are in compliance with all applicable REIT requirements.

 

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

 

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

 

***Offeringsof our Common Stock***

 

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

 

On September 5,2008, we commenced a public offering (the “Initial Public Offering”) of up to200,000,000 shares of common stock offered at a price of $10.00 per sharepursuant to a Registration Statement on Form S-11 filed under theSecurities Act.   The Initial PublicOffering also covered the registration of up to an additional 50,000,000 sharesof common stock at a price of $9.50 per share pursuant to our distributionreinvestment plan (“DRIP”).  We reservethe right to reallocate shares of our common stock between the primary offeringand our DRIP.  As of June 30, 2009,we have sold a total of approximately 17.8 million shares of common stock andraised a total of approximately $178.0 million in gross offering proceeds inthe Initial Public Offering. Net proceeds, including DRIP, after sellingcommissions, dealer manager fees, and other offering costs were approximately$150.1 million.

 

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

 

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

 

The accompanyingconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in our AnnualReport on Form 10-K for the year ended December 31, 2008 which wasfiled with the Securities and Exchange Commission (“SEC”) on March 31,2009. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) have been condensedor omitted from this report.

 

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

 

Wehave evaluated subsequent events for recognition or disclosure through August14, 2009, which is the date the financial statements were issued.

 

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

 

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

 

            The preparation of consolidated financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  These estimatesinclude such items as the purchase price allocation for real estateacquisitions; impairment of long-lived assets, notes receivables andequity-method real estate investments; revenue recognition of note receivableinterest income and equity in earnings of investments in unconsolidated realestate joint ventures; depreciation and amortization and allowance for doubtfulaccounts.  Actual results could differfrom those estimates.

 

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

 

Our consolidatedfinancial statements include our accounts, the accounts of variable interestentities in which we are the primary beneficiary and the accounts of othersubsidiaries over which we have control. All inter-company transactions, balances and profits have beeneliminated in consolidation.  Interestsin entities acquired are evaluated based on Financial Accounting StandardsBoard Interpretation (“FIN”) 46(R), “Consolidation of Variable InterestEntities,” which requires the consolidation of variable interest entities inwhich we are deemed to be the primary beneficiary.  If the interest in the entity is determinedto not be a variable interest entity under FIN 46(R), then the entities areevaluated for consolidation under the American Institute of Certified PublicAccountants’ (“AICPA”) Statement of Position (“SOP”) 78-9, “Accounting forInvestments in Real Estate Ventures,” and by Emerging Issues Task Force (“EITF”)04-5, “Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights.”

 

***RealEstate and Other Related Intangibles***

 

For acquired realestate properties by our Co-Investment Ventures or us, we will allocate thepurchase price of those properties to the tangible assets acquired, consistingof land, inclusive of associated rights, and buildings, any assumed debt,identified intangible assets and asset retirement obligations based on theirrelative fair values in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 141(R), “Business Combinations.” Identifiedintangible assets consist of the fair value of above-market and below-marketleases and in-place leases.  Goodwill isrecognized as of the acquisition date and measured as the aggregate fair valueof the consideration transferred and any noncontrolling interests in theacquiree over the fair value of identifiable net assets acquired.  Likewise, a bargain purchase gain isrecognized in current earnings when the aggregate fair value of theconsideration transferred and any noncontrolling interests in the acquiree isless than the fair value of the identifiable net assets acquired.  Acquisition-related costs are expensed in theperiod incurred.

 

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The fair value of anytangible assets that will be 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.  The valuesof buildings are depreciated over the estimated useful lives ranging from 25 to35 years using the straight-line method.

 

We will determine thevalue of above-market and below-market in-place leases for acquired propertiesbased on the present value (using an interest rate that reflects the risksassociated with the leases acquired) of the difference between (1) thecontractual amounts to be paid pursuant to the in-place leases and (2) estimatesof current market lease rates for the corresponding in-place leases, measuredover a period equal to (a) the remaining non-cancelable lease term forabove-market leases, or (b) the remaining non-cancelable lease term plusany fixed rate renewal options for below-market leases. We record thefair value of above-market andbelow-market leases as intangible assets or intangible liabilities,respectively, and amortize them as an adjustment to rental income over theabove determined lease term.

 

We will determine thevalue of in-place lease values and tenant relationships based on our evaluationof the specific characteristics of each tenant’s lease and our overallrelationship with that respective tenant. The aggregate value of in-place leases and tenant relationships will bedetermined by applying a fair value model. The estimates of fair value of in-place leases includes an estimate ofcarrying costs during the expected lease-up periods for the respective unitsconsidering current market conditions. In estimating fair value of in-place leases, we will consider items suchas real estate taxes, insurance, leasing commissions, legal, tenantimprovements and other operating expenses to execute similar deals as well asprojected rental revenue during the expected lease-up period.  The estimate of the fair value of tenantrelationships also includes an estimate of the likelihood of renewal asdetermined by management on a tenant-by-tenant basis.

 

We will amortize thevalue of in-place leases acquired to expense over the term of the leases. Thevalue of tenant relationship intangibles will be amortized to expense over theinitial term and any anticipated renewal periods, but in no event will theamortization period for intangible assets exceed the remaining depreciable lifeof the building.

 

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

 

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

 

Prior to the adoption ofSFAS No. 141(R) on January 1, 2009, we allocated the purchaseprice of the real estate property we acquired to the tangible assets acquired,consisting of land, inclusive of associated rights, and buildings, any assumeddebt, identified intangible assets and asset retirement obligations based ontheir relative fair values in accordance with SFAS No. 142, “Goodwill andOther Intangible Assets.”  Upon thecompletion of a business combination, we recorded the tangible assets acquired,consisting of land, inclusive of associated rights, and buildings, any assumeddebt, identified intangible assets and asset retirement obligations based ontheir fair values in accordance with SFAS No. 141, “Business Combinations.”

 

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

 

Upon the acquisition ofany wholly-owned properties by our Co-Investment Ventures or us, we willmonitor events and changes in circumstances indicating that the carryingamounts 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.

 

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

 

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***Cashand Cash Equivalents***

 

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

 

***NotesReceivable***

 

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

 

Inaccounting for notes receivable by our Co-Investment Ventures or us we evaluatewhether the investments are loans, investments in joint ventures oracquisitions of real estate. In applying Exhibit 1 of AICPA PracticeBulletin 1, “AICPA Notice to Practitioners regarding Acquisition, Development,and Construction Arrangements to Acquisition of an Operating Property” and EITF86-21, “Application of the AICPA Notice to Practitioners regarding Acquisition,Development, and Construction Arrangements to Acquisition of an OperatingProperty,” we evaluate whether the loans contain any rights to participate inexpected residual profits, provide sufficient collateral or qualifyingguarantees or include other characteristics of a loan. As a result of ourreview, neither our wholly-owned loan nor the loans made through ourCo-Investment Ventures contain a right to participate in expected residualprofits. In addition, the project borrowers remain obligated to pay principaland interest due on the loan with sufficient collateral, reserves or qualifyingguarantees to account for the investments as loans.

 

Weassess notes receivable for impairment in accordance with SFAS No.114, “Accountingby Creditors for Impairment of a Loan.” Based on specific circumstances, wedetermine whether it is probable that there has been an adverse change in theestimated cash flows of the contractual payments for the notes receivable. Wethen assess whether the impairment is other than temporary. If the impairmentis other than temporary, 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 the collateral’sfair value as a basis for the impairment.

 

Thereare judgments involved in determining whether an impairment is other thantemporary. As these types of notes receivable are generally investment specificbased on the particular loan terms and the underlying project characteristics,generally, there is usually no secondary market to evaluate impairments.Accordingly, we must rely on our subjective judgments and individual weightingsof the specific factors. If notes receivable are considered impaired, thenjudgments and estimates are required to determine the projected cash flows forthe note receivable, considering the borrower’s or, if applicable, theguarantor’s financial condition and the consideration and valuation of thesecured property and any other collateral. Changes in these facts or in ourjudgments and assessments of these facts could result in impairment losseswhich could be material to our consolidated financial statements.

 

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

 

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

 

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

 

***Acquisition Costs***

 

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

 

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determination of itsstatus, amounts incurred are recorded in other assets.  Acquisition costs and expenses includeamounts incurred with our advisor or its affiliates and with third parties.

 

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

 

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

 

***Redemptionof Common Stock***

 

Weaccount for the possible redemption of our shares under SFAS No.150 “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity” which requires that securities that are convertible for cash at theoption of the holder be classified outside of equity.  In accordance with SFAS No.150, we do not reclassify the shares to be redeemedfrom equity to a liability until such time as the redemption has been formallyapproved.  The portion of theredeemed common stock in excess of the par value is charged to additionalpaid-in capital.

 

***IncomeTaxes***

 

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

 

We have evaluated thecurrent and deferred income tax related to the Texas margin tax and we have nosignificant tax liability or benefit as of June 30, 2009 and December 31,2008. In addition, we recognized no current tax expense for the six monthsended June 30, 2009 and 2008 related to the Texas margin tax other thanour share of non-material amounts included in equity in earnings in investmentsin unconsolidated real estate joint ventures.

 

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

 

***Stock-BasedCompensation***

 

We have a stock-basedincentive award plan for our directors and consultants and for employees,directors and consultants of our affiliates, and our advisor and itsaffiliates.  We account for this planunder the modified prospective method of SFAS No. 123(R), “Share-BasedPayment.” In the modified prospective method, compensation cost is recognizedfor all stock-based payments granted after the effective date and for allunvested awards granted prior to the effective date. In accordance with SFAS No. 123(R),prior period amounts were not restated. SFAS No. 123(R) also requiresthe tax benefits associated with these stock-based payments to be classified asfinancing activities in the Consolidated Statements of Cash Flows, rather thanas operating cash flows as required under previous regulations.

 

We have issued a total of6,000 shares of restricted stock to our independent directors.  These restricted shares are fully vested. Thefair value of the restricted stock was recognized as compensation expense on astraight-line basis over the required service period. For the six months ended June 30,2009 and 2008, we recognized stock-based compensation expense of approximately$0 and $12,000, respectively.

 

***Concentrationof Credit Risk***

 

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

 

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***Income per Share***

 

We calculate earnings pershare in accordance with SFAS No. 128, “Earnings 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 itincludes the dilutive effect of the assumed exercise of securities, includingthe effect of shares issuable under our stock-based incentive plans.

 

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

 

Asof June 30, 2009 and December 31, 2008, we had 1,000 shares ofconvertible stock issued and outstanding, no shares of preferred stock issuedand outstanding, and had no options to purchase shares of common stockoutstanding.  The convertible stock isnot included in the dilutive earnings per share because the shares ofconvertible stock do not participate in earnings and would currently not beconvertible into any common shares, if converted.

 

***Reportable Segments***

 

SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” establishes standardsfor reporting financial and descriptive information about an enterprise’sreportable segments. Our current business consists of investing in andoperating multifamily communities. Substantially all of our consolidated netincome is from real estate properties that we own through joint ventures, andwe account for each joint venture under the equity method of accounting. Ourchief operating decision maker evaluates operating performance on an individualjoint venture level. However, as each of our joint ventures has similareconomic characteristics in our consolidated financial statements, the Companyis managed on an enterprise-wide basis with one reportable segment.

 

***Fair Value of Financial Instruments***

 

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

 

**4.****                                     ****Recently Announced AccountingPronouncements**

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 168, “TheFASB Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles — a Replacement of FASB Statement No. 162” (“SFAS No. 168”).  The FASB Accounting Standards Codification (“Codification”)will be the single source of authoritative non-governmental U.S. generallyaccepted accounting principles.  Rules andinterpretive releases of the SEC under authority of federal securities laws arealso sources of authoritative GAAP for SEC registrants.  SFAS No. 168 is effective for interimand annual periods ending after September 15, 2009.  All existing accounting standards aresuperseded as described in SFAS No. 168. All other accounting literature not included in the Codification isnon-authoritative. We will disclose the Codification requirements in our Form 10-Qfor the third quarter 2009.

 

In June 2009, the FASB issued SFAS No. 167, “Amendmentsto FASB Interpretation No. 46(R)” (“SFAS No. 167”).  SFAS No. 167 eliminates Interpretation46(R)’s 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.  SFAS No. 167 also contains a newrequirement that any term, transaction, or arrangement that does not have asubstantive effect on an entity’s status as a variable interest entity, acompany’s power over a variable interest entity, or a company’s obligation toabsorb losses or its rights to receive benefits of an entity must bedisregarded in applying Interpretation 46(R)’s provisions.  SFAS No. 167 is applicable for annualperiods after November 15, 2009 and interim periods thereafter.  We are currently assessing the impact, ifany, on our consolidated financial statements.

 

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In May 2009, the FASB issued SFAS No. 165, “SubsequentEvents” (“SFAS No. 165”).  SFAS No. 165establishes general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued.   Itrequires the disclosure of the date through which an entity has evaluatedsubsequent events and the basis for that date; that is, whether the daterepresents the actual date the financial statements were issued or wereavailable to be issued.  SFAS No. 165is effective for interim and annual financial periods ending after June 15,2009.  We included the requireddisclosures in the accompanying notes to these consolidated financialstatements (see Note 2).

 

In April 2009, the FASB issued FASB StaffPosition (“FSP”) SFAS No. 107-1 and Accounting Principles Board (“APB”)28-1, “Interim Disclosures about Fair Value of Financial Instruments.” The FSPamends SFAS No. 107, “Disclosures about Fair Value of FinancialInstruments” to require an entity to provide disclosures about fair value offinancial instruments in interim financial information. This FSP is to beapplied prospectively and is effective for interim and annual periods endingafter June 15, 2009 with early adoption permitted for periods ending afterMarch 15, 2009.  We included therequired disclosures in the accompanying notes to these consolidated financialstatements (see Note 3).

 

In April 2009,the FASB issued FSP SFAS No. 157-4, “Determining Fair Value When theVolume and Level of Activity for the Asset or Liability Have Significantly Decreasedand Identifying Transactions That Are Not Orderly.” Based on the guidance, ifan entity determines that the level of activity for an asset or liability hassignificantly decreased and that a transaction is not orderly, further analysisof transactions or quoted prices is needed, and a significant adjustment to thetransaction or quoted prices may be necessary to estimate fair value inaccordance with SFAS No. 157, “Fair Value Measurements.” This FSP is to beapplied prospectively and is effective for interim and annual periods endingafter June 15, 2009 with early adoption permitted for periods ending afterMarch 15, 2009. The adoption of this FSP did not have a material impact onour consolidated financial statements.

 

In November 2008,the FASB reached a consensus on EITF Issue No. 08-6, “Equity MethodInvestment Accounting Considerations” (“EITF 08-6”) which was issued to clarifyhow the application of equity method accounting will be affected by SFAS No. 141(R) andSFAS No. 160. EITF 08-6 clarifies that an entity shall continue to use thecost accumulation model for its equity method investments. It also confirmspast accounting practices related to the treatment of contingent considerationand the use of the impairment model under APB Opinion No. 18, “The EquityMethod of Accounting for Investments in Common Stock”, (“APB No. 18”).Additionally, it requires an equity method investor to account for a shareissuance by an investee as if the investor had sold a proportionate share ofthe investment. EITF 08-6 was effective January 1, 2009, and appliesprospectively.  The adoption of this EITFdid not have a material impact on our consolidated financial statements.

 

**5.**                                      Investments in Unconsolidated Real Estate JointVentures

** **

Asof June 30, 2009 and December 31, 2008, we had eleven and teninvestments in unconsolidated real estate joint ventures, respectively. All ofour investments are BHMPCO-JVs (as defined below). We are not limited to BHMP CO-JVs, and we may choose otherjoint venture partners or investment structures.

 

***BHMPCO-JV***

 

We have entered intoseparate joint ventures with Behringer Harvard Master Partnership I LP (“BHMPCo-Investment Partner”) in which we are the manager. The 1% general partner of BHMPCo-Investment Partner is Behringer Harvard Institutional GP LP, which is anaffiliate of Behringer Harvard Multifamily Advisors I, which is indirectlyowned by our sponsor, Behringer Harvard Holdings, LLC. The 99% limited partnerof BHMP Co-Investment Partner is an unaffiliated social work sector pensionfund based in The Netherlands, Stichting Pensioenfonds Zorg en Welijn (“PFZW”).Substantially all of the capital provided to the BHMP Co-Investment Partner isfrom PFZW.  We have no direct financialor other ownership interest in either of these entities.  Each separate joint venture with the BHMPCo-Investment Partner is referred to as a BHMP CO-JV.

 

PFZWhas committed to invest up to $200 million in co-investments with affiliates orinvestment programs of our sponsor.  Thisfunding commitment may be increased to $300 million.  Until the current funding commitment fromPFZW of $200 million has been placed in BHMP CO-JVs or in other co-investmentswith affiliates or investment programs of our sponsor, to the extent thatinvestments fit within the investment parameters agreed between PFZW and oursponsor, we expect a significant portion of our future real estate acquisitionsand real estate under development activities will be made through a BHMP CO-JV.

 

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Wehave determined that our BHMP CO-JVs are not variable interest entities underFIN 46(R), and thus have evaluated them for consolidation under SOP 78-9 andEITF 04-5. We and BHMP Co-Investment Partner are the two partners, where eachpartner possesses equal substantive participating rights to make decisionswhich constitute routine occurrences in each BHMP CO-JV’s ordinary course ofbusiness. These decisions include the requirement to approve initial and annualoperating plans, initial and annual capital expenditures, any sales ordispositions of investments, and any method of refinancing or raisingadditional debt or equity capital. As a result of these equal substantiveparticipating rights, no single party controls each BHMP CO-JV; accordingly, weaccount for our interest in each BHMP CO-JV using the equity method ofaccounting.

 

Wehave established each BHMP CO-JV to make investments in separate underlyingproperties. The following presents our separate investments in the individualBHMP CO-JVs as of June 30, 2009. The investments are categorized based on the type of investment and onthe stages in the development and operation of the investment.  The definitions of each stage are as follows:

 

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

 

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

 

·                  Lease-up are communities which are non-stabilized and going throughtheir initial leasing activity.

 

·                  Developments are communities currently under construction.

