Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended September 30, 2009**

 

**CommissionFile Number: 000-53650**

 

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

(Exact Name of Registrant as Specified in Its Charter)

 

| **Maryland**                                                     | ** ** | **20-8198863**                      |
|------------------------------------------------------------------|------------|-------------------------------------|
| (State or other  jurisdiction of incorporation or  organization) |       | (I.R.S. EmployerIdentification No.) |

 

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

(Address ofprincipal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code:**  (866) 655-3600**

** **

**None**

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

 

Indicateby check mark whether the Registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x   No o

 

Indicate by check 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 the definitions of “large acceleratedfiler,” “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) |   |                         |

 

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

 

As of October 30,2009, Behringer Harvard Opportunity REIT II, Inc. had 13,073,832****shares of common stock, $.0001 par value,outstanding.

 

 

 

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**BEHRINGERHARVARD OPPORTUNITY REIT II, INC.**

**FORM 10-Q**

**QuarterEnded September 30, 2009**

 
| ** **                | ** **                                                                                                   | **Page** |
|---------------------------|--------------------------------------------------------------------------------------------------------------|----------|
|                      |                                                                                                         |     |
| **PART I**           |
| **FINANCIAL INFORMATION** |
|                      |                                                                                                         |     |
| **Item 1.**               | **Financial Statements (Unaudited)**                                                                         |     |
|                      |                                                                                                         |     |
|                      | Consolidated Balance Sheets as of  September 30, 2009 and December 31, 2008                        | 3        |
|                      |                                                                                                         |     |
|                      | Consolidated Statements of  Operations for the Three and Nine Months Ended September 30, 2009 and  2008 | 4        |
|                      |                                                                                                         |     |
|                      | Consolidated Statement of  Stockholders’ Equity for the Nine Months Ended September 30, 2009       | 5        |
|                      |                                                                                                         |     |
|                      | Consolidated Statements of  Cash Flows for the Nine Months Ended September 30, 2009 and 2008            | 6        |
|                      |                                                                                                         |     |
|                      | Notes to  Consolidated Financial Statements                                                                  | 7        |
|                      |                                                                                                         |     |
| **Item 2.**               | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**              | 18       |
|                      |                                                                                                         |     |
| **Item 3.**               | **Quantitative  and Qualitative Disclosures About Market Risk**                                              | 28       |
|                      |                                                                                                         |     |
| **Item 4T.**              | **Controls and  Procedures**                                                                                 | 29       |
|                      |                                                                                                         |     |
| **PART II**          |
| **OTHER  INFORMATION**    |
|                      |                                                                                                         |     |
| **Item 1.**               | **Legal Proceedings**                                                                                        | 30       |
|                      |                                                                                                         |     |
| **Item 1A.**              | **Risk Factors**                                                                                             | 30       |
|                      |                                                                                                         |     |
| **Item 2.**               | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                             | 31       |
|                      |                                                                                                         |     |
| **Item 3.**               | **Defaults  Upon Senior Securities**                                                                         | 34       |
|                      |                                                                                                         |     |
| **Item 4.**               | **Submission  of Matters to a Vote of Security Holders**                                                     | 34       |
|                      |                                                                                                         |     |
| **Item 5.**               | **Other Information**                                                                                        | 34       |
|                      |                                                                                                         |     |
| **Item 6.**               | **Exhibits**                                                                                                 | 35       |
|                      |                                                                                                         |     |
| **Signature**             |                                                                                                         | 36       |

 

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**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.****                                                          ****Financial Statements.**

 

**BehringerHarvard Opportunity REIT II, Inc.**

**Consolidated Balance Sheets**

**(inthousands, except share and per share amounts)**

(Unaudited)

 
| ** **                                                                                                                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                             | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                                                                                             |       |                   |       |                  |       |
| Real  estate                                                                                                                                                                                           |       |                   |       |                  |       |
| Land                                                                                                                                                                                                   |       | $                      | 9,000      |                  | $          | 9,000 |   |
| Buildings,  net                                                                                                                                                                                        |       | 25,542                 |       | 25,964                |       |
| Total  real estate                                                                                                                                                                                     |       | 34,542                 |       | 34,964                |