 

Theschedule also presents as of June 30, 2009 the occupancy rates forstabilized properties, based on the number of individual units and theapproximate square footage of retail space, referred to as gross leasable area(“GLA”).

 
| ** **                                                                                                                                          | ** ** | **Our  Investment in  unconsolidated  real estate  joint venture  (in millions)** | ** **  | **Our  ownership** | ** ** | **Acquisition date,  completion date  or  estimated future  completion date** | ** **            |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|-------------|--------------------|------------|-------------------------------------------------------------------------------|-----------------------|
| **Equity Investments**                                                                                                                              | ** ** | ** **                                                                        | ** **  | ** **         | ** ** | ** **                                                                    | ** **            |
| *Stabilized / Comparable:*                                                                                                                          |       |                                                                              |        |               |       |                                                                          |                  |
| The Reserve at Johns Creek Walk / Fulton County,  Georgia                                                                                           |       | $                                                                                 |  4.4   |               | 64         | %                                                                             | 3rd Quarter 2007 |   |
| Garden-style multifamily community with 210 rental  units, 94% occupancy rate                                                                       |       |                                                                              |        |               |       |                                                                          |                  |
| * *                                                                                                                                            |       |                                                                              |        |               |       |                                                                          |                  |
| *Stabilized / Non-comparable*                                                                                                                       |       |                                                                              |        |               |       |                                                                          |                  |
| Verandah at Meyerland / Houston, Texas                                                                                                              |       | 4.1                                                                               |        | 55                 | %          | 2nd Quarter 2009                                                         |                  |
| Multi-story multifamily  community with 301 rental units, 92% occupancy rate                                                                        |       |                                                                              |        |               |       |                                                                          |                  |
| ** **                                                                                                                                          |       |                                                                              |        |               |       |                                                                          |                  |
| **Equity and Loan Investments**                                                                                                                     |       |                                                                              |        |               |       |                                                                          |                  |
| *Lease-ups:*                                                                                                                                        |       |                                                                              |        |               |       |                                                                          |                  |
| The Eclipse / Houston, Texas                                                                                                                        |       | 6.1                                                                               |        | 55                 | %          | 2nd Quarter 2009                                                         |                  |
| Low-rise multifamily community with 330 rental units                                                                                                |       |                                                                              |        |               |       |                                                                          |                  |
|                                                                                                                                                |       |                                                                              |        |               |       |                                                                          |                  |
| Satori / Fort Lauderdale, Florida                                                                                                                   |       | 13.0                                                                              |        | 55                 | %          | 3rd Quarter 2009                                                         |                  |
| Mid-rise multifamily community with 279 rental units  and approximately 13,300 square feet of GLA retail space                                      |       |                                                                              |        |               |       |                                                                          |                  |
| * *                                                                                                                                            |       |                                                                              |        |               |       |                                                                          |                  |
| *Developments:*                                                                                                                                     |       |                                                                              |        |               |       |                                                                          |                  |
| 55 Hundred / Arlington County, Virginia                                                                                                             |       | 13.8                                                                              |        | 55                 | %          | 3rd Quarter 2009                                                         |                  |
| High-rise multifamily community with 234 rental  units and an underground parking facility and approximately 7,200 square feet  of GLA retail space |       |                                                                              |        |               |       |                                                                          |                  |
|                                                                                                                                                |       |                                                                              |        |               |       |                                                                          |                  |
| The Venue / Clark County, Nevada                                                                                                                    |       | 5.0                                                                               |        | 55                 | %          | 4th Quarter 2009                                                         |                  |
| Garden-style multifamily community with 168 units                                                                                                   |       |                                                                              |        |               |       |                                                                          |                  |
|                                                                                                                                                |       |                                                                              |        |               |       |                                                                          |                  |
| Alexan Prospect / Denver, Colorado                                                                                                                  |       | 12.6                                                                              |        | 55                 | %          | 4th Quarter 2010                                                         |                  |
| Low-rise multifamily community with 400 units and  approximately 4,500 square feet of GLA retail space                                              |       |                                                                              |        |               |       |                                                                          |                  |
|                                                                                                                                                |       |                                                                              |        |               |       |                                                                          |                  |
| Alexan St. Rose / Henderson, Nevada                                                                                                                 |       | 15.1                                                                              |        | 55                 | %          | 1st Quarter 2011                                                         |                  |
| Garden-style multifamily community with 430 rental  units                                                                                           |       |                                                                              |        |               |       |                                                                          |                  |
| ** **                                                                                                                                          |       |                                                                              |        |               |       |                                                                          |                  |
| **Loan Investments**                                                                                                                                |       |                                                                              |        |               |       |                                                                          |                  |
| *Developments:*                                                                                                                                     |       |                                                                              |        |               |       |                                                                          |                  |
| Grand Reserve / Dallas, Texas                                                                                                                       |       | 5.2                                                                               |        | 55                 | %          | 1st Quarter 2010                                                         |                  |
| Townhome multifamily community with 149 rental units                                                                                                |       |                                                                              |        |               |       |                                                                          |                  |
|                                                                                                                                                |       |                                                                              |        |               |       |                                                                          |                  |
| Bailey’s Crossing / Fairfax County, Virginia                                                                                                   |       | 12.5                                                                              |        | 55                 | %          | 1st Quarter 2010                                                         |                  |
| Mid-rise multifamily community with 414 rental units  and an attached parking structure                                                             |       |                                                                              |        |               |       |                                                                          |                  |
|                                                                                                                                                |       |                                                                              |        |               |       |                                                                          |                  |
| The Cameron / Silver Spring, Maryland                                                                                                               |       | 10.9                                                                              |        | 55                 | %          | 1st Quarter 2010                                                         |                  |
| High-rise multifamily community with 325 rental  units and approximately 7,300 square feet of GLA retail space                                      |       |                                                                              |        |               |       |                                                                          |                  |
|                                                                                                                                                |       |                                                                              |        |               |       |                                                                          |                  |
| Our total investments in unconsolidated real estate  joint ventures                                                                                 |       | $                                                                                 |  102.7 |               |       |                                                                          |                  |   |

 

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Generally,each BHMP CO-JV owns 100% of the voting equity interests and 99% of theeconomic interests in one subsidiary REIT and substantially all of its businessis conducted through its subsidiary REIT. Each subsidiary REIT has made equityinvestments and/or notes receivable to entities that own one real estateoperating property or development project. Each individual operating property or development project hasestablished one or more separate legal entities for the sole purpose of holdingthe respective operating property or development project and obtaining legallyseparated debt and equity financing.  Thecollective group of each such operating property’s or development project’sseparate legal entities is referred to herein as a “Property Entity.”  The general partners of the Property Entities aregenerally subsidiaries of commercial developers and were organized to own,construct, and finance only one particular real estate project.  Each BHMP CO-JV investment in a PropertyEntity is evaluated for consolidation at the BHMP CO-JV level using ourprinciples of consolidation. The investments in The Reserve at Johns Creek Walkand Verandah at Meyerland are reported on a consolidated basis by the BHMPCO-JV and the remaining investments are recorded as unconsolidated real estatejoint ventures and reported with the equity method of accounting by the respectiveBHMP CO-JVs.

 

Thesummarized financial data shown below presents the combined accounts of each ofthe BHMP CO-JVs and 100% of the accounts of the Property Entities where thereis a corresponding BHMP CO-JV equity investment. The Property Entities which wehave indirect equity investments through a BHMP CO-JV include The Reserve atJohns Creek Walk, Verandah at Meyerland, The Eclipse, 55 Hundred, Alexan St.Rose, Satori, Alexan Prospect, and The Venue. The Property Entities include 100% of their accounts, where thenoncontrolling interest amounts represent the portion not attributable to theBHMP CO-JV’s ownership interest.  Allinter-entity transactions, balances and profits have been eliminated in thecombined financial data.   The December 31, 2008 combined financialdata has been adjusted to reflect the noncontrolling interest standards asrequired by SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements - an amendmentof ARB No. 51” (amounts in millions):

 

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| ** **                                                     | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|----------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| **Balance sheet data**                               | ** ** | **2009**          | ** **  | **2008**              | ** ** |
| Land,  buildings, and fixtures, net                            |       | $                 |  177.9 |                  | $          |  136.3 |   |
| Construction  in progress                                      |       | 192.0             |        | 139.4                 |       |
| Notes  receivable, net                                         |       | 46.7              |        | 45.9                  |       |
| Cash  and cash equivalents                                     |       | 2.8               |        | 8.0                   |       |
| Other  assets, including restricted cash                       |       | 5.3               |        | 1.8                   |       |
| Total  assets                                                  |       | $                 |  424.7 |                  | $          |  331.4 |   |
|                                                           |       |              | * *    | * *              | * *   |
| Property  Entity level construction and mortgage loans payable |       | $                 |  164.1 |                  | $          |  109.4 |   |
| BHMP  CO-JV level mortgage loans payable                       |       | 47.4              |        | 23.0                  |       |
| Accounts  payable, interest payable and other liabilities      |       | 32.9              |        | 27.9                  |       |
| Total  liabilities                                             |       | 244.4             |        | 160.3                 |       |
|                                                           |       |              | * *    | * *              | * *   |
| Our  members’ equity                                      |       | 97.1              |        | 91.6                  |       |
| BHMP  Co-Investment Partner’s equity                      |       | 78.5              |        | 73.8                  |       |
| Noncontrolling  interest                                       |       | 4.7               |        | 5.7                   |       |
| Total  equity                                                  |       | 180.3             |        | 171.1                 |       |
| Total  liabilities and equity                                  |       | $                 |  424.7 |                  | $          |  331.4 |   |

 
| ** **                                                                                    | ** ** | **For the  Three Months Ended** | ** **  | **For the  Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|-------------------------------|------------|
| ** **                                                                                    | ** ** | **June 30,**               | ** **  | **June 30,**             | ** ** |
| **Income statement data**                                                                | ** ** | **2009**                        | ** **  | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                                                                                      |       |                            |        |                          |       |   |   |   |   |
| Rental  revenues                                                                              |       | $                               |  1,334 |                          | $          |  766 |   | $ |  2,351 |   | $ |  1,474 |   |
| Interest  income                                                                              |       | 3,567                           |        | 2,386                         |       | 6,922 |   | 4,491 |   |
|                                                                                          |       | 4,901                           |        | 3,152                         |       | 9,273 |   | 5,965 |   |
|                                                                                          |       |                            |        |                          |       |   |   |   |   |
| Expenses                                                                                      |       |                            |        |                          |       |   |   |   |   |
| General  and operating expenses                                                               |       | 1,089                           |        | 195                           |       | 1,937 |   | 655 |   |
| Real  estate taxes                                                                            |       | 264                             |        | 110                           |       | 489 |   | 200 |   |
| Interest  expense                                                                             |       | 690                             |        | 375                           |       | 1,313 |   | 751 |   |
| Acquisition  expenses                                                                         |       | 177                             |        | —                        |       | 177 |   | — |   |
| Depreciation  and amortization                                                                |       | 685                             |        | 512                           |       | 1,377 |   | 1,034 |   |
|                                                                                          |       | 2,905                           |        | 1,192                         |       | 5,293 |   | 2,640 |   |
| Net  income                                                                                   |       | 1,996                           |        | 1,960                         |       | 3,980 |   | 3,325 |   |
|                                                                                          |       |                            |        |                          |       |   |   |   |   |
| Net  loss attributable to noncontrolling interest                                             |       | 35                              |        | 82                            |       | 88 |   | 174 |   |
| Net  income attributable to consolidated BHMP CO-JV                                           |       | $                               |  2,031 |                          | $          |  2,042 |   | $ |  4,068 |   | $ |  3,499 |   |
| ** **                                                                                    |       |                            |        |                          |       |   |   |   |   |
| Our  share of equity in earnings of investments in unconsolidated real estate  joint ventures |       | $                               |  1,119 |                          | $          |  1,093 |   | $ |  2,214 |   | $ |  1,858 |   |

 

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,  2009** | ** **  | **December 31,  2008** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| Balance of our member’s equity in the BHMP CO-JVs    |       | $                       |  97.1  |                        | $          |  91.6 |   |
| Other capitalized costs, net of amortization              |       | 5.6                     |        | 4.9                         |       |
| Investments in unconsolidated real estate joint  ventures |       | $                       |  102.7 |                        | $          |  96.5 |   |

 

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Includedin the combined financial data are notes receivable by BHMP CO-JVs to threeProperty Entities in various stages of development.  The BHMP CO-JVs acquired options to purchase a certainpercentage ownership interest in the Property Entity, or to convert the notesreceivable into equity interests in the Property Entities. Options aregenerally exercisable during defined periods after project completion.  Below are the BHMP CO-JVs’notes receivable from the Property Entities as of June 30, 2009 (amountsin millions):

** **
| **Name of Underlying Property** | ** ** | **Maximum  Advance** | ** ** | **Amount  Advanced** | ** ** | **Interest  Rate** | ** ** | **Maturity Date**  | ** ** | **Option Period  Commencement  After Construction** | ** ** |
|---------------------------------|------------|----------------------|------------|----------------------|------------|--------------------|------------|--------------------|------------|-----------------------------------------------------|------------|
| Grand Reserve                   |       | $                    | 7.5        |                 | $          | 7.5                |       | 10.0               | %          | April 2012                                     |       | 120 days of the earlier of 1 year or 90% occupied |   |
| Bailey’s Crossing          |       | 22.1                 |       | 22.1                 |       | 9.5                | %          | July 2012     |       | 90 days                                             |       |
| The Cameron                     |       | 19.3                 |       | 19.3                 |       | 9.5                | %          | December 2012 |       | 90 days                                             |       |
| Total BHMP CO-JV Notes          |       | $                    | 48.9       |                 | $          | 48.9               |       |               |       |                                                |       |   |   |
| Less: Deferred Financing Fees   |       |                 |       | (2.2                 | )          |               |       |               |       |                                                |       |
| Net BHMP CO-JV Notes            |       |                 |       | $                    | 46.7       |               |       |               |       |                                                |       |   |

 

Inthe combined financial data, notes receivable and notes payable between theBHMP CO-JVs and its Property Entities in which the BHMP CO-JVs have equityinterests are eliminated.  Below are theeliminated BHMP CO-JVs’ notes receivable as of June 30, 2009 (amounts inmillions):

 
| **Name of Underlying Property**                              | ** ** | **Maximum  Advance** | ** ** | **Amount  Advanced** | ** ** | **Interest Rate** | ** ** | **Maturity Date**  | ** ** |
|--------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|-------------------|------------|--------------------|------------|
| The Eclipse                                                  |       | $                    | 8.1        |                 | $          | 8.1               |       | 9.5                | %          | April 2012 |   |
| Alexan St. Rose                                              |       | 21.0                 |       | 20.7                 |       | 13.0              | %          | December 2013 |       |
| 55 Hundred                                                   |       | 20.0                 |       | 20.0                 |       | 9.5               | %          | October 2012  |       |
| Satori                                                       |       | 14.8                 |       | 14.8                 |       | 10.0              | %          | October 2012  |       |
| Alexan Prospect                                              |       | 14.8                 |       | 14.8                 |       | 10.0              | %          | April 2013    |       |
| The Venue                                                    |       | 5.8                  |       | 5.8                  |       | 10.0              | %          | June 2013     |       |
| Total BHMP CO-JV Notes Receivable Eliminated in  Combination |       | $                    | 84.5       |                 | $          | 84.2              |       |               |       |   |   |

 

Theoption period for the BHMP CO-JV to purchase The Eclipse from the developerbecame effective on May 22, 2009 allowing the developer and the BHMP CO-JVto begin negotiations to purchase The Eclipse. The option period terminated on July 22, 2009 with no agreementreached, but the parties continue to negotiate the option. We have noobligation to purchase the property if a mutual agreement is not reached, inwhich case the note receivable will be paid in accordance with its terms.

 

Otherthan loans made by our BHMP CO-JVs or us, as of June 30, 2009, there arenine construction loans and two mortgage notes relating to our investments,each made by an unaffiliated third party. Other than guarantees issued by the project developers or theiraffiliates, the Property Entities are solely responsible for amounts undertheir construction, mortgage loans and mezzanine loans as well as otherliability balances. Neither we nor the BHMP CO-JVs have a primary or secondaryobligation on those obligations of the Property Entities.  The land, building and construction inprogress of the Property Entities are used as collateral for these loans.  In addition, two BHMP CO-JVs are solelyresponsible for their respective mortgage notes, which are secured by therespective underlying properties.

 

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Thefollowing presents the carrying value of construction and mortgage loanspayable as of June 30, 2009 made by parties other than BHMP CO-JVs or us(amounts in millions):

 
| **BHMP CO-JV Level Mortgage Loans** | ** ** | **Amount** | ** ** | **Interest Rate** | ** **    | **Maturity Date**   | ** **      | **Total  Commitment** | ** ** |
|-------------------------------------|------------|------------|------------|-------------------|---------------|---------------------|-----------------|-----------------------|------------|
| The Reserve at Johns Creek Walk     |       | $          | 23.0       |              | 6.46% - Fixed |                | March 2013 |                  | $          | — |   |
| Verandah at Meyerland               |       | 24.4       |       | 6.17% - Fixed     |          | September 2011 |            | —                |       |
| Total                               |       | $          | 47.4       |              |          |                |            |                  | $          | — |   |

 
| **Property Entity Level  Construction and  Mortgage Loans** | ** ** | **Amount** | ** ** | **Interest  Rate**      | ** **              | **Maturity  Date** | ** **      | **Total  Commitment** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-------------------------|-------------------------|--------------------|-----------------|-----------------------|------------|
| The Eclipse                                                 |       | $          | 20.5       |                    | Monthly LIBOR + 185 bps |               | April 2010 |                  | $          | 38.1 |   |
| Satori                                                      |       | 61.7       |       | Monthly LIBOR + 140 bps |                    | October 2010  |            | 73.9                  |       |
| 55 Hundred                                                  |       | 48.4       |       | Monthly LIBOR + 150 bps |                    | October 2010  |            | 69.8                  |       |
| Alexan Prospect                                             |       | 21.9       |       | Monthly LIBOR + 195 bps |                    | May 2011      |            | 70.5                  |       |
| The Venue                                                   |       | 11.6       |       | Monthly LIBOR + 225 bps |                    | June 2012     |            | 20.3                  |       |
| Total                                                       |       | $          | 164.1      |                    |                    |               |            |                  | $          | 272.6 |   |

 

MonthlyLIBOR at June 30, 2009 is 0.31%.

 

Eachof the Property Entity level construction loans have provisions allowing forextensions, generally two, one-year options if certain operation performancelevels have been achieved as of the maturity date.  An extension fee, generally 0.25% of thetotal loan balance, is required for each extension.

 

InApril 2009, we received the December 31, 2008 audited consolidatedfinancial statements of Fairfield Residential LLC and its affiliates (“FairfieldResidential”), the developer for three multifamily community developments inwhich we have invested through their respective BHMP CO-JVs (Bailey’s Crossing,The Cameron and 55 Hundred, or the “Fairfield Projects”).  In its opinion on the consolidated financialstatements, the auditor expressed concern that Fairfield Residential might notbe able to continue to operate as a going concern through the end of 2009.

 

Inaddition to serving as project developer, Fairfield Residential has guaranteedrepayment of each of the development project senior construction loans that are fundingconstruction of the Fairfield Projects, as well as completion of suchdevelopment projects.  Furtherdeterioration in Fairfield Residential’s financial condition may give rise toan event of default under the senior construction loan agreements.  If there is an event of default under asenior construction loan, underour intercreditor agreements with the senior construction lenders or otherwise, weexpect to have an opportunity to (a) cure the default, (b) purchasethe senior construction loan or (c) otherwiseenforce or negotiate a solution acceptable to the senior construction lender.  Any such negotiations may require us to agreeto less desirable investment terms than we currently have.  In addition, such defaults or negotiationsmay change our analysis of the accounting for these investments, which couldresult in the BHMP CO-JVs accounting for the investments as joint ventures, orif the BHMP CO-JV is viewed as the primary beneficiary under FIN 46(R), toconsolidate the investment(s). However, we believe that, even if FairfieldResidential becomes insolvent, we have sufficient collateral, contractualremedies and other creditor rights for us to recover all of our investments inthese development projects.

 

Subsequentto the issuance of the 2008 consolidated financial statements and continuingthrough August 14, 2009, we understand that the development project seniorconstruction lenders have not declared the Property Entities in default andhave continued to fund the construction loan draws.  As of June 30, 2009, the amountsunfunded under each senior construction loan for Bailey’s Crossing, TheCameron, and 55 Hundred were approximately $37.7 million, $58.5 million and$21.4 million, respectively. We understand Fairfield Residential has reached anagreement with its senior credit facility lender for an additional extensionthrough August 31, 2009. In addition, Fairfield as project developer hascontinued to perform under the development agreement, meeting all constructionrequirements and schedules.  Constructionis expected to continue through the first half of 2010.

 

Asof June 30, 2009, management’s assessment related to the FairfieldProjects is that the BHMP CO-JV loan investments are still properly accountedfor as loans and equity accounting is still appropriate for the BHMP CO-JVequity investment in unconsolidated real estate joint ventures.  The continuation of these accounting treatments isdependent on the resolution of the issues described above, and there can be noassurance as new facts and circumstances arise that different accounting wouldnot be required. 

 

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Achange in accounting could affect our recognition of earnings in futureperiods. As of June 30, 2009, no impairment charges related to ourinvestments with respect to the Fairfield Projects have been recorded and ourcarrying value of investments in the Fairfield Projects is $33.8 million(approximately 13% of our total assets). For the three and six months ended June 30, 2009, for the FairfieldProjects, the equity in earnings of investments in unconsolidated real estatejoint ventures was $0.8 million and $1.6 million, respectively. Distributionsto us from our investments related to the Fairfield Projects for the three andsix months ended June 30, 2009 were $0.8 million and $1.7 million,respectively.

 

Asof June 30, 2009 and December 31, 2008, the Fairfield Projects andanother unaffiliated commercial property company and their affiliates aredevelopers, partners and guarantors in six of the Property Entities,representing 22% and 42% of our total assets, respectively.

 

On June 28, 2009, weacquired through a newly formed BHMP CO-JV, Verandah at Meyerland, amulti-story multifamily community providing a total of 301 units located inHouston, Texas.   We contributed $3.6million in equity to the BHMP CO-JV for a 55% ownership interest. Verandah atMeyerland has a $24.0 million interest-only mortgage loan payable whichVerandah at Meyerland BHMP CO-JV assumed.

 

**6.****                                      Stockholders’Equity**

 

***Capitalization***

 

As of June 30,2009 and December 31, 2008, we had 31,939,965 and 15,347,792 shares ofcommon stock outstanding, respectively, including 6,000 shares of restrictedstock issued to our independent directors for no cash, and 24,969 shares ownedby Behringer Harvard Holdings, LLC, an affiliate of our advisor, for cash of$200,001.

 

As of June 30,2009 and December 31, 2008, we had 1,000 shares of convertible stock ownedby our advisor issued for cash of $1,000. The convertible stock has no voting rights and, prior to conversion,does not participate in any earnings or distributions.  The convertible stock generally isconvertible into shares of common stock with a value equal to 15% of the amountby which (1) our enterprise value at the time of conversion, including thetotal amount of distributions paid to our stockholders, exceeds (2) thesum of the aggregate capital invested by our stockholders plus a 7% cumulative,non-compounded, annual return on such capital at the time of conversion, on acash-on-cash basis.  The convertiblestock can be converted when the excess value described above is achieved anddistributed to stockholders or our common stock is listed on a nationalsecurities exchange.  The conversion mayalso be prorated in the event of certain termination of the Advisory ManagementAgreement.  Management has reviewed theterms of the underlying convertible stock and determined the fair value underGAAP approximated the nominal value paid for the shares.

 

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

 

***Share Redemption Program***

 

OnSeptember 2, 2008, our board of directors authorized a share redemptionprogram for investors who hold their shares for more than one year.  Thepurchase price for redeemed shares is set forth in the prospectus for ourInitial Public Offering of common stock, as supplemented from time totime.  Our board of directors reserves the right in its sole discretion atany time, and from time to time, to (1) waive the one-year holding periodin the event of the death, disability, need for long-term care, or otherexigent circumstances such as bankruptcy, a mandatory distribution requirementunder a stockholder’s IRA or with respect to shares purchased under or throughour DRIP or automatic purchase plan, (2) reject any request forredemption, (3) change the purchase price for redemptions, or (4) terminate,suspend or amend the share redemption program.  Under the terms of theplan, during any calendar year, we will not redeem in excess of 5% of theweighted average number of shares outstanding during the twelve-monthcalendar-based period immediately prior to the date of redemption.  Inaddition, our board of directors will determine whether we have sufficient cashfrom operations to repurchase shares, and such purchases will generally belimited to proceeds of our DRIP plus 1% of operating cash flow for the previousfiscal year.  We redeemed 144,299 shares of common stock forapproximately $1.2 million for the six months ended June 30, 2009.  No shares were redeemed for the six monthsended June 30, 2008.

 

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***Distributions***

 

Wepaid our first distribution effective July 1, 2007.

 

Distributions, including DRIP, for the six months ended June 30,2009 and for the year ended December 31, 2008 were as follows (amounts inmillions):

 
| ** **      | ** ** | **Distributions** | ** ** |
|-----------------|------------|-------------------|------------|
| ** **      | ** ** | **Declared**      | ** ** | **Paid** | ** ** |
| **2009**        | ** ** | ** **        | ** ** | ** ** | ** ** |
| Second  Quarter |       | $                 | 4.6        |   | $ | 4.1 |   |
| First  Quarter  |       | 2.9               |       | 2.5 |   |
| Total           |       | $                 | 7.5        |   | $ | 6.6 |   |
|            |       |              |       |   |   |
| **2008**        | ** ** | ** **        | ** ** | ** ** | ** ** |
| Fourth  Quarter |       | $                 | 2.4        |   | $ | 2.0 |   |
| Third  Quarter  |       | 1.3               |       | 1.3 |   |
| Second  Quarter |       | 1.3               |       | 1.3 |   |
| First  Quarter  |       | 1.3               |       | 1.3 |   |
| Total           |       | $                 | 6.3        |   | $ | 5.9 |   |

 

**7.****                                      Commitmentsand Contingencies**

 

In the ordinary course ofbusiness, we and/or Co-Investment Ventures contract with unaffiliatedcommercial property development companies and provide equity and/or loans for aparticular 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, 2009, all ofour Co-Investment Ventures have been BHMP CO-JVs.

 

As of June 30,2009, the BHMP CO-JVs held contracts for equity investments and/or loans with atotal commitment value of approximately $179.6 million and the BHMP CO-JVs havecurrently funded approximately $179.2 million. The BHMP CO-JVs will requireadditional capital from us and BHMP Co-Investment Partner in order to fund theremaining commitments of $0.4 million. The remaining $0.4 million was fundedsubsequent to June 30, 2009.

 

One ofour Property Entities in development, The Grand Reserve, has a $29 millionconstruction loan with Guaranty Bank (“Guaranty”) of which $21.1 million hadbeen funded as of July 31, 2009.  OnJuly 23, 2009, the parent of Guaranty Bank, Guaranty Financial Group, Inc(“Guaranty Parent”) disclosed in a filing with the SEC their inability to raisesufficient capital for Guaranty Bank and the probable likelihood that GuarantyParent and Guaranty will not be able to continue as a going concern.  The Office of Thrift Supervision hasrecommended that the Federal Deposit Insurance Corporation (“FDIC”) becomereceiver or conservator for the Guaranty Parent and Guaranty, giving the FDICcontrol of operations.  As of July 31,2009, Guaranty has continued to fund construction draws for the Property Entityand we have received no communication that future fundings would be affected. Through the BHMP CO-JV, as of June 30, 2009, we have made a mezzanineloan to the Property Entity of approximately $7.5 million, which is the BHMPCO-JV’s full mezzanine loan commitment amount. Our share of the BHMP CO-JV is55%. In addition, we had made a junior mezzanine loan to the Property Entityfor approximately $2.3 million as of June 30, 2009. We own 100% of thisjunior mezzanine loan.  Accordingly ouraggregate loan investment in the Property Entity as of June 30, 2009 is$6.4 million.  Each of the mezzanine loans are subordinate to the Guarantyconstruction loan.  We are currentlyassessing the impact, if any, this will have to our Property Entity.

 

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

 

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**8.****                                     ****Related Party Arrangements**

 

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

 

Our advisory management agreement, as it has beenamended and restated (the “Advisory Management Agreement”), has a terminationdate of April 1, 2010 with the option to be renewed by either party for anunlimited number of successive one-year terms. The board of directors has a duty to evaluate the performance of ouradvisor annually before the parties can agree to renew the agreement.

 

Effectivethrough March 31, 2009, the Advisory Management Agreement provided wereimburse our advisor and its affiliates for all Initial Public Offeringorganization and offering costs (the “O&O Reimbursement”) incurred by themin an amount not to exceed 1.5% of the gross proceeds from our Initial PublicOffering.  O&O Reimbursements werepaid at a capped amount of 1.5% of the actual gross proceeds at the time ofeach share sale. Additional amounts that have been incurred by our advisorsthat we believe are probable are accrued. Effective April 1, 2009, the Advisory Management Agreement was amended, such thatwe will pay our advisor the O&O Reimbursement for all Initial PublicOffering organization and offering costs as well as all Private Offeringorganization and offering costs previously incurred by our advisor to theextent not previously reimbursed by us.  Our reimbursements will no longerbe subject to a cap at the time of reimbursement, but will be reimbursed by ouradvisor at the end of the Initial Public Offering to the extent such amountsincurred by us exceed 1.5% of the gross proceeds from our Initial Public Offering.  Further,if the Advisory Management Agreement is terminated or not renewed for reasonsother than a material breach by our advisor, the Advisory Management Agreementwill require our advisor to reimburse the Initial Public Offering organizationand offering costs only to the extent such amounts incurred by us through thetermination date exceed 15% of our gross Initial Public Offering.  In April 2009 in connection with theamendment, a payment of $6.9 million was made to the advisor for prior O&OReimbursement incurred but not previously paid. For the three months and sixmonths ended June 30, 2009, we incurred O&O Reimbursement of $2.3million and $4.3 million, respectively. No amounts of O&O Reimbursementwere incurred for the three and six months ended June 30, 2008.  As of June 30, 2009, the amount by whichour O&O Reimbursement exceeded 1.5% of our gross Initial Public Offeringwas $6.6 million.

 

Ouradvisor and its affiliates were obligated to pay all of our Private Offering organization andoffering costs. Under the Advisory Management Agreement through September 2,2008, our only obligation for those costs was to pay a fee to our advisor andits affiliates underthe Advisory Management Agreement.  Weincurred this fee obligation at the rate of 1.5% of the actual gross PrivateOffering proceeds (the “O&O Fee”), regardless of whether the actual amountof Private Offering costs incurred our advisor and itsaffiliates was higheror lower than the O&O Fee. On September 2, 2008, the AdvisoryManagement Agreement was amended and our reimbursement was increased to nowinclude Private Offering costs incurred by our advisor and itsaffiliates in excessof total amounts due under the O&O Fee. The amount of O&O Fees recorded was determined as 1.5% of the actualPrivate Offering proceeds received to date; no other amounts were considered bymanagement to be probable of reimbursement.

 

BehringerSecurities LP (“Behringer Securities”), an affiliate of our advisor, serves asthe dealer manager for the Initial Public Offering and receives commissions ofup to 7% of gross offering proceeds before reallowance of commissions earned byparticipating broker-dealers.  In connection with the Initial PublicOffering, up to 2.5% of gross proceeds before reallowance to participating broker-dealersare paid to Behringer Securities as a dealer manager fee; except that no dealermanager fee is paid on purchases made pursuant to our DRIP.  In theInitial Public Offering, Behringer Securities reallows all of its commissionsto participating broker-dealers and reallows a portion of its dealer managerfee of up to 2.0% of the gross offering proceeds to be paid to suchparticipating broker-dealers; provided, however, that Behringer Securities mayreallow, in the aggregate, no more than 1.5% of gross offering proceeds formarketing fees and expenses, bona fide training and educational meetings andnon-itemized, non-invoiced due diligence efforts, and no more than 0.5% ofgross offering proceeds for bona fide, separately invoiced due diligenceexpenses incurred as fees, costs and other expenses from thirdparties. For the three months ended June 30, 2009, we soldapproximately 11.2 million shares and therefore Behringer Securities earnedcommissions and dealer manager fees of approximately $7.6 million and $2.8million, respectively. For the six months ended June 30, 2009, we soldapproximately 16.5 million shares and therefore Behringer Securities earnedcommissions and dealer manager fees of approximately $11.3 million and$4.1million, respectively. For the three and six months ended June 30, 2008, BehringerSecurities did not receive any commissions or dealer manager fees due to ourInitial 

 

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Public Offering notcommencing until September 5, 2008.  Through June 30, 2009, BehringerSecurities earned commissions and dealer manager fees of approximately $12.0million and $4.4 million, respectively.

 

The following presentsthe components of our sale of common stock, net related to our Initial PublicOffering (amounts in millions):

 
| ** **                 | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                 | ** ** | **2009**                       | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Sale of common stock**   |       |                           |       |                         |       |   |   |   |   |
| Gross  proceeds            |       | $                              | 111.5      |                         | $          | — |   | $ | 164.8 |   | $ | — |   |
| Less  offering costs:      |       |                           |       |                         |       |   |   |   |   |
| O&O  Reimbursement (1) |       | (2.3                           | )          | —                       |       | (4.3 | ) | — |   |
| Dealer  manager fees       |       | (2.8                           | )          | —                       |       | (4.1 | ) | — |   |
| Selling  commissions       |       | (7.6                           | )          | —                       |       | (11.3 | ) | — |   |
| Total  offering costs      |       | (12.7                          | )          | —                       |       | (19.7 | ) | — |   |
| Sale  of common stock, net |       | $                              | 98.8       |                         | $          | — |   | $ | 145.1 |   | $ | — |   |

 

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

 

Includedin general and administrative expense for the three months ended June 30,2009 and 2008 is approximately $0.3 million and less than $0.1 million,respectively, for accounting and legal personnel costs incurred on our behalfby our advisor.  For the six months endedJune 30, 2009 and 2008, general and administrative expense incurred is$0.6 million and less than $0.1 million, respectively.

 

ThroughSeptember 1, 2008, our advisor and its affiliates received acquisition and advisory fees of2.5% of (1) the contract purchase price paid or allocated in respect ofthe development, construction or improvement of each asset acquired directly byus, including any debt attributable to these assets, or (2) when we madean investment indirectly through another entity, our pro rata share of thegross asset value of real estate investments held by that entity. Our advisor andits affiliates alsoreceived 2.5% of the funds advanced in respect of a loan or other investment. Our advisor andits affiliates reimbursedfor all expenses related to the selection and acquisition of assets, whether ornot acquired by us. Under the Advisory Management Agreement dated September 2,2008, these rates were reduced to 1.75%.

 

Ouradvisor or its affiliates will also receive a non-accountable acquisitionexpense reimbursement in the amount of 0.25% of (a) funds advanced in respectof a loan or other investment, and, (b) the funds paid for purchasing anasset, including any debt attributable to the asset, plus 0.25% of the fundsbudgeted for development, construction or improvement in the case of assetsthat we acquire and intend to develop, construct or improve. We will also paythird parties, or reimburse the advisor or its affiliates, for anyinvestment-related expenses due to third parties in the case of a completedinvestment, including, but not limited to, legal fees and expenses, travel andcommunication expenses, costs of appraisals, accounting fees and expenses,third-party brokerage or finder’s fees, title insurance, premium expenses andother closing costs; we have no obligation to our advisor unless the acquisitionis completed. Our advisor will be responsible, and we have no obligation, forpaying all of the expenses it incurs associated with persons employed by theadvisor to the extent dedicated to making investments for us, such as wages andbenefits of the investment personnel. Our advisor will also be responsible, and we have no obligation, forpaying all of the investment-related expenses that we or our advisor incursthat are due to third parties with respect to investments we do not make.

 

Forthe three months ended June 30, 2009 and 2008, our advisor or itsaffiliates earned acquisition and advisory fees, including the non-accountableacquisition expense reimbursement, of approximately $0.3 million and $0.9million, respectively.  For the sixmonths ended June 30, 2009 and 2008, acquisition and advisory fees earnedwere $0.4 million and $0.9 million, respectively.  For the three months and six months ended June 30,2009, $0.3 million and $0.4 million, respectively, were capitalized toinvestments in unconsolidated real estate joint ventures.

 

Ouradvisor or its affiliates will receive debt financing fees of 1% of the amountavailable to us under debt financing which was originated, assumed orrefinanced by or for us. It is anticipated that our advisor or its affiliateswill pay some or all of these fees to third parties with whom it subcontractsto coordinate financing for us. For both the three and six months ended June 30,2009, our advisor or its affiliates has earned debt financing fees of $0.2 million,respectively.   Our advisor andits affiliates didnot earn any debt financing fees in 2008.

 

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On September 2, 2008, the Company entered into anAmended and Restated Property Management Agreement (the “Property ManagementAgreement”) with our operating partnership and our property manager, BHMManagement. The Property Management Agreement has a term of two years from theeffective date of the original property management agreement and will terminateon November 21, 2010 with automatic renewal periods of two years. If noparty gives written notice to the other at least thirty days prior to theexpiration date of the agreement that it will terminate, then it willautomatically continue for consecutive two-year periods. The PropertyManagement Agreement also provides that, in the event the Company terminatesits advisory management agreement with the advisor, the Manager, upon at leastthirty days prior written notice, will have the right to terminate theagreement.

 

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

 

TheProperty Management Agreement applies where we have control over the selectionof property management.  As of June 30,2009, Verandah at Meyerland and The Reserve at Johns Creek Walk were the onlyproperties under the Property Management Agreement.  For the three and six months ended June 30,2009 and 2008, BHM Management or its affiliates earned minimal property managementfees.   For all other properties, thethird-party developer has selected the property manager or the property isstill in development.

 

ThroughSeptember 1, 2008, our advisor and its affiliates received a monthly asset management feefor each asset held by us. This amount was calculated based upon one-twelfth of1% of aggregate asset value, as defined, as of the last day of the precedingmonth. Effective September 2, 2008, this fee is 0.75% of the higher of thecost of investment or value of the investment. For the three months ended June 30,2009 and 2008, our advisor and its affiliates earned asset management fees ofapproximately $0.3 million and $0.2 million, respectively.  For the six months ended June 30, 2009and 2008, Behringer Harvard Multifamily Advisors I or its affiliates earnedasset management fees of approximately $0.5 million and $0.4 million,respectively.

 

Ouradvisor and its affiliates are paid a disposition fee if our advisor provides asubstantial amount of services, as determined by our independent directors, inconnection with the sale of one or more properties.  In such an event, wewill pay our advisor (1) in the case of the sale of real property, thelesser of:  (A) one-half of the aggregate brokerage commission paid(including the subordinate disposition fee) or if none is paid, the amount thatcustomarily would be paid, or (B) 3% of the sales price of each propertysold, and (2) in the case of the sale of any asset other than realproperty, 3% of the sales price of such assets.  This fee shall not beearned or paid unless and until the stockholders have received totaldistributions in an amount equal to or in excess of the sum of the aggregatecapital contributions by stockholders plus a 7% cumulative, non-compounded,annual return on such capital contributions.  Subordinated dispositionfees that are not payable at the date of sale because stockholders have not yetreceived their required minimum distributions will be deferred and paid at suchtime as these subordination conditions have been satisfied.  Nodisposition fee has been earned as of June 30, 2009.

 

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

 

**For other expenses paid or incurred by the advisor in connection withthe services provided to us that are not covered by a fee, we will reimburseour advisor, subject to the limitation that we will not reimburse our advisorfor any amount by which its operating expenses (including the asset managementfee) at the end of the four preceding fiscal quarters exceeds the greaterof:  (A) 2% of our average invested assets (“AIA”), or (B) 25%of our net income (“NI”) determined without reduction for any additions toreserves for depreciation, bad debts or other similar non-cash reserves andexcluding any gain from the sale of our assets for that period. Notwithstanding the above, we may reimburse the advisor for expenses in excessof this limitation if a majority of our independent directors determines thatsuch excess expenses are justified based on unusual and non-recurringfactors.   For the trailing twelve monthsended June 30, 2009, total operating expenses of approximately $3.4million exceeded 2% of our AIA (which was approximately $2.0 million) byapproximately $1.4 million.  Our board of directors, including all of ourindependent directors, have reviewed this analysis and unanimously determinedthe excess to be justified considering the fact that we were in theregistration for**

** **

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** **

**our Initial PublicOffering of common stock where the expenses incurred as a result of being apublic company for audit and legal services, director and officer liabilityinsurance and fees for board of directors to be disproportionate to the Company’sAIA and NI.**

** **

**9.****                                     ****Supplemental disclosures of cashflow information**

 

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

 
| ** **                                     | ** ** | **For the Six Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **June 30,**            | ** ** |
| ** **                                     | ** ** | **2009**                     | ** ** | **2008** | ** ** |
| Non-cash investing activities:                 |       |                         |       |   |   |
| Escrow and prepaid acquisition costs           |       | $                            | —     |   | $ | 1,534 |   |
| Accrued acquisition fees                       |       | $                            | —     |   | $ | 40 |   |
| Accrued other assets                           |       | $                            | —     |   | $ | 22 |   |
|                                           |       |                         |       |   |   |
| Non-cash financing activities:                 |       |                         |       |   |   |
| Accrued offering costs and dealer manager fees |       | $                            | 1,947      |   | $ | 22 |   |
| Distributions payable                          |       | $                            | 1,737      |   | $ | — |   |
| DRIP reinvestment                              |       | $                            | 2,195      |   | $ | — |   |

 

**10.****                              ****Subsequent Events**

 

***Statusof the Offering***

 

For the period July 1,2009 through August 7, 2009, we have sold approximately 3.9 million sharesof common stock for gross proceeds of approximately $39.2 million.

 

***Distributions Paid***

 

On July 2, 2009,we paid total distributions of approximately $1.7 million; of which $1.0million were cash distributions and $0.7 million were pursuant to our DRIPrelating to distributions declared each day in the month of June 2009. On August 4,2009, we paid total distributions of approximately $2.0 million; of which $1.1million were cash distributions and $0.9 million were pursuant to our DRIPrelating to distributions declared each day in the month of July 2009.

 

***Distributions Declared***

 

OnAugust 13, 2009, our board of directors declared distributions payable tothe stockholders of record each day during the months of September, October andNovember 2009.  The distributions authorized for September, October andNovember equal a daily amount of $0.0019178 per share of commonstock.  Distributions payable to each stockholder of record during a monthwill be paid in cash on or before the 16th day of the following month.  Aportion of each distribution may constitute a return of capital for taxpurposes.  If the rate we are paying for each day in September, October andNovember were paid each day for a 365-day period, it would equal a 7.0%annualized rate based on a purchase price of $10.00 per share.

 

***PFZW Transfer of Assets***

 

As described in Note 5,affiliates of our advisor agreed to an investment arrangement (the “MasterCo-Investment Arrangement”) with a Dutch pension fund then called StichtingPensioenfonds voor de Gezondheid, Geestelijke en Maatschappelijke Belangen.  The Master Co-Investment Arrangement is managed byBehringer Harvard Institutional GP LP, a Texas limited partnership (“InstitutionalGP”), an affiliate of our advisor that is indirectly wholly-owned by oursponsor. On January 1, 2008, the Dutch pension fund changed its name to PFZW as part of a restructuring in whichthe formerly internal management of the fund became a separate, externalmanager to the fund.  This new managemententity assumed a name similar to the pension fund’s prior name (called herein “PGGMManagement”).

 

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Until July 2009, theBHMP Co-Investment Partner was owned (i) 99% by PFZW, which served as thelimited partner of the BHMP Co-Investment Partner, and (ii) 1% byInstitutional GP, which serves as the general partner of the BHMP Co-InvestmentPartner.  On July 31, 2009, PFZWassigned all of its 99% limited partnership interest in the BHMP Co-InvestmentPartner to Stichting Depositary PGGM Real Estate Fund, a Dutch foundation,acting in its capacity as depositary of and for the account and risk of PGGMReal Estate Fund (the “PGGM Real Estate Fund”). Accordingly, instead of PFZW being obligated to meet the entire fundingobligations concomitant with a 99% limited partnership interest in the BHMPCo-Investment Partner, the PGGM Real Estate Fund will be responsible for theseobligations.  In order to meet theseobligations we expect that PGGM Real Estate Fund will make capital calls uponinvestors in the new pooled structure who must then proportionally comply withtheir obligations to make such contributions. The management of the assets assigned by PFZW has not changed and is notexpected to change.

 

We have been advised thatthe PGGM Real Estate Fund is a pooled investment structure in which assets areheld by a depository for the benefit of its members.  This structure will allow various Dutchpension funds to invest in the PGGM Real Estate Fund, rather than justPFZW.  This assignment is part of alarger process in which PGGM Management is transferring PFZW’s diverseinvestments, which include real estate, liquid equity securities, privateequity, and bonds, into separate funds that focus on a particular investmenttype.  We understand that PFZW intends totransfer all of its real estate investments to the PGGM Real Estate Fund.  Initially, PFZW will be the sole investor inthe PGGM Real Estate Fund, which is expected to initially have assets thatexceed €4 billion and an additional €1 billion of commitments.

 

In addition, on the samedate that PFZW assigned all of its 99% limited partnership interest in the BHMPCo-Investment Partner to the PGGM Real Estate Fund, the parties to the MasterCo-Investment Arrangement amended the types of multifamily investments to bemade under the joint investment arrangement from to-be-developed multifamilycommunities or newly constructed multifamily communities that have not yetreached stabilization, other than residential properties for assisted living, studenthousing or senior housing, to multifamily communities that are to-be-developedor in the process of being developed, or for which development has beencompleted for less than three years, other than residential properties forassisted living, student housing or senior housing.  This amendment is meant to adjust the MasterCo-Investment Arrangement to better position the BHMP Co-Investment Partner tomake co-investments with us.

 

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

 

Subsequent to the quarterended June 30, 2009, we entered into purchase and sale agreements for threemultifamily communities for a total purchase price of approximately $215.7million, excluding closing costs.  As of August 14, 2009, we havemade a total of $4.3 million in earnest money deposits on these threemultifamily communities.  If consummated, we expect that two of the threeacquisitions, with a total purchase price of approximately $119.7 million,would be made through a joint venture with our BHMP Co-Investment Partner,whereby our BHMP Co-Investment Partner would provide 45% of the capital forthese investments. The consummation of the purchase of each of thesemultifamily communities remains subject to substantial conditions, including,but not limited to, (1) the satisfaction of the conditions to theacquisition contained in the relevant contracts; (2) no material adversechange occurring relating to the multifamily communities or in the localeconomic conditions; (3) our receipt of sufficient net proceeds from theInitial Public Offering and financing proceeds to make these acquisitions; and (4) ourreceipt of satisfactory due diligence information, including appraisals,environmental reports and lease information.  Other investments may beidentified in the future that we may acquire before or instead of thesemultifamily communities.

 

SeeNotes 5 and 7 for other disclosures which include events subsequent to June 30,2009.

 

**********

 

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

 

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

 

**Overview**

 

Wewere incorporated on August 4, 2006 as a Maryland corporation and operateas a real estateinvestment trust (“REIT”) for federal and state income tax purposes. Wemake investments in and operate high quality multifamily communities. Inparticular, we were organized to invest in and operate high quality multifamilycommunities that we believe have desirable locations, personalized amenities,and high quality construction. We began acquiring interests in multifamilycommunities in April 2007. As of June 30, 2009, all of ourinvestments have been in high quality development and operating multifamilycommunities located in the top 50 metropolitan statistical areas (“MSAs”) inthe United States.

 

Our investmentstrategy is designed to provide our stockholders with a diversified portfolioand our management and board of directors have extensive experience ininvesting in numerous types of real estate, loans and other investments toexecute this strategy. We intend to primarily invest in, acquire and operatemultifamily communities, using multiple strategies to acquire investments inhigh quality multifamily communities that produce stabilized rental income. Wewill invest in and acquire a blended portfolio consisting of core, stabilizedincome generating assets, assets that may benefit from enhancement orrepositioning and development assets forstabilization to retain as core assets generatingincome with potential capital appreciation. Further, we may invest incommercial real estate, including office buildings, shopping centers, businessand industrial parks, manufacturing facilities, warehouses and distributionfacilities and motel and hotel properties. We intend to make investments on ourown or indirectly through co-investment arrangements with other participants (“Co-InvestmentVentures”). Directly or through Co-Investment Ventures, we may invest in realestate-related securities, including securities issued by other real estatecompanies, either for investment or in change of control transactions completedon a negotiated basis or otherwise. We also may originate or invest incommercial mortgage-backed securities, mortgage, bridge, mezzanine or otherloans and Section 1031 tenant-in-common interests (including those issuedby programs sponsored by Behringer Harvard Holdings, LLC), or in entities thatmake investments similar to the foregoing. Although we intend to primarilyinvest in real estate assets located in the United States, in the future, wemay make investments in real estate assets located outside the United States.As of June 30, 2009, we have not made any international investments. Wewill not make international investments until one of our independent directorshas at least three years of relevant experience acquiring and managing suchinternational investments.

 

Wehave entered into separate joint ventures with Behringer Harvard MasterPartnership I LP (the “BHMP Co-Investment Partner”) 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 Behringer Harvard MultifamilyAdvisors I, which is indirectly owned by our sponsor, Behringer HarvardHoldings, LLC and the 99% limited partner of the BHMP Co-Investment Partner isan unaffiliated social work sector pension fund based in The Netherlands,Stichting Pensioenfonds Zorg en Welijn (“PFZW”). Substantially all of thecapital provided to the BHMP Co-Investment Partner is from PFZW. We have nodirect financial or other ownership interest in either of these entities.  Each separate joint venture with BHMPCo-Investment Partner is referred to as a BHMP CO-JV.

 

Generally,each BHMP CO-JV owns 100% of the voting equity interests and 99% of theeconomic interests in one subsidiary REIT and substantially all of its businessis conducted through its subsidiary REIT. Each subsidiary REIT has made equityinvestments and/or notes receivable to entities that own one real estate operatingproperty or development project.  Each individualoperating property or development project has established one or more separatelegal entities for the sole purpose of holding the respective operatingproperty or development project and obtaining legally separated debt and equityfinancing.  The collective group of eachsuch operating property’s or development project’s separate legal entities isreferred to herein as a “Property Entity.” The generalpartners of the Property Entities are generally subsidiaries of commercialdevelopers and were organized to own, construct, and finance only oneparticular real estate project.

 

All but one of ourreal estate investments are unconsolidated joint venture investments in BHMPCO-JVs. As of June 30, 2009, we have made eleven separate investments inmultifamily BHMP CO-JVs. Seven of the eleven Property Entities are indevelopment, two are in lease-up and two are operating properties. As of June 30,2009, the BHMP CO-JVs have made nine mezzanine loans related to the developmentprojects and seven equity investments in Property Entities, with equitypurchase options for all Property Entities. Of the equity investments, oneinvestment, Verandah at Meyerland, is a wholly-owned investment by one BHMPCO-JV.  The remaining six equityinvestments include other unaffiliated third-party partners.  At the completion of our capital 

 

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raise and investment ofthe proceeds, we expect our investment portfolio to consist of a domesticallygeographically diversified portfolio.

 

Webelieve our strategy of investing through BHMP CO-JVs will allow us to increasethe number of our investments, thereby increasing our risk diversification, andproviding participation with greater economic interest in larger or moreselective real estate investments with greater access to high qualityinvestments. We intend to continue to invest through BHMP CO-JVs in multifamily operatingcommunities, to-be-developed multifamily communities or newly constructedmultifamily communities that have not yet stabilized, other than residentialproperties for assisted living, student housing or senior housing. However, weare not limited to co-investments with the BHMP Co-Investment Partner and maypursue other Co-Investment Ventures if they provide greater diversification orinvestment opportunities. We may also pursue direct investments consistent withour investment policies.

 

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

 

EachProperty Entity agreement isunique and heavily negotiated, but we will generally seek the followingprovisions:

 

Fordevelopment stage investments:

 

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

 

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

 

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

 

For operating and development stage investments:

 

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

 

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

 

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

 

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

 

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

 

 Duringthe past two years, real estate markets have continued to experience unusualvolatility and uncertainty. Based on projected economic and credit marketconditions for the United States in 2008, as published by prominent real estateand economic advisory firms, we expect the national pace of multifamilyacquisitions to be slower in 2009 than in recent years.  The vacancy rate for multifamily communitieswas recently reported at a 22-year high as rising joblessness reduced demandwhile supply components increased, particularly so-called shadow rentalalternatives from unsold condominiums and single-family residences. Thesefactors are contributing to lower rental rates, lower occupancy levels andlower valuations in many multifamily markets. With our strategy of investing inhigh quality projects in fundamentally sound long-term markets, we believe ourexisting portfolio is well positioned to perform over the life of the project.However, we may experience a decrease in net operating income in the interim,which may affect certain investment values and cash flow. On the other hand, ifmultifamily prices decline and cap rates increase, any new investments we maymake may generate higher returns and cash flows.

 

 Liquidity has tightened in most financial markets,including investment grade debt, commercial and construction real estatefinancing and equity capital markets. The availability and the resulting terms for acquisition financing andrefinancing of existing mortgages have been significantly affected by thistightening in the capital markets.  Ingeneral, we expect leverage availability to be lower with greater emphasis onrecourse to the borrower and principal amortization.  We believe with the proceeds from ourofferings we have the capital to meet these requirements.  In addition, government-sponsored entitiessuch as Fannie Mae and Freddie Mac have and may continue to provide neededfinancing, refinancing and credit enhancement to the multifamily sector.

 

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

 

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

 

As discussed furtherbelow, we expect to meet our short-term liquidity requirements through the netcash raised from our prior private offering, our Initial Public Offering andcash flow from operating activities of our current and future investments. Forpurposes of our long-term liquidity requirements, we expect that the net cashfrom our Initial Public Offering and from our current and future investmentswill generate sufficient cash flow to cover operating expenses and our monthlydistribution.

 

We expect to usethe proceeds from our Initial Public Offering to substantially increase thenumber and amount of our investments in operating properties and potentialdevelopment projects.  As of June 30,2009, we sold a total of approximately 17.8 million shares of common stock andraised a total of $178.0 million in gross proceeds in our Initial PublicOffering.  In addition, we commenced thePrivate Offering to accredited investors on November 22, 2006 andterminated that offering on December 28, 2007. We sold a total ofapproximately 14.2 million shares of common stock and raised a total ofapproximately $127.3 million in gross offering proceeds in the PrivateOffering.

 

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**PropertyPortfolio**

 

Thefollowing presents our separate investments as of June 30, 2009 and December 31,2008 (amounts in millions).  Theinvestments are categorized based on the type of investment and on the stagesin the development and operation of the investment.  The definitions of each stage are as follows:

 

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

 

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

 

·                  Lease-up are communities which are non-stabilized and going through itsinitial leasing activity.

 

·                  Developments are communities currently under construction.

 

Theschedule also presents as of June 30, 2009 and December 31, 2008 theoccupancy rates for stabilized properties, based on the number of individualunits and the approximate square footage of retail space, referred to as grossleasable area (“GLA”).

 

The increased balance on our investments inunconsolidated real estate joint ventures for the six months ended June 30,2009 is largely due to one new BHMP CO-JV investment of $4.1 million, advanceson existing notes receivable for approximately $5.8 million and equity inearnings of investments in unconsolidated real estate joint ventures of $2.2million offset by $5.8 million in distributions from the BHMP CO-JVs.

 

Presentedbelow are our separate investments in the individual BHMP CO-JVs as of June 30,2009 and December 31, 2008 (amounts in millions):

 
| ** **                                                                                                                                          | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Wholly-Owned Investment**                                                                                                                         |       |                    |       |                        |       |
| *Multifamily Developm*ent                                                                                                                           |       |                    |       |                        |       |
| Grand Reserve / Dallas, Texas(1)                                                                                                                    |       | $                       | 2.3        |                        | $          | — |   |
| Townhome  multifamily community with 149 rental units                                                                                               | * *   | * *                |       |                        |       |
| ** **                                                                                                                                          | * *   | * *                |       |                        |       |
| **Investments in Unconsolidated  Real Estate Joint Ventures**                                                                                       | * *   | * *                |       |                        |       |
| *Stabilized / Comparable:*                                                                                                                          | * *   | * *                |       |                        |       |
| The  Reserve at Johns Creek Walk / Fulton County, Georgia(2)                                                                                        |       | $                       | 4.4        |                        | $          | 4.8 |   |
| Garden-style  multifamily community with 210 rental units, 94% occupancy rate as of  June 30, 2009 and 90% as of December 31, 2008        |       |                    |       |                        |       |
| * *                                                                                                                                            |       |                    |       |                        |       |
| *Stabilized / Non-comparable:*                                                                                                                      |       |                    |       |                        |       |
| Verandah at Meyerland / Houston, Texas (2)(4)                                                                                                       |       | 4.1                     |       | —                      |       |
| Multi-story multifamily community with 301 rental units, 92% occupancy rate as of  June 30, 2009                                               |       |                    |       |                        |       |
| * *                                                                                                                                            |       |                    |       |                        |       |
| *Lease-ups:*                                                                                                                                        |       |                    |       |                        |       |
| The  Eclipse / Houston, Texas(3)                                                                                                                    |       | 6.1                     |       | 7.0                         |       |
| Low-rise  multifamily community with 330 rental units                                                                                               |       |                    |       |                        |       |
|                                                                                                                                                |       |                    |       |                        |       |
| Satori  / Fort Lauderdale, Florida(3)                                                                                                               |       | 13.0                    |       | 13.0                        |       |
| Mid-rise  multifamily community with approximately 279 rental units and 13,300 square  feet of GLA retail space                                     |       |                    |       |                        |       |
| * *                                                                                                                                            |       |                    |       |                        |       |
| *Developments:*                                                                                                                                     |       |                    |       |                        |       |
| Grand  Reserve / Dallas, Texas(1)                                                                                                                   |       | 5.2                     |       | 4.3                         |       |
| Townhome  multifamily community with 149 rental units                                                                                               |       |                    |       |                        |       |
|                                                                                                                                                |       |                    |       |                        |       |
| Bailey’s  Crossing / Fairfax County, Virginia(1)                                                                                               |       | 12.5                    |       | 12.6                        |       |
| Multi-story  (3, 4 and 7) multifamily community with 414 rental units and an attached  parking structure                                            |       |                    |       |                        |       |
|                                                                                                                                                |       |                    |       |                        |       |
| 55  Hundred / Arlington County, Virginia(3)                                                                                                         |       | 13.8                    |       | 13.9                        |       |
| High-rise  multifamily community with 234 rental units and an underground parking  facility and approximately 7,200 square feet of GLA retail space |       |                    |       |                        |       |
|                                                                                                                                                |       |                    |       |                        |       |
| The  Cameron / Silver Spring, Maryland(1)                                                                                                           |       | 10.9                    |       | 10.9                        |       |
| High-rise  multifamily community with 325 rental units and approximately 7,300 square  feet of GLA retail space                                     |       |                    |       |                        |       |
|                                                                                                                                                |       |                    |       |                        |       |
| Alexan  St. Rose / Henderson, Nevada(3)                                                                                                             |       | 15.1                    |       | 14.4                        |       |
| Garden-style  multifamily community with 430 rental units                                                                                           |       |                    |       |                        |       |
|                                                                                                                                                |       |                    |       |                        |       |
| Alexan  Prospect / Denver, Colorado(3)                                                                                                              |       | 12.6                    |       | 10.6                        |       |
| Low-rise  multifamily community with 400 units and approximately 4,500 square feet of  GLA retail space                                             |       |                    |       |                        |       |
|                                                                                                                                                |       |                    |       |                        |       |
| The  Venue / Clark County, Nevada(3)                                                                                                                |       | 5.0                     |       | 5.0                         |       |
| Garden-style  multifamily community with 168 units                                                                                                  |       |                    |       |                        |       |
| ** **                                                                                                                                          |       |                    |       |                        |       |
| Total Investments in Unconsolidated Real Estate  Joint Ventures                                                                                     |       | $                       | 102.7      |                        | $          | 96.5 |   |

 

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(1)   Mezzanineinvestment

 

(2)   Equityinvestment

 

(3)   Equity andmezzanine investment

 

(4)   On June 28,2009, we acquired through a BHMP CO-JV Verandah at Meyerland.  We contributed $3.6 million in equity to theBHMP CO-JV for a 55% ownership in the property. The Verandah at Meyerland has a $24.0 million interest-only mortgagenote which the BHMP CO-JV assumed.

 

**Critical Accounting Policies andEstimates**

** **

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

 

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

 

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

 

Ourconsolidated financial statements will include our accounts, the accounts ofVIEs in which we are the primary beneficiary and the accounts of othersubsidiaries over which we will have control. All inter-company transactions,balances and profits are eliminated in consolidation. Interests in entitiesacquired will be evaluated for consolidation based on Financial AccountingStandards Board Interpretation (“FIN”) 46(R), which requires the consolidationof VIEs in which we are deemed to be the primary beneficiary. If the interestin the entity is determined to not be a VIE under FIN 46(R), then the entitywill be evaluated for consolidation under the American Institute of CertifiedPublic Accountants’ (“AICPA”) Statement of Position (“SOP”) 78-9, “Accountingfor Investments in Real Estate Ventures,” and by Emerging Issues Task Force (“EITF”)04-5, “Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights.”

 

Thereare judgments and estimates involved in determining if an entity in which wewill make an investment will be a VIE and if so, if we will be the primarybeneficiary. The entity will be evaluated to determine if it is a VIE by, amongother things, 

 

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calculating thepercentage of equity being risked compared to the total equity of the entity.FIN 46(R) provides some guidelines as to what the minimum equity at riskshould be, but the percentage can vary depending upon the industry or the typeof operations of the entity and it will be up to our advisor to determine thatminimum percentage as it relates to our business and the facts surrounding eachof our acquisitions. In addition, even if the entity’s equity at risk is a verylow percentage, our advisor will be required by FIN 46(R) to evaluate theequity at risk compared to the entity’s expected future losses to determine ifthere could still in fact be sufficient equity at the entity. Determiningexpected future losses involves assumptions of various possibilities of theresults of future operations of the entity, assigning a probability to eachpossibility using a discount rate to determine the net present value of thosefuture losses and allocating those losses between the equity owners,subordinated lenders or other variable interests. A change in the judgments,assumptions, allocations and estimates outlined above could result inconsolidating an entity that should not be consolidated or accounting for aninvestment on the equity method that should in fact be consolidated, theeffects of which could be material to our results of operations and financialcondition.

 

*** 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 notes receivable.  Loan origination fees and certain directorigination costs are generally deferred and recognized as adjustments tointerest income over the lives of the related loans.

 

Inaccounting for notes receivable by our Co-Investment Ventures or us, there arejudgments related to whether the investments are loans, investments in jointventures or acquisitions of real estate. In applying Exhibit 1 of AICPAPractice Bulletin 1, “AICPA Notice to Practitioners regarding Acquisition,Development, and Construction Arrangements to Acquisition of an OperatingProperty” and EITF 86-21, “Application of the AICPA Notice to Practitionersregarding Acquisition, Development, and Construction Arrangements toAcquisition of an Operating Property,” we evaluate whether the loans containany rights to participate in expected residual profits, the loans providesufficient collateral or qualifying guarantees or include other characteristicsof a loan. As a result of our review, neither our wholly-owned loan nor theloans made through our BHMPCO-JVs contain a right to participate in expected residual profits. Inaddition, the PropertyEntities or project borrower remain obligated to pay principal and interest dueon the loan with sufficient collateral, reserves or qualifying guarantees to accountfor the investments as loans.

 

Weassess notes receivable for impairment in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 114, “Accounting by Creditors forImpairment of a Loan.” Based on specific circumstances we determine whether itis probable that there has been an adverse change in the estimated cash flowsof the contractual payments for the notes receivable. We then assess whetherthe impairment is other than temporary based on factors including the generalor market-specific economic conditions for the project; the financialconditions of the borrower and guarantors, if any; the degree of any defaultsby the borrower on any of its obligations; the assessment of the underlyingproject’s financial viability and other collateral; the length of time andextent of the condition and our or the Co-Investment Venture’s intent andability to retain its investment in the issuer for a period sufficient to allowfor any anticipated recovery in the market value. If the impairment is otherthan temporary, we recognize an impairment loss equal to the difference betweenour or the Co-Investment Venture’s investment in the loan and the present valueof the estimated cash flows discounted at the loan’s effective interest rate.Where we have the intent and the ability to foreclose on our security interestin the property, we will use the property’s fair value as a basis for theimpairment.

 

Thereare judgments involved in determining whether an impairment is other thantemporary. As these types of loans are generally investment specific based onthe particular loan terms and the underlying project characteristics, there isusually not any secondary market to evaluate impairments. Accordingly, we mustrely on our subjective judgments and individual weightings of the specificfactors. If loans are considered impaired, then judgments and estimates arerequired to determine the projected cash flows for the loan, considering theborrower’s or, if applicable, the guarantor’s financial condition and theconsideration and valuation of the secured 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******Real******Estate Joint Ventures***

 

Allbut one of our current investments have been made through joint Co-InvestmentVentures. Each Co-Investment Venture is evaluated under FIN 46(R). If theCo-Investment Venture is determined to not be a VIE under FIN 46(R), then theventures are evaluated for consolidation under the AICPA SOP 78-9, “Accountingfor Investments in Real Estate Ventures,” and by EITF 04-5, 

 

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“Determining Whether aGeneral Partner, or the General Partners as a Group, Controls a LimitedPartnership or Similar Entity When the Limited Partners Have Certain Rights.”

 

As of June 30,2009, all of our Co-Investment Ventures have been and are BHMP CO-JVs.  We are the manager of each BHMP CO-JV’saffairs, but the operation of BHMP CO-JVs are conducted in accordance withoperating plans prepared by us and approved by us and the BHMP Co-InvestmentPartner.  In addition, without theconsent of both members of the BHMP CO-JV, the manager may not approve ordisapprove on behalf of the BHMP CO-JV certain major decisions affecting theBHMP CO-JV, such as (i) selling or otherwise disposing of the investment or anyother property having a value in excess of $100,000, (ii) selling anyadditional interests in the BHMP CO-JV or its subsidiary REIT (with limitedexceptions relating to the subsidiary REIT maintaining its status as a realestate investment trust or the sale of an interest to the developer of theproject), (iii) approving initial and annual operating plans and capitalexpenditures or (iv) incurring or materially modifying any indebtedness orrefinancing of the BHMP CO-JV or the subsidiary REIT.  As a result of the equal substantiveparticipating rights possessed by each partner, no single party controls eachventure; accordingly, we account for each BHMP CO-JV using the equity method ofaccounting pursuant to SOP 78-9. The equity method of accounting requires theseinvestments 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 are received.

 

Eachof the PropertyEntities have different profit sharing interests, some of which have numerousallocation and distribution provisions where certain equity investors receivepreferred interests or deferred participations. In accordance with SOP 78-9, weallocate income and loss for determining our equity in earnings ofunconsolidated joint ventures based on the underlying economic effect orparticipation in the benefit or loss. Although our policy is to use theconcepts of a hypothetical liquidation at book value, judgment is required todetermine which owners are bearing economic benefits or losses, particularly asproperties move from development to operations and guarantees are triggered orremoved. A change in these judgments could result in greater or lesser amountsof equity in earnings.

 

***Investment Impairments***

 

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

 

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

 

Inevaluating our investments for impairment, our advisor will make severaljudgments, assumptions and estimates, including, but not limited to, theprojected date of disposition of our investments in real estate, the estimatedfuture cash flows from our investments in real estate and the projected salesprice of each of our investments in real estate. Recently, domestic financialand real estate markets have experienced unusual volatility and uncertaintywith fewer non-distressed secondary transactions available to base theseestimates and assumptions on. A change in these judgments, assumptions andestimates could result in understating or overstating the book value of ourinvestments which could be material to our financial statements.

 

***Real Estate***

 

For acquired realestate properties, we will allocate the purchase price of those properties tothe tangible assets acquired, consisting of land, inclusive of associatedrights, and buildings, any assumed debt, identified intangible assets and assetretirement obligations based on their relative fair values in accordance withSFAS No. 141(R), “Business Combinations.” Identified intangible assetsconsist of the fair value of above-market and below-market leases, in-placeleases, in-place leasing commissions and tenant relationships.  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

 

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interests in the acquireeis less than the fair value of the identifiable net assets acquired.  Acquisition-related costs are expensed in theperiod incurred.

 

Thefair value of the tangible assets acquired, consisting of land and buildings,will be determined by valuing the property as if it were vacant, and the “as-if-vacant”value will then be allocated to land and buildings. Land values will be derivedfrom appraisals, and building values will be calculated as replacement costless depreciation or our advisor’s estimates of the relative fair value ofthese assets using discounted cash flow analyses or similar methods. The valueof the building will be depreciated over the estimated useful life of 25 to 35years, using the straight-line method.

 

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

 

Thetotal value of identified real estate intangible assets acquired will befurther allocated to in-place lease values, in-place leasing commissions andtenant relationships based on our evaluation of the specific characteristics ofeach tenant’s lease and our overall relationship with that respective tenant.The aggregate value of in-place leases acquired and tenant relationships willbe determined by applying a fair value model. The estimates of fair value ofin-place leases will include an estimate of carrying costs during the expectedlease-up periods for the respective spaces considering then current marketconditions. In estimating the carrying costs that would have otherwise beenincurred had the leases not been in place, we will include such items as realestate taxes, insurance and other operating expenses as well as projectedrental revenue during the expected lease-up period based on then current marketconditions. The estimates of the fair value of tenant relationships will alsoinclude costs to execute similar leases including leasing commissions, legaland tenant improvements as well as an estimate of the likelihood of renewal asdetermined by our advisor on a tenant-by-tenant basis.

 

Wewill amortize the value of in-place leases and in-place tenant improvementsover the initial term of the respective leases. The value of tenantrelationship intangibles will be amortized over the initial term and anyanticipated renewal periods, but in no event exceeding the remainingdepreciable life of the building. If a tenant terminates its lease prior toexpiration of the initial terms, the unamortized portion of the in-place leasevalue and tenant relationship intangibles will be charged to expense.

 

Wewill determine the fair value of assumed debt by calculating the net presentvalue of the scheduled mortgage payments using interest rates for debt withsimilar terms and remaining maturities that our advisor believes we couldobtain. Any difference between the fair value and stated value of the assumeddebt will be recorded as a discount or premium and amortized over the remaininglife of the loan.

 

Prior to the adoption ofSFAS No. 141(R) on January 1, 2009, we allocated the purchaseprice of the real estate property we acquired to the tangible assets acquired,consisting of land, inclusive of associated rights, and buildings, any assumeddebt, identified intangible assets and asset retirement obligations based ontheir relative fair values in accordance with SFAS No. 142, “Goodwill andOther Intangible Assets.”  Upon thecompletion of a business combination, we recorded the tangible assets acquired,consisting of land, inclusive of associated rights, and buildings, any assumeddebt, identified intangible assets and asset retirement obligations based ontheir fair values in accordance with SFAS No. 141, “Business Combinations.”

 

Inallocating the purchase price of each of our properties, our advisor will makeassumptions and use various estimates, including, but not limited to, theestimated useful lives of the assets, the cost of replacing certain assets,discount rates used to determine present values, market rental rates per squarefoot and the period required to lease the property up to its occupancy atacquisition if it were vacant. Many of these estimates will be obtained fromindependent third-party appraisals. However, our advisor will be responsiblefor the source and use of these estimates. A change in these estimates andassumptions 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. Thesevariances could be material to our results of operations and financialcondition.

 

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**Results of Operations**

** **

Forthe three months ended June 30, 2009, we are reporting net income of $0.4million, compared to a net income of $0.8 million for the three months ended June30, 2008. For the six months ended June 30, 2009, we are reporting net incomeof $0.5**million, compared to a net income of$1.5 million for the six months ended June 30, 2008. The decrease in net incomeis primarily due to our 2009 results incurring additional costs in general andadministrative expenses as a result of our larger portfolio as well as areduction in interest income due to lower interest rates on our cashequivalents.   We expect that as wecomplete the investment of the proceeds from our Initial Public Offering thatearnings on our real estate investments will have a higher contribution to ournet income while general and administrative expenses and interest income fromour cash equivalents will be proportionally less significant to our overalloperating results.

 

Forthe three and six months ended June 30, 2009 and 2008, our primary investmentshave been mezzanine and mortgage development loans in Property Entities, substantiallythrough our BHMPCO-JVs.  As of June 30, 2008, we and our BHMP CO-JVs have madeinvestments in nine properties under development and one operating multifamilycommunities.  As of June 30, 2009, wehave added an additional operating multifamily community, Verandah atMeyerland.  In addition, two of theproperties under development have begun lease-up but have not yet reachedstabilized operations.

 

Accordingly,many of our results for the three and six months ended June 30, 2009 are notdirectly comparable to the three and six months ended June 30, 2008, where our results of operations for eachperiod presented reflect significant increases in substantially all reportingcategories. This will likely be the case until we substantially invest theproceeds from the Initial Public Offering.

 

***The three monthsended June 30, 2009 as compared to the three months ended June 30, 2008***

 

*Asset Management and Other Fees.*Asset management fees for the threemonths ended June 30, 2009 and 2008 were approximately $0.3 million and $0.2million, respectively. These fees are based on the amount of our gross realestate investments and the time period in place.  Accordingly, the increase is due to thetiming and funded amounts of our investments for 2009 compared to 2008.  We expect continued increases in these feesas a result of owning and acquiring additional real estate investments.

 

*Generaland Administrative Expenses*. General and administrative expenses for the threemonths ended June 30, 2009 and 2008 were approximately $0.6 million and $0.2million respectively, and included corporate general and administrativeexpenses incurred and reimbursable, as well as compensation of our board ofdirectors, auditing and tax fees, and legal fees. The significant increases inthe three months ended June 30, 2009 as compared to the three months ended June30, 2008 was due to higher administrative costs related to our Initial PublicOffering which occurred in September 2008, and therefore was not a factor forthe period ended June 30, 2008.  Theincrease included corporate legal and accounting reimbursements to our advisorfor $0.2 million, outside audit and legal fees for $0.1 million, and othermiscellaneous expenses for $0.1 million. We expect further increases as a result of owning and acquiringadditional joint venture interests and other real estate investments.

 

*InterestIncome.*Interestincome, which primarily included interest earned on our cash equivalents, wassubstantially unchanged for the three months ended June 30, 2009 and 2008.Although we had higher average investment balances for the three months ended June30, 2009 as compared to the same period in 2008, our average interest rate forthree months ended June 30, 2009 was approximately 0.5% compared toapproximately 2.0% for the same period in 2008 due to market rate declines inshort-term interest rates.  Our interestincome on bank deposits is a function of the timing and magnitude of ourcapital raise and our acquisition activity, where we expect both to increase.  For the three months ended June 30, 2009 and2008, interest income also included earnings on a direct, wholly-owned notereceivable of approximately $0.1 million with no investment or earnings for theprior period in 2008.

 

*Equity inEarnings of Investments in Unconsolidated Real Estate Joint Ventures.*Equity in earnings of joint ventureinvestments for the three months ended June 30, 2009 and 2008 was unchanged, atapproximately $1.1 million and $1.1 million, respectively, and included ourshare in earnings from our unconsolidated joint venture investments. Althoughthe total amounts for each period were substantially unchanged, the individualcomponents did vary. Increased earnings due to additional fundings,particularly for loan investments, were offset by losses incurred oninvestments entering lease-up. During the twelve months ended June 30,2009, we made $29.3 million of new investments in BHMP CO-JVs.  Of this amount, approximately $22.8 million related toloan investments in Property Entities and approximately $6.5 million related toequity investments in Property Entities. A breakdown of ourapproximate equity earnings by type of underlying investments for the threemonths ended June 30, 2009 and 2008 is as follows (amounts in millions):

 

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| ** **                  | ** ** | **For the three months ended  June 30,** | ** ** |
|-----------------------------|------------|------------------------------------------|------------|
| ** **                  | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Loan investments            |       | $                                        | 1.9        |   | $ | 1.3 |   |
|                        |       |                                     |       |   |   |
| Equity investments:         |       |                                     |       |   |   |
| Stabilized / Comparable     |       | (0.1                                     | )          | (0.2 | ) |
| Stabilized / Non-comparable |       | (0.1                                     | )          | — |   |
| Lease-ups                   |       | (0.6                                     | )          | — |   |
| Developments                |       | —                                   |       | — |   |
|                        |       | (0.8                                     | )          | (0.2 | ) |
| Total                       |       | $                                        | 1.1        |   | $ | 1.1 |   |

 

Earningsfrom underlying loan investments increased due to investments in Property Entities for the GrandReserve, Bailey’s Crossing, and The Cameron. Our weighted average interest rateall of our loan investments was approximately 10.2% as of June 30, 2009compared to 9.7% as of June 30, 2008. Equity in earnings from all of our equityinvestments was a loss for both periods and was primarily related to the two Property Entities that are inlease-up, The Eclipse and Satori. These losses were recognized due to thesecommunities recently being placed in service, where interest expense anddepreciation exceeded the unstabilized net operating income.  Although all of the underlying equityinvestments produced a loss in equity in earnings, The Reserve at Johns CreekWalk, Satori, and The Eclipse provided cash distributions to us for the threemonths ending June 30, 2009 of approximately $0.4 million and the loss inequity in earnings for The Eclipse and Satori had no affect on our cash flow asthe operating deficit was included in the development budget and was covered byconstruction loan draws.  The stabilized/ non-comparable activity related to our investment in Verandah at Meyerland.This investment was made on June 29, 2009. As of June 30, 2009, the property is 92% leased.  We expect to receive distributions from theinvestment but due to interest expense and deprecation exceeding net operatingincome, we expect a loss in earnings.

 

Wewould expect our equity in earnings related to underlying loan investments toincrease until the PropertyEntities have completed the project developments, when, if the mezzanine loansare converted to equity investments, our equity investments will increase.However, we anticipate the underlying equity investments to report lessearnings due to depreciation and interest expense exceeding net operatingincome for the PropertyEntities during the initial period of operations through lease-up. Accordingly,as the proportion of the underlying equity investments increases, we expect ournet earnings from unconsolidated real estate joint ventures to decline for aninterim period and they may even reflect a net loss. During the remainder of2009, we expect two additional underlying investments to transition from theirdevelopment phases to lease-up and non-stabilized operations.  These include our investments in 55 Hundredand The Venue.  During the period untilstabilization for these investments, we expect interest and depreciationexpense to exceed net operating income until we reach stabilizedoccupancy.  For the three months ended June30, 2009, our equity in earnings from these underlying investments was $0.3million. Even if underlying loan investments are not converted to equityinterests, our earnings in unconsolidated real estate joint ventures maydecline due to restrictions on recording interest income, either due todeferral of interest or consolidation. See “Critical Accounting Policies andEstimates” discussed above.

 

***The six monthsended June 30, 2009 as compared to the six months ended June 30, 2008***

 

*Asset Management and Other Fees.*Asset management fees for the six monthsended June 30, 2009 and 2008 were approximately $0.5 million and $0.4 million,respectively. These fees are based on the amount of our gross real estateinvestments and the time period in place. Accordingly, the increase is due to the timing and funded amounts of ourinvestments for 2009 compared to 2008. We expect continued increases in thesefees as a result of owning and acquiring additional joint venture interests andother real estate investments.

 

*Generaland Administrative Expenses*. General and administrative expenses for the six monthsended June 30, 2009 and 2008 were approximately $1.4 million and $0.5 millionrespectively, and included corporate general and administrative expensesincurred and reimbursable, as well as compensation of our board of directors,auditing and tax fees, and legal fees. The significant increases in the sixmonths ended June 30, 2009 as compared to the six months ended June 30, 2008were due to higher administrative costs related to our Initial Public Offeringwhich occurred in September 2008, and therefore was not a factor for the periodended June 30, 2008.  The increaseincluded corporate legal and accounting reimbursements to our advisor for $0.5million, outside audit and legal 

 

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fees for $0.2 million,and other miscellaneous expenses for $0.2 million.  We expect further increases as a result ofowning and acquiring additional joint venture interests and other real estateinvestments.

 

*InterestIncome.*Interestincome for the six months ended June 30, 2009 and 2008 was approximately $0.3million and $0.7 million, respectively, and primarily included interest earnedon our cash equivalents. Although we had higher average investment balances forthe six months ended June 30, 2009 as compared to the same period in 2008, ouraverage interest rate for 2009 was approximately 0.5% compared to approximately2.6% for the same period in 2008 due to market rate declines in short-terminterest rates.  Our interest income onbank deposits is a function of the timing and magnitude of our capital raiseand acquisition activity, where we expect both to increase.  For the six months ended June 30, 2009 and2008, interest income also included earnings on a direct, wholly-owned notereceivable of approximately $0.1 million with no investment or earnings for theprior period in 2008.

 

*Equity inEarnings of Investments in Unconsolidated Real Estate Joint Ventures.*Equity in earnings of joint ventureinvestments for the six months ended June 30, 2009 and 2008 was approximately$2.2 million and $1.9 million, respectively, and included our share in earningsfrom our unconsolidated joint venture investments. Increased earnings were dueto additional fundings, particularly for loan investments, offset by lossesincurred on investments entering lease-up. During the twelve monthsended June 30, 2009, we made $29.3 million of new investments in BHMPCO-JVs.  Of this amount, approximately $22.8 million related toloan investments in Property Entities and approximately $6.5 million related toequity investments in Property Entities. A breakdown of ourapproximate equity earnings by type of underlying investments for the sixmonths ended June 30, 2009 and 2008 is as follows (amounts in millions):

 
| ** **                  | ** ** | **For the six months ended  June 30,** | ** ** |
|-----------------------------|------------|----------------------------------------|------------|
| ** **                  | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Loan investments            |       | $                                      | 3.7        |   | $ | 2.4 |   |
|                        |       |                                   |       |   |   |
| Equity investments:         |       |                                   |       |   |   |
| Stabilized / Comparable     |       | (0.3                                   | )          | (0.5 | ) |
| Stabilized / Non-comparable |       | (0.1                                   | )          | — |   |
| Lease-ups                   |       | (1.1                                   | )          | — |   |
| Developments                |       | —                                 |       | — |   |
|                        |       | (1.5                                   | )          | (0.5 | ) |
| Total                       |       | $                                      | 2.2        |   | $ | 1.9 |   |

 

Earningsfrom underlying loan investments increased due to investments in Property Entities for the GrandReserve, Bailey’s Crossing, and The Cameron. Our weighted average interest rateon all of our loan investments was approximately 10.2% as of June 30, 2009 and9.7% as of June 30, 2008. Equity in earnings from all of our equity investmentswas a loss for both periods and was primarily related to the two Property Entities that are inlease-up, The Eclipse and Satori. These losses were recognized due to thesecommunities recently being placed in service, where interest expense anddepreciation exceeded the unstabilized net operating income.  Although all of the underlying equity investmentsproduced a loss in equity in earnings, The Reserve at Johns Creek Walk, Satori,and The Eclipse provided cash distributions to us for the six months ending June30, 2009, of approximately $0.7 million and the loss in equity in earnings forThe Eclipse and Satori had no affect on our cash flow as the operating deficitwas included in the development budget and was covered by construction loandraws.  The stabilized / non-comparableactivity related to our investment in Verandah at Meyerland. This investmentwas made on June 29, 2009.  As of June 30,2009, the property is 92% leased.  Weexpect to receive distributions from the investment but due to interest expenseand deprecation exceeding net operating income, we expect a loss in earnings.

 

Wewould expect our equity in earnings related to underlying loan investments toincrease until the PropertyEntities have completed the project developments, when, if the mezzanine loansare converted to equity investments, our equity investments will increase. However,we anticipate the underlying equity investments to report less earnings due todepreciation and interest expense exceeding net operating income for the Property Entities during theinitial period of operations through lease-up. Accordingly, as the proportionof the underlying equity investments increases, we expect our net earnings fromunconsolidated real estate joint ventures to decline for an interim period andthey may even reflect a net loss. During the remainder of 2009, we expect twounderlying additional investments to transition from their development phasesto lease-up and non-stabilized operations. These include our investments 55

 

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Hundredand The Venue.  During the period untilstabilization for these investments, we expect interest and depreciationexpense to exceed net operating income until we reach stabilized occupancy.  For the six months ended June 30, 2009, ourequity in earnings from these underlying investments was $0.6 million. Even ifunderlying loan investments are not converted to equity interests, our earningsin unconsolidated real estate joint ventures may decline due to restrictions onrecording interest income, either due to deferral of interest or consolidation.See “Critical Accounting Policies and Estimates” discussed above.

 

Wereview our investments for impairments in accordance with our accountingpolicies. For the three and six months ended June 30, 2009 and 2008 we have notrecorded any impairment losses. However, this conclusion could change in futureperiods based on changes in certain factors, primarily:

 

·                  Status of guarantors’ financial position. Ifmarket 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. If our analysis was dependenton a guarantor’s ability to perform, our judgments could change based on newdevelopments. As of June 30, 2009, each of our development Property Entities are dependent uponthe guarantor’s financial position.

 

·                  Project specific performance. All of our loanand equity investments in Property Entities are dependent on the level 3 assumptions(management derived market assumptions) included in our SFAS No. 157 fair valuedeterminations. These assumptions particularly include projected rents,occupancy and terminal cap rates. If general and specific market conditionscontinue to deteriorate, changes in these assumptions will affect our fairvalue determinations.

 

·                  Workouts. In structuring the BHMP CO-JVs investment in Property Entities, some of ourinvestments contain provisions that provide us with priority or preferentialreturns. If the underlying projects are affected by market conditions, whichmay not directly affect our returns, but do affect the other partners, theother partners may request workouts or other changes to the deal structures.Although we may not be contractually forced to accept these changes, therecould be other factors that would cause us to accept certain modifications orenter into workouts. Based on the consequences of theses changes, ourassessment of our investment could change.

 

·                  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 start of lease-upactivities. Our assumptions are based on our marketing analysis and competingprojects. When the developments actually begin lease-up activity we may befaced with different market conditions and our assessment of our investmentcould change.

 

Wereview for these and similar events in the preparation of our consolidatedfinancial statements.  In April 2009, wereceived the December 31, 2008 audited consolidated financial statements ofFairfield Residential LLC and its affiliates (“Fairfield Residential”), thedeveloper for three multifamily community developments in which we haveinvested through their respective BHMP CO-JVs (Bailey’s Crossing, The Cameronand 55 Hundred, or the “Fairfield Projects”). In the consolidated financial statements, the auditor expressed concernthat Fairfield Residential might not be able to continue to operate as a goingconcern through the end of 2009.

 

Inaddition to serving as project developer, Fairfield Residential has guaranteedrepayment of each of the development project senior construction loans that are fundingconstruction of the Fairfield Projects, as well as completion of suchdevelopment projects.  Furtherdeterioration in Fairfield Residential’s financial condition may give rise toan event of default under the senior construction loan agreements.  If there is an event of default under asenior construction loan, underour intercreditor agreements with the senior construction lenders or otherwise, weexpect to have an opportunity to (a) cure the default, (b) purchase the senior construction loan or (c) otherwiseenforce or negotiate a solution acceptable to the senior construction lender.  Any such negotiations may require us to agreeto less desirable investment terms than we currently have.  In addition, such defaults or negotiationsmay change our analysis of the accounting for these investments, which couldresult in the BHMP CO-JVs accounting for the investments as joint ventures, orif the BHMP CO-JV is viewed as the primary beneficiary under FIN 46(R), toconsolidate the investment(s). However, we believe that, even if FairfieldResidential becomes insolvent, we have sufficient collateral, contractualremedies and other creditor rights for us to recover all of our investments inthese development projects.

 

Subsequentto the issuance of the 2008 consolidated financial statements and continuingthrough August 14, 2009, we understand that the development project seniorconstruction lenders have not declared the Property Entities in default andhave continued to fund the construction loan draws.  As of June 30, 2009, the amounts unfundedunder each senior construction loan for Bailey’s Crossing, The Cameron, and 55Hundred were approximately $37.7 million, $58.5 million and $21.4 million,respectively.

 

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Inaddition, Fairfield as project developer has continued to perform under thedevelopment agreement.  Construction isexpected to continue through the first half of 2010.

 

Asof June 30, 2009, management’s assessment related to the Fairfield Projects isthat the BHMP CO-JV loan investments are still properly accounted for as loansand equity accounting is still appropriate for the BHMP CO-JV equity investmentin unconsolidated real estate joint ventures. Thecontinuation of these accounting treatments is dependent on theresolution of the issues described above, and there can be no assurance as newfacts and circumstances arise that different accounting would not be required.A change in accounting could affect our recognition of earnings in futureperiods. As of June 30, 2009, no impairment charges related to ourinvestments with respect to the Fairfield Projects have been recorded and ourcarrying value of investments in the Fairfield Projects is $33.8 million(approximately 13% of our total assets). For the three and six months ended June 30, 2009, for the FairfieldProjects, the equity in earnings of unconsolidated real estate joint ventureswas $0.8 million and $1.6 million, respectively.  Distributions to us from our investmentsrelated to the Fairfield Projects for the three and six months ended June 30,2009 were $0.8 million and $1.7 million, respectively.

 

One ofour Property Entities in development, The Grand Reserve, has a $29 millionconstruction loan with Guaranty Bank (“Guaranty”) of which $21.1 million hadbeen funded as of July 31, 2009.  On July23, 2009, the parent of Guaranty Bank, Guaranty Financial Group, Inc (“GuarantyParent”) disclosed in a filing with the SEC their inability to raise sufficientcapital for Guaranty Bank and the probable likelihood that Guaranty Parent andGuaranty will not be able to continue as a going concern.  The Office of Thrift Supervision hasrecommended that the Federal Deposit Insurance Corporation (“FDIC”) becomereceiver or conservator for the Guaranty Parent and Guaranty, giving the FDICcontrol of operations.  As of July 31,2009, Guaranty had continued to fund construction draws for the Property Entityand we have received no communication that future fundings would be affected.  Through the BHMP CO-JV, as of June 30, 2009,we have made a mezzanine loan to the Property Entity of approximately $7.5million, which is the BHMP CO-JV’s full mezzanine loan commitment amount. Ourshare of the BHMP CO-JV is 55%. In addition, we had made a junior mezzanineloan to the Property Entity for approximately $2.3 million as of June 30, 2009.We own 100% of this junior mezzanine loan. Accordingly our aggregate loan investment in the Property Entity as of June30, 2009 is $6.4 million.  Each of themezzanine loans are subordinate to the Guaranty construction loan.  We are currently assessing the impact, ifany, this will have to our Property Entity.

 

**CashFlow Analysis**

 

Cashand cash equivalents increased for the six months ended June 30, 2009 byapproximately $126.2 million as compared to a decrease in cash and cashequivalents for the six months ended June 30, 2008 of approximately $18.7million.  The increase in cash and cash equivalentsis primarily due to our Initial Public Offering which commenced in September 2008.

 

***The six monthsended June 30, 2009 as compared to the six months ended June 30, 2008***

 

As of June 30,2009, we made investments in eleven multifamily communities, nine in variousstages of development and two operating multifamily communities. We began toreceive proceeds from our Initial Public Offering in October 2008.  As a result, our cash flows for the sixmonths ended June 30, 2009 reflect significant differences from the cash flowsfor six months ended June 30, 2008.

 

Cash flows provided byoperating activities for the six months ended June 30, 2009 and 2008 were $1.7million and $1.5 million, respectively. The six months ended June 30, 2009recognized less net income as compared to the same period in 2008, butbenefited from increased operating liabilities. Distributions received from our investments increased for the six monthsended June 30, 2009, primarily from interest income received from increasedloan investments made through BHMP CO-JVs.

 

Cash flows used ininvesting activities for the six months ended June 30, 2009 and 2008 were $10.1million and $17.4 million, respectively. Our primary investing activity is investment acquisitions or fundings,which are largely dependent on our capital raises. Our investments inunconsolidated real estate joint ventures decreased due to fulfilling ourfunding for eight of our nine BHMP CO-JVs investments in 2008.  As our Initial Public Offering continues into2009, we would expect our new acquisitions to increase.  For the six months ending June 30, 2009, wehave made one additional BHMP CO-JV investment for $3.7 million.  Also providing a source of investing cashflow for the six months ended June 30, 2009 were BHMP CO-JV distributions whichwere returns of investments in unconsolidated real estate joint ventures,primarily related to an excess contribution to the Alexan St. Rose BHMP CO-JVfunded in 2008 and returned during 2009.

 

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Cashflow provided by (used in) financing activities for the six months ended June 30,2009 and 2008 was $134.5 million and ($2.9) million, respectively.  Financing activities increased due to ourInitial Public Offering commencing in September 2008. As our Initial PublicOffering continues into 2009, we would expect proceeds from the sale of commonstock to increase. For the six months ended June 30, 2009, distributions werehigher due to higher distribution rates and increased common stock outstandingas compared to the same period in 2008. There was no capital raise for the six months ended June 30, 2008. Ourboard of directors increased the distribution rate from an effective annualrate of 6.5% to 7.0% in March 2009, increasing the amount of distributionssignificantly. As discussed above, we expect to fund increased distributionsfrom earnings on the increased amount of investments and, to the extentnecessary, from the proceeds of our Initial Public Offering. Offering costspaid were significantly higher for the six months ended June 30, 2009, becauseoffering costs paid are a factor of our common stock sales and our advisorincurs greater costs in the initial phases of our offering.

 

**In accordance with the Statement of Policy Regarding Real EstateInvestment Trusts published by the North American Securities AdministratorsAssociation, also known as the NASAA REIT Guidelines, our charter requires thatwe monitor our expenses on a trailing twelve-month basis.  Our charter defines the following terms andrequires that our Total Operating Expenses (“TOE”) are deemed to be excessiveif at the end of any quarter they exceed for the prior trailing twelve monthperiod the greater of 2% of our Average Invested Assets (“AIA”) or 25% of ourNet Income (“NI”).  For the trailingtwelve months ended June 30, 2009, TOE of approximately $3.4 million exceeded2% of our AIA (which was approximately $2.0 million) by approximately $1.4million.  Our board of directors,including all of our independent directors, have reviewed this analysis andunanimously determined the excess to be justified considering the fact that wewere in the registration for our initial public offering of common stock from December31, 2007 through September 2, 2008 and our rate of investments thereaftercaused the expenses incurred as a result of being a public company for auditand legal services, director and officer liability insurance and fees for boardof directors members in connection with service on the board of directors andits committees to be disproportionate to the Company’s AIA and NI.**

** **

**Liquidityand Capital Resources**

** **

***General***

** **

Ourprincipal demands for funds will continue to be for making investments inmultifamily communities, on our own or through joint ventures and for thepayment of operating expenses and distributions. Generally, cash needs foritems other than our investments are expected to be met from operations, and cashneeds for our investments, including acquisition expenses, are expected to bemet from the net proceeds from our Initial Public Offering and other offeringsof our securities as well as mortgages 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 decide totemporarily invest any uninvested proceeds in investments that could lowerreturns rather than our targeted investments in real estate-relatedassets.  These lower returns may affectour ability to make distributions or the amount actually disbursed.

 

Ifreal estate financing is not available on terms and conditions we findacceptable, we may not be able to obtain financing for investments.  Recently, domestic and international financialmarkets have experienced unusual volatility and uncertainty.  If this volatility and uncertainty persists,our ability to borrow monies to finance the purchase of, or other activitiesrelated to, real estate assets will be significantly impacted.  If we are unable to borrow monies on terms andconditions that we find acceptable, we likely will have to reduce the number ofproperties we can purchase, and the return on the properties we do purchaselikely will be lower.  In addition, wemay find it difficult, costly or impossible to refinance indebtedness that ismaturing.  If interest rates are higherwhen the properties are refinanced, we may not be able to finance theproperties and our income could be reduced.

 

***Short Term Liquidity***

 

Ourprimary indicator of short-term liquidity is our cash and cash equivalents. Asof June 30, 2009, our cash and cash equivalents balance was $150.0 million,compared to $23.8 million as of December 31, 2008. On a daily basis, cash isaffected by our net raise from our Initial Public Offering. Since September 5,2008, we sold approximately 17.8 million shares of our common stock with grossproceeds of approximately $178.0 million. Although there can be no assurance, we expect our sales of shares ofcommon stock in our Initial Public Offering to increase in 2009. For the threeand six months ended June 30, 2009, we received gross proceeds from our InitialPublic Offering (including our distribution reinvestment plan (“DRIP”) ofapproximately $113.0 million and $167.0 million, respectively.  We also expect our operating cash flows toincrease when additional investments are added to our portfolio.

 

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Ourcash and cash equivalents are invested in bank demand deposits, bank moneymarket accounts and a high grade money market fund.  We manage our credit exposure by diversifyingour investments over several financial institutions and investing at amountswithin federally-insured levels.  Informationon our cash and cash equivalents as of June 30, 2009 and December 31, 2008 isas follows (dollar amounts in thousands):

 
| ** **                            | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **Number of**     | ** ** | ** **            | ** ** | **Number of** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Accounts**      | ** ** | **Amount**            | ** ** | **Accounts** | ** ** | **Amount** | ** ** |
| Commercial bank demand deposits:      |       |              |       |                  |       |   |   |   |   |
| Within federally-insured limits       |       | 1                 |       | $                     | 250        |   | 1 |   | $ | 250 |   |
| In excess of federally-insured limits |       | 1                 |       | 9,668                 |       | 1 |   | 398 |   |
|                                  |       |              |       |                  |       |   |   |   |   |
| Commercial bank money markets:        |       |              |       |                  |       |   |   |   |   |
| Within federally-insured limits       |       | 73                |       | 17,214                |       | 13 |   | 3,250 |   |
| In excess of federally-insured limits |       | 7                 |       | 52,650                |       | 8 |   | 4,136 |   |
|                                  | * *   | * *          | * *   | * *              |       |   |   |   |   |
| Money market reserves fund: (1)       |       | 1                 |       | 70,173                |       | 1 |   | 15,737 |   |
|                                  |       |              |       | $                     | 149,955    |   |   |   | $ | 23,771 |   |

 

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(1)          The money market reservesfund invests in high quality, short-term debt securities including, bank obligationssuch as certificates of deposit and time deposits issued by domestic or foreignbanks, commercial paper, and corporate bonds. These securities may have fixed, floating or variable rates of interest.

 

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

 

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

 

Ourprimary source for acquisitions is the funds from our Initial Public Offering.This is an offering of up to $2 billion in gross proceeds from our primaryoffering and $475 million in gross proceeds from our DRIP. Total offeringexpenses are expected to be approximately 11% of the gross proceeds from ourprimary offering, netting approximately 89% that is generally available for newinvestment, before funding of distributions and other operations as discussedabove. We expect offering expenses from our DRIP offering to be immaterial.Through June 30, 2009, we have raised total gross proceeds from our InitialPublic Offering of approximately $178.0 million and paid related offering costsof approximately $30.3 million.

 

Weintend to increase the number and diversity of our investments by entering intojoint ventures with partners such as the BHMP Co-Investment Partner. Through June30, 2009, we and the BHMP Co-Investment Partner have contributed approximately$101.6 million and $79.0 million, respectively, to the BHMP CO-JVs for acquisition ofinvestments, primarily mezzanine construction loans and equity investments inmultifamily communities. As of June 30, 2009, the BHMP Co-Investment Partnerhas a remaining contractual commitment of approximately**$11.0million to BHMP CO-JVs. For us to realize the commitment, we would generally beexpected to contribute approximately $9.5**million toBHMP CO-JVs. We anticipate raising this capital and capital for future BHMPCO-JVs from our continuing proceeds of our Initial Public Offering. There is noassurance that we will be able to raise sufficient capital to meet theserequirements and consequently, all or portions of the BHMP Co-InvestmentPartner commitment may not be available to us. See the following sections below on “Off-Balance Sheet Arrangements” andContractual Obligations for further discussion of our contractualcontingencies.

 

Foreach equity investment made by the BHMP CO-JV in a Property Entity, we will alsoevaluate the use of existing or new property debt. Based on current marketconditions and our investment and borrowing policies, we would expect toutilize PropertyEntity debt financing in a range of 50 to 75% of acquisition or constructionrequirements. This PropertyEntity debt is not an obligation or contingency of the BHMP CO-JVs or of us but does allow usto increase our access to capital. As of June 30, 2009, the Property Entities****hadapproximately $211.5 million of borrowings (exclusive of BHMP CO-JV debt),which are summarized as follows (amounts in millions):

 

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| ** **                                        | ** ** | **Amount** | ** ** | **Interest Rates** | ** **      | **Maturity Dates**              | ** **                         |
|---------------------------------------------------|------------|------------|------------|--------------------|-----------------|---------------------------------|------------------------------------|
| Construction  financing - variable interest rates |       | $          | 164.1      |               | 3.22% (average) |                            | October 2011 through December 2012 |   |
| Permanent  mortgages                              |       | 47.4       |       | 6.46% & 6.17%  |            | September 2011 & March 2013 |                               |
| Total                                             |       | $          | 211.5      |               |            |                            |                               |   |

 

Wewould expect that the PropertyEntities would refinance these borrowings prior to their respective maturitydates. There is no assurance that at those times market terms would allowfinancings at comparable interest rates or leverage levels. We would anticipatethat for some of these properties, lower leverage levels may be necessary,which may require additional contributions from the BHMP CO-JVs. To the best of ourknowledge, all of the PropertyEntities are compliant with each of their borrowings.

 

Otherpotential future sources of capital may include proceeds from secure orunsecured financings, arrangements with other joint venture partners, proceedsfrom the sale of our investments, if and when they are sold, and undistributedcash flow from operating activities.  For investments not made with a Co-Investment partner, we may alsoutilize a credit facility collateralized by our wholly-owned properties.

 

Subsequentto the quarter ended June 30, 2009, we entered into purchase and saleagreements for three multifamily communities for a total purchase price ofapproximately $215.7 million, excluding closing costs.  As of August 14, 2009, we have made a totalof $4.3 million in earnest money deposits on these three multifamilycommunities.  If consummated, we expectthat two of the three acquisitions, with a total purchase price ofapproximately $119.7 million, would be made through a joint venture with ourBHMP Co-Investment Partner, whereby our BHMP Co-Investment Partner wouldprovide 45% of the capital for these investments. The consummation of thepurchase of each of these multifamily communities remains subject tosubstantial conditions, including, but not limited to, (1) the satisfaction ofthe conditions to the acquisition contained in the relevant contracts; (2) nomaterial adverse change occurring relating to the multifamily communities or inthe local economic conditions; (3) our receipt of sufficient net proceeds fromthe Initial Public Offering and financing proceeds to make these acquisitions;and (4) our receipt of satisfactory due diligence information, includingappraisals, environmental reports and lease information.  Other investments may be identified in thefuture that we may acquire before or instead of these multifamily communities.

 

In connection with ourBHMP CO-JV investment in The Eclipse, the BHMP CO-JV has the option to purchasethe property from the Property Entity. The option period for theBHMP CO-JV to purchase became effective on May 22, 2009 allowing the developerand the BHMP CO-JV to begin negotiations for the purchase.  The option period terminated on July 22, 2009with no agreement reached, but the parties continue to negotiate the option.BHMP CO-JV has no obligation to purchase the property if a mutual agreement isnot reached. If an agreement is reached, we would expect to fund our portion ofthe purchase price, net of any assumed debt, from the proceeds of our InitialPublic Offering. We would also expect that in connection with any purchase, theBHMP CO-JV would elect the purchase option related to the property’s groundlease. The purchase price under the ground lease is for approximately $4.6million, where our share would be 55%.

 

For each equityinvestment made by the BHMP CO-JV in a Property Entity, we will also evaluaterequirements for capital expenditures. Of the eight Property Entities withequity investments, two are operating properties and were placed in service inthe last two years. Accordingly, property capital expenditures are not expectedto be significant in the near term. When they do occur, we would expectrecurring capital expenditures to be funded from the Property Entities cash flowfrom operating activities. For non-recurring capital expenditures, we wouldlook to the capital sources noted above. As of June 30, 2009, neither us norany of the BHMP CO-JVs have any commitments for property capital expenditures.

 

**Distributions**

 

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

 

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

 

The cashdistributions paid in the six months ended June 30, 2009 and 2008 wasapproximately $4.4 million and $2.6 million, respectively.  For the six months ended June 30, 2009 and2008, cash flow from operating activities was approximately $1.7 million and $1.5million; respectively. For the six months ended June 30, 2009 and 2008, cashamounts distributed to stockholders exceeded cash flow from operatingactivities by $2.7 million and $1.1 million, respectively. Such differenceswere funded from proceeds from

 

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ourofferings. In addition, acquisition expenses included in cash flow fromoperating activities for the six months ended June 30, 2009 was $0.1 millionand funded from the proceeds from our offerings.  We did not incur any acquisition expenses in2008.

 

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

 

Distributions for the six months ended June 30, 2009 andfor the year ended December 31, 2008 were as follows (in millions, except pershare amounts):

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

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

 

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

 

Accordingly, over the long term, we expect that more of ourdistributions (except with respect to distributions related to sales of ourassets) will be paid from cash flow from operating activities, includingdistributions from our unconsolidated real estate joint ventures in excess ofreported earnings, and operations.  However, operating performance cannot beaccurately predicted due to numerous factors, including our ability to raiseand invest capital at favorable yields, the financial performance of ourinvestments in the current real estate environment, the types and mix ofinvestments in our portfolio and the accounting treatment of our investments inaccordance with our accounting policies.  As a result, future distributions declared andpaid may continue to exceed cash flow from operating activities.

 

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**Off-BalanceSheet Arrangements**

 

We have two BHMP CO-JV levelborrowings, The Reserve at Johns Creek Walk and Verandah at Meyerland, whichmeet the requirements of consolidated BHMP CO-JV borrowingsas of June 30, 2009.  The lenders have norecourse to BHMP CO-JVs or us, only to those particular PropertyEntities.  As of June 30, 2009, no eventsof default have occurred.  The followingpresents terms of the borrowings:

 
| **BHMP CO-JV Borrowings**       | ** ** | **Loan  Amount** | ** **   | **Loan Type** | ** **    | **Interest  Rate** | ** ** | **Maturity  Date** | ** **     |
|---------------------------------|------------|------------------|--------------|---------------|---------------|--------------------|------------|--------------------|----------------|
| The Reserve at Johns Creek Walk |       | $                | 23.0 million |          | Interest-only |               | 6.461      | %                  | March 2013     |   |
| Verandah at Meyerland           |       | $                | 24.4 million |          | Interest-only |               | 6.165      | %                  | September 2011 |   |

 

The investments in real estate and loans owned by us andour BHMP CO-JVswere entered into with unaffiliated developers and previous owners who owninterests in Property Entities that own the underlying real estate anddevelopment projects.  These unaffiliatedparties and their affiliates have provided us with collateral interests in theproperties, development projects, improvements and Property Entities and/orfinancial and performance guarantees of the developer and certain of itsaffiliates.  These Property Entitieshave also obtained additional financing that is senior to our investments, bothour loans and equity investments. The senior loans are collateralized by thedevelopments and improvements and further secured with repayment and completionguarantees from the unaffiliated developers or their affiliates. We have nocontractual obligations on these senior level financings obtained by theunaffiliated developers, which include land loans, construction loans, andground leases.  These senior levelfinancings have rates and terms that are different from our loan investmentrates and terms.  In addition, financialinstitutions behind these loans have independent unfunded obligations under theloan terms.  See discussion above andNote 5 to our consolidated financial statements for information regardingborrowings for unconsolidated Property Entities.

 

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

 

**ContractualObligations**

 

In the ordinary course ofbusiness, we and/or Co-Investment Ventures contract with unaffiliatedcommercial property development companies and provide equity and/or loans for aparticular project (our “Project Commitments”).  We generally fund an initial amount under ourProject Commitments at contract inception and fund additional amounts asconstruction progresses, typically spanning one to three years.  As of June 30, 2009, all of our Co-InvestmentVentures have been BHMP CO-JVs.

 

As of June30, 2009, the BHMP CO-JVs held contracts for equity investments and/or loanswith a total commitment value of approximately $179.6 million and the BHMPCO-JVs have currently funded approximately $179.2 million. The BHMP CO-JVs willrequire additional capital from us and BHMP Co-Investment Partner in order tofund the remaining commitments of $0.4 million. The remaining $0.4 million wasfunded subsequent to June 30, 2009.

 

TheBHMP CO-JVs may become obligated to purchase all or a portion of the interestson three Property Entities under contingent sell options held by otherinvestors on the Property Entities: Bailey’s Crossing, The Cameron and theGrand Reserve.  The options are generallyexercisable after completion of the development and for a period of three yearsthereafter.  The option price is set by agreementand is either based on the fair value of the project at exercise or the cost ofthe project as defined in the respective agreement. The estimated amount of thesell options is $63.6 million and our estimated portion of those commitments is$35.0 million.  As of June 30, 2009, nosell options are exercisable.

 

OnSeptember 2, 2008, our board of directors authorized a share redemption programfor investors who hold their shares for more than one year.  The purchase price for redeemed shares is setforth in the prospectus for our Initial Public Offering of common stock, assupplemented from time to time.  Ourboard of directors reserves the right in its sole discretion at any time, andfrom time to time, to (1) waive the one-year holding period in the event of thedeath, disability, need for long-term care, or other exigent circumstances suchas bankruptcy, a mandatory distribution requirement under a stockholder’s IRAor with respect to shares purchased under or through our DRIP or automaticpurchase plan, (2) reject any request for redemption, (3) change the purchaseprice for redemptions, or (4) terminate, suspend or amend the share redemptionprogram.  Under the terms of the plan,during any calendar year, we will not redeem in excess of 5% of the weightedaverage number of shares outstanding during the twelve-month calendar-basedperiod immediately prior to the date of redemption.  In addition, our board of directors willdetermine whether we have

 

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sufficientcash from operations to repurchase shares, and such purchases will generally belimited to proceeds of our DRIP plus 1% of operating cash flow for the previousfiscal year.  During the three monthsended June 30, 2009, weredeemed 96,041 shares of common stock for approximately $0.8 million.  During the six months ended June30, 2009, we redeemed144,299 shares of common stock for approximately $1.2 million.

 

**Fundsfrom Operations and Modified Funds from Operations**

 

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

 

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

 

·                  *Acquisitionexpense.* In evaluating investments in real estate, includingboth business combinations and investments accounted for under the equitymethod of accounting, management’s investment models and analysisdifferentiates costs to acquire the investment from the operations derived fromthe investment. 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 acquisitions 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 itsaffiliates or third parties.

 

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

 

·                  *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,

 

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MFFOprovides useful supplemental information on the realized economic impact of thehedges independent of short-term market fluctuations.

 

By providing MFFO, we believe we are presenting useful information thatassists investors to more 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 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 affected by impairments.

 

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

 

For the three and six monthsended June 30, 2009, MFFO per share has been impacted by the increase in netproceeds realized from our existing offering of shares. For the three monthsended June 30, 2009, we sold 11.2 million shares of our common stock,increasing our outstanding shares by 53%. For the six months ended June 30, 2009, we sold 16.5 million shares ofour common stock, increasing our outstanding shares by 73%.  The proceeds from this issuance weretemporarily 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 communities’ investments consistent withour investment policy to identify high quality investments.  We believe this will add value to ourstockholders over our longer-term investment horizon, even if this results inless current-period earnings.

 

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

 
| ** **                                | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **June 30,**                   | ** ** | **June 30,**                 | ** ** |
| ** **                                | ** ** | **2009**                       | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  income                               |       | $                              | 0.4        |                         | $          | 0.8 |   | $ | 0.5 |   | $ | 1.5 |   |
| Real estate depreciation and amortization |       | 0.4                            |       | 0.3                          |       | 0.7 |   | 0.6 |   |
| FFO                                       |       | 0.8                            |       | 1.1                          |       | 1.2 |   | 2.1 |   |
|                                      |       |                           |       |                         |       |   |   |   |   |
| Acquisition  expenses                     |       | 0.1                            |       | —                       |       | 0.1 |   | — |   |
| MFFO                                      |       | $                              | 0.9        |                         | $          | 1.1 |   | $ | 1.3 |   | $ | 2.1 |   |
|                                      |       |                           |       |                         |       |   |   |   |   |
| GAAP  weighted average common shares      |       | 26.3                           |       | 14.3                         |       | 21.9 |   | 14.3 |   |
| MFFO  per share                           |       | $                              | 0.03       |                         | $          | 0.08 |   | $ | 0.06 |   | $ | 0.15 |   |

 

·                  The real estatedepreciation and amortization amount includes our consolidated real estaterelated depreciation and amortization (including amortization of in-placeleases) and our share of Co-Investment depreciation and amortization, which isincluded in earnings of unconsolidated real estate joint venture investments.

 

·                  Acquisition expenses includeour share of expenses incurred by our unconsolidated investments in real estatejoint ventures and amounts incurred with our advisor (see Note 8 to our consolidatedfinancial statements). Acquisition expenses also include operating expensesthat were identified or given credit by the seller in the acquisition but areexpensed in accordance with generally accepted accounting principles. For thethree and six months ended June 30, 2009, acquisition expenses wereapproximately $97,000 and $97,000, respectively.  No acquisition expenses were incurred in2008.

 

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Providedbelow is additional information related to the FFO and MFFO calculations, whichmay be helpful in assessing our operating results:

 

·                  Included in the return ofinvestments in unconsolidated real estate joint venture for the six monthsended June 30, 2009, was $2.0 million related to an excess contribution to theAlexan St. Rose BHMP CO-JV funded in 2008 and returned during 2009;

 

·                  Accrued interest income onloans with deferred interest payment terms was approximately $171,000 and$135,000 for the three months ended June 30, 2009 and 2008, respectively;$303,000 and $258,000 for the six months ended June 30, 2009 and 2008,respectively;

 

·                  Amortization of intangiblelease assets was approximately $0 and $94,000 for the for the three monthsended June 30, 2009 and 2008, respectively; $47,000 and $194,000 for the forthe six months ended June 30, 2009 and 2008, respectively;

 

·                  Loan fee income collectedand deferred was approximately $0 and $244,000 for the three months ended June 30,2009 and 2008, respectively; $347,000 and $812,000 for the six months ended June30, 2009 and 2008, respectively;

 

·                  Amortized loan fee incomewas approximately $86,000 and $61,000 for the three months ended June 30, 2009and 2008, respectively; $172,000 and $112,000 for the six months ended June 30,2009 and 2008, respectively;

 

·                  Amortization of deferredfinancing and other costs was approximately $31,000**and$11,000 for the three months ended June 30, 2009 and 2008, respectively; $64,000**and $21,000 for the six months ended June 30, 2009 and2008, respectively.

 

**As noted above, we believe FFO and MFFO are helpful to investors andour management as a measure of operating performance.  FFO and MFFO are not indicative of our cashavailable to fund distributions since other uses of cash, such as capitalexpenditures and principal payment of debt related to investments inunconsolidated real estate joint ventures, are not deducted when calculatingFFO and MFFO.**

** **

**Recently Announced AccountingPronouncements**

** **

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles — a Replacement of FASB Statement No. 162” (“SFAS No. 168”).  The FASB Accounting Standards Codification (“Codification”)will be the single source of authoritative non-governmental U.S. generallyaccepted accounting principles.  Rules andinterpretive releases of the SEC under authority of federal securities laws arealso sources of authoritative GAAP for SEC registrants.  SFAS No. 168 is effective for interim andannual periods ending after September 15, 2009. All existing accounting standards are superseded as described in SFAS No.168.  All other accounting literature notincluded in the Codification is non-authoritative.  We will disclose the Codificationrequirements in our Form 10-Q for the third quarter 2009.

 

In June 2009, the FASB issued SFAS No. 167, “Amendmentsto FASB Interpretation No. 46(R)” (“SFAS No. 167”).  SFAS No. 167 eliminates Interpretation 46(R)’sexceptions to consolidating qualifying special-purpose entities, contains newcriteria for determining the primary beneficiary, and increases the frequencyof required reassessments to determine whether a company is the primarybeneficiary of a variable interest entity. SFAS 167 also contains a new requirement that any term, transaction, orarrangement that does not have a substantive effect on an entity’s status as avariable interest entity, a company’s power over a variable interest entity, ora company’s obligation to absorb losses or its rights to receive benefits of anentity must be disregarded in applying Interpretation 46(R)’s provisions.  SFAS No. 167 is applicable for annual periodsafter November 15, 2009 and interim periods thereafter.  We are currently assessing the impact, ifany, on our consolidated financial statements.

 

In May 2009, the FASB issued SFAS No. 165, “SubsequentEvents” (“SFAS No. 165”).  SFAS No. 165establishes general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued.   Itrequires the disclosure of the date through which an entity has evaluatedsubsequent events and the basis for that date; that is, whether the daterepresents the actual date the financial statements were issued or wereavailable to be issued.

 

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SFAS No. 165 is effective for interim and annualfinancial periods ending after June 15, 2009. We included the required disclosures in our the accompanying notes tothese consolidated financial statements (see Note 2).

 

In April 2009, the FASB issued FASB Staff Position (“FSP”)Financial Accounting Standard (“SFAS”) No. 107-1 and Accounting PrinciplesBoard (“APB”) 28-1, “Interim Disclosures about Fair Value of FinancialInstruments.” The FSP amends SFAS No. 107, “Disclosures about Fair Value ofFinancial Instruments” to require an entity to provide disclosures about fairvalue of financial instruments in interim financial information. This FSP is tobe applied prospectively and is effective for interim and annual periods endingafter June 15, 2009 with early adoption permitted for periods ending after March15, 2009. We included the required disclosures in the accompanying notes tothese consolidated financial statements (see   Note 3).

 

In April 2009, theFASB issued FSP SFAS No. 157-4, “Determining Fair Value When the Volume andLevel of Activity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly.” Based on the guidance, if anentity determines that the level of activity for an asset or liability hassignificantly decreased and that a transaction is not orderly, further analysisof transactions or quoted prices is needed, and a significant adjustment to thetransaction or quoted prices may be necessary to estimate fair value inaccordance with SFAS No. 157, “Fair Value Measurements.” This FSP is to beapplied prospectively and is effective for interim and annual periods endingafter June 15, 2009 with early adoption permitted for periods ending after March15, 2009. The adoption of this FSP did not have a material impact on ourfinancial statements.

 

In November 2008,the FASB reached a consensus on EITF Issue No. 08-6, “Equity Method InvestmentAccounting Considerations” (“EITF 08-6”) which was issued to clarify how theapplication of equity method accounting will be affected by SFAS No. 141(R) andSFAS No. 160. EITF 08-6 clarifies that an entity shall continue to use the costaccumulation model for its equity method investments. It also confirms pastaccounting practices related to the treatment of contingent consideration andthe use of the impairment model under APB Opinion No. 18, “The Equity Method ofAccounting for Investments in Common Stock” (“APB No. 18”). Additionally, itrequires an equity method investor to account for a share issuance by aninvestee as if the investor had sold a proportionate share of the investment.EITF 08-6 was effective January 1, 2009, and applies prospectively.  The adoption of this EITF did not have amaterial impact on our consolidated financial statements.

 

**Inflation**

** **

The real estate markethas not been affected significantly by inflation in the past several years dueto a relatively low inflation rate.  Themajority of our fixed-lease terms are less than 18 months and containprotection provisions applicable to reimbursement billings for utilities.

 

**REITTax Election**

** **

Wehave elected to be taxed as a REIT under Sections 856 through 860 of the Code,and have qualified as a REIT since the year ended December 31, 2007.  To qualify as a REIT, we must meet a number oforganizational and operational requirements, including a requirement that wedistribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subject tofederal income tax at the corporate level.  We are organized and operate in such a manneras to qualify for taxation as a REIT under the Code, and we intend to continueto operate in such a manner, but no assurance can be given that we will operatein a manner so as to qualify or remain qualified as a REIT.

 

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

 

We are exposed tointerest rate changes as a result of long-term debt used by the PropertyEntities.  Our interest rate riskmanagement objectives are primarily to limit the impact of interest ratechanges on earnings and cash flows and to lower overall borrowing costs. Toachieve these objectives, borrowings are done primarily at fixed rates orvariable rates with the lowest margins available and in some cases, the abilityto convert variable rates to fixed rates. With regard to variable-ratefinancing, we will assess interest rate cash flow risk by continuallyidentifying and monitoring changes in interest rate exposures that may adverselyimpact expected future cash flows and by evaluating hedging opportunities.

 

Asof June 30, 2009, wedid not have any outstanding debt. Our BHMP CO-JVs had investments in PropertyEntities with funded aggregate senior debt (which consists of third-party firstmortgages and construction loans and excludes loans made by the BHMP CO-JVs of$84.2 million) of approximately $211.5 million. Of the third-party PropertyEntity debt, approximately $47.4 million was at fixed rate and $164.1 millionwas at variable interest rates with a weighted average of 3.2%*.*

 

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Asof June 30, 2009, we have only one wholly-owned note receivable with a carryingvalue of approximately $2.3 million and a fixed interest rate of 10%.  Our BHMP CO-JVs had notes receivable from Property Entities ofapproximately $130.9 million with a weighted average coupon of 10.2%, all ofwhich were at fixed rates.

 

Asof June 30, 2009 wealso had approximately $150.0 million of bank deposits and money marketaccounts. During 2008, the interest rates on these accounts significantlydecreased and as of June 30, 2009 had a weighted average interest rate of 0.63%. Given thatcurrent interest rate levels were are at historically low levels, we do notbelieve interest rates could significantly decrease further; however, ifinterest rates were to increase, we could earn a higher return on our cash andcash equivalents.

 

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

 

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

 

*Evaluationof Disclosure Controls and Procedures*

 

As required by Rule13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”), our management, including our Chief ExecutiveOfficer and Chief Financial Officer, evaluated, as of June 30, 2009, theeffectiveness of our disclosure controls and procedures as defined in ExchangeAct Rule 13a-15(e) and Rule 15d-15(e).  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of June 30, 2009, and 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 the rulesand 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.

 

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

 

*Changesin Internal Control over Financial Reporting*

 

There have been nochanges in internal control over financial reporting during the quarter ended June30, 2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II**

**OTHER INFORMATION**

 

**Item1.         Legal Proceedings.**

 

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

 

**Item1A.      Risk Factors.**

 

The following riskfactors update the risk factors contained in Item 1A. set forth our AnnualReport on Form 10-K, filed with the Securities Exchange Commission on March 31,2009.

 

***The sponsor’s Master Co-Investment Arrangemententered into by a subsidiary of our sponsor with a Dutch foundation (the “PGGMReal Estate Fund”) requires it to offer the PGGM Real Estate Fund a right offirst refusal to co-invest with our sponsor or its affiliates or investmentprograms in multifamily investments that meet certain specified investmentguidelines which are a significant majority of the type of investments that weintend to acquire.***

* *

Oursponsor has entered into the Master Co-Investment Arrangement for multifamilyinvestments.  Under the arrangement, oursponsor or one of its affiliates or investment programs will generally provide55% of the capital for each investment, and our BHMP Co-Investment Partner,which is 99% owned by the PGGM Real Estate Fund and 1% indirectly wholly-ownedby our sponsor, will provide 45% of the capital for each investment.  Generally, our co-investment ownership withour BHMP Co-Investment Partner will incorporate a subsidiary REIT structure toacquire the multifamily investment.  ThePGGM Real Estate Fund has committed to invest up to $200 million under thisarrangement and may increase its commitment to $300 million at any time priorto November 9, 2011.  As of June 30,2009, the PGGM Real Estate Fund had committed approximately $90 million underthis arrangement to existing investments.  The Master Co-Investment Arrangement isintended to allow for co-investments with any Behringer Harvard-sponsoredinvestment program; however, because of our investment objectives, we believethat we are the most likely Behringer Harvard-sponsored investment program toco-invest with the BHMP Co-Investment Partner. We have committed to invest up to $247 million to co-investmentsapproved by our board of directors and expect that we will generally providethe 55% of capital for each such investment that is required from an affiliateor investment program of our sponsor.  Inaddition, we have agreed to increase this commitment to $370 million if thePGGM Real Estate Fund were to increase its capital commitment to the BHMP Co-InvestmentPartner to $300 million.  Until the PGGMReal Estate Fund has reached its $200 million commitment, the PGGM Real EstateFund has a right of first refusal to co-invest in multifamily investments ofthe type targeted by the Master Co-Investment Arrangement that are made by oursponsor or its affiliates or investment programs.  This arrangement reduces the likelihood thatwe will pursue independent investment in multifamily investment opportunitiesof the type targeted by the Master Co-Investment Arrangement until the capitalcommitment of the PGGM Real Estate Fund has been substantially invested.

 

***If the PGGM Real EstateFund does not honor its commitments, our portfolio may not be as diverse andour investments may suffer.***

 

Underarrangements managed by a subsidiary of our sponsor, we have entered into, andit is intended that we will continue to enter into, joint venture investmentswith the PGGM RealEstate Fund in multifamilycommunities that are to-be-developed or in the process of being developed, orfor which development has been completed for less than three years, other thanresidential properties for assisted living, student housing or senior housing.  As of June 30, 2009, we have made jointventure investments with the PGGM Real Estate Fund in all of the propertiesand development projects in which we have invested.  The PGGM Real Estate Fund has committed to oursponsor to invest up to $200 million in such joint ventures (with approximately$90 million committed to currently existing properties and projects), and the PGGM Real Estate Fund has recentlyindicated that it expects to increase its commitment to invest with us to $300million.  As such, we expect asubstantial portion of our future investments will be made through such jointventures.  We expect this investmentstrategy to increase the number of investments we make and the diversificationof our investment portfolio.  However, ifthe PGGM Real EstateFund does not honor its current commitment to invest up to $200 million insuch joint ventures, or does not increase its commitment to $300 million ormore, our portfolio will not consist of as many investments or be as diverse asit otherwise would.

 

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Inaddition, under the joint venture arrangements into which we have entered, andexpect to continue to enter, with the PGGM Real Estate Fund, we may in certainsituations call for capital contributions to be made by the PGGM Real Estate Fund.  This has typically been the case in thedevelopment projects in which we have co-invested with the PGGM Real Estate Fund; as thedevelopment progresses, it is generally required that both we and the PGGM Real Estate Fund contributeadditional capital to the project.  If the PGGM Real Estate Fund were unwillingor unable to contribute this capital when required, the project and ourinvestment therein could suffer due to lack of funding or delays infunding.  In addition, we could, throughour interest in the joint venture with the PGGM Real Estate Fund, be in breach of ourobligations to the other parties investing in the development project unless wewere to fund the PGGMReal Estate Fund’s portion on its behalf or obtain alternativesources of funding.  If we were to fund the PGGM Real Estate Fund’s portion onits behalf, we would have less capital to invest in other assets and thediversification of our portfolio would suffer. If we were unable to fund the portion of any project that the PGGM Real Estate Fund is expectedto, but does not, fund in accordance with the joint venture agreement, thejoint venture may be unable to meet its funding obligations to the project andthe value of our interest in the project may be reduced or eliminated.

 

Becausethe PGGM Real Estate Fund is a pooled investment structure, each investor investing in the structurewill be responsible for its proportionate share of the capital PGGM RealEstate Fund is obligated to provided to our joint venture. PFZW will initially own 100% of the PGGM Real Estate Fund, but otherDutch pension funds are expected to join the fund in the future.  We will indirectly rely on these investors tomeet their obligations to the PGGM Real Estate Fund so that the PGGMReal Estate Fund can meet its obligations described above.

 

***Wemay be disqualified from treatment as a REIT if a joint venture entity electsto qualify as a REIT and is later disqualified from treatment as a REIT.***

*** ***

As part of our joint ventures,such as our joint ventures with our BHMP Co-Investment Partner or future jointventures with any other Behringer Harvard-sponsored investment program, we haveand we may in the future form subsidiary REITs that will acquire and holdassets, such as a co-investment project owned through a joint venture with ourBHMP Co-Investment Partner.  In order toqualify as a REIT, among numerous other requirements, each subsidiary REIT musthave at least 100 persons as beneficial owners after the first taxable year forwhich it makes an election to be taxed as a REIT and satisfy all of the otherrequirements for REITs under the Internal Revenue Code.  We may be unable to satisfy theserequirements for the subsidiary REITs created in our joint ventures with theBHMP Co-Investment Partner or other joint ventures.  In the event that a subsidiary REIT isdisqualified from treatment as a REIT for whatever reason, we will bedisqualified from treatment as a REIT as well absent our ability to comply withcertain relief provisions, which are unlikely to be available.  If we were disqualified from treatment as aREIT we would lose the ability to deduct from our income distributions that wemake to our stockholders and there would be a negative impact on our operationsand our stockholders’ investment in us.

 

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

 

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

 

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

 

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Guaranty Financial Group,Inc. (“Guaranty Parent”), the parent company of the financial institution thatholds the senior loan on the Grand Reserve project, Guaranty Bank, recentlyreceived a cease and desist order from the OTS ordering it to strengthen itsrequired capital ratio.  Guaranty Parenthas recently reported that it does not believe that it or its subsidiary,Guaranty Bank, will be able to raise sufficient capital to comply with thecease and desist order.  Guaranty Parent hasreported that it likely will not be able to continue as a going concern.  The OTC has recommended that the FDIC becomereceiver or conservator for Guaranty Parent and Guaranty Bank, giving the FDICcontrol of operations.  Our aggregateinvestment in the Grand Reserve project as June 30, 2009 is $6.4 million,consisting of a senior mezzanine loan made through a joint venture with theBHMP Co-Investment Partner and a wholly- owned junior mezzanine loan. Through July31, 2009, Guaranty Bank has been continuing to fund construction draws for theproject and we have received no communication that future fundings will beaffected.

 

**Item2.         UnregisteredSales of Equity Securities and Use of Proceeds.**

 

**Use ofProceeds from Registered Securities**

 

On September 2,2008, our Registration Statement on Form S-11 (File No. 333-148414), covering apublic offering (our “Initial Public Offering”) of up to 250,000,000 shares ofcommon stock, was declared effective under the Securities Act of 1933. OurInitial Public Offering commenced on September 5, 2008 and is ongoing.  We expect to sell the shares offered in ourInitial Public Offering over a two-year period.  Under rules promulgated by the SEC, in somecircumstances we may continue the offering beyond this date.  Our board of directors has the discretion toextend the offering period for the shares offered under the DRIP up to thesixth anniversary of the termination of the primary offering.  We may reallocate the shares of common stockbeing offered between the primary offering and the distribution reinvestmentplan.

 

We are offering amaximum of 200,000,000 shares in our primary offering at an aggregate offeringprice of up to $2 billion, or $10.00 per share with discounts available tocertain categories of purchasers.  The50,000,000 shares offered under the DRIP are initially being offered at anaggregate offering price of $475 million, or $9.50 per share.  Behringer Securities LP, an affiliate of ouradvisor, is the dealer manager of the Initial Public Offering.  As of June 30, 2009, we had sold approximately17.8 million shares of our common stock in our Initial Public Offering on abest efforts basis pursuant to the offering for gross offering proceeds ofapproximately $178.0 million.

 

From thecommencement of the Initial Public Offering through June 30, 2009, we incurredexpenses from our advisor of approximately $30.3 million in connection with theissuance and distribution of the registered securities pursuant to theoffering.

 

From thecommencement of the Initial Public Offering through June 30, 2009, the netoffering proceeds to us from the Initial Public Offering, including thedistribution reinvestment plan, after deducting the total expenses incurreddescribed above, were $150.1 million.  From the commencement of the Initial PublicOffering through June 30, 2009, we had used $26.3 million of such net proceedsto purchase interests in real estate, net of notes payable.  Of the amount used for the purchase of theseinvestments, $0.9 million was paid to Behringer Harvard Multifamily Advisors I,as acquisition and advisory fees and acquisition expense reimbursement.

 

**RecentShares of Unregistered Securities**

 

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

 

**ShareRedemption Program**

 

Ourboard of directors authorized a share redemption program that permits ourstockholders to sell their shares to us in limited circumstances after theyhave held them for at least one year, subject to certain conditions andlimitations.  The purchase price for theredeemed shares is set forth in the prospectus for the Initial Public Offeringof our common stock, as supplemented from time to time.  Our board of directors reserves the right inits sole discretion at any time, and from time to time, to (1) waive theone-year holding period in the event of other exigent circumstances affecting astockholder such as bankruptcy or a mandatory distribution requirement underthe stockholder’s IRA, (2) reject any request for redemption, (3) change thepurchase price for redemptions, or (4) otherwise amend the terms for the shareredemption program.  Under the terms ofthe program, we will not redeem in excess of 5% of the weighted average numberof shares outstanding during the twelve-month period immediately prior to thedate of redemption.  In addition, ourboard of directors will determine at least quarterly whether we have sufficientcash to repurchase shares, and such 

 

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purchaseswill generally be limited to proceeds from the DRIP plus 1% of operating cashflow for the previous fiscal year.  Theprovisions of the share redemption program in no way limit our ability torepurchase shares from stockholders by any other legally available means forany reason that our board of directors, in its discretion, deems to be in ourbest interest.

 

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

 
| **2009** | ** ** | **Total Number  of Shares  Redeemed** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs** | ** ** | **Maximum Number  of Shares That May  Be Purchased Under  the Plans or  Programs** | ** ** |
|----------|------------|---------------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| April    |       | —                                |       | $                                  | —     |                                                                                     | —     |                                                                               | (1         | ) |
| May      |       | 96,041                                |       | 8.28                               |       | 96,041                                                                                   |       | (1                                                                                 | )          |
| June     |       | —                                |       | —                             |       | —                                                                                   |       | (1                                                                                 | )          |
|     |       | 96,041                                |       | $                                  | 8.28       |                                                                                     | 96,041     |                                                                               |       |   |

 

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

 

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

 

None.

 

**Item 4.         Submission of Matters to a Vote of SecurityHolders.**

 

TheAnnual Meeting of our stockholders was held on June 23, 2009.  At the Annual Meeting, all nominees standingfor election as directors were elected.  The following directors were elected to holdoffice for a term expiring at the 2010 Annual Meeting or until their successorsare elected and qualified, with the vote for each director being reflectedbelow:

 
| ** **           | ** ** | **Number of Votes** | ** ** | **Number of Votes** | ** ** |
|----------------------|------------|---------------------|------------|---------------------|------------|
| **Director Nominee** | ** ** | **For**             | ** ** | **Withheld**        | ** ** |
| Robert M. Behringer  |       | 11,060,735          |       | 136,233             |       |
| Robert S. Aisner     |       | 11,060,470          |       | 136,498             |       |
| Sami S. Abbasi       |       | 11,050,459          |       | 146,509             |       |
| Roger D. Bowler      |       | 11,054,215          |       | 142,753             |       |
| Jonathan L. Kempner  |       | 11,043,388          |       | 153,580             |       |
| E. Alan Patton       |       | 11,053,860          |       | 143,108             |       |

 

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

 

**Item 5.         Other Information.**

 

None.

 

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**Item6.      Exhibits.**

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

 

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| 21.1  |   | Subsidiaries  of the Company (incorporated by reference to Exhibit 21.1 to the Company’s  Post-Effective Amendment No.1 to its Registration Statement on Form S-11  filed on March 6, 2009, Commission File No. 333-148414) |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1* |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                                                                                             |
| 31.2* |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                                                                                             |
| 32.1* |   | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002**                                                                |

 

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* Filed herewith

 

** In accordance withItem 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” forpurposes of Section 18 of the Exchange Act or otherwise subject to theliabilities of that section.  Suchcertifications will not be deemed incorporated by reference into any filingunder the Securities Act or the Exchange Act, except to the extent that theregistrant specifically incorporates it by reference.

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                   | **BEHRINGER HARVARD MULTIFAMILY  REIT I, INC.** |
|------------------------|-------------------------------------------------|
|                   | ** **                                      |
|                   | ** **                                      |
| Dated: August 14, 2009 |                                            | /s/ Gary S. Bresky |
|                   |                                            | Gary S. Bresky |
|                   |                                            | Chief Financial Officer |
|                   |                                            | (Principal Financial  Officer) |

 

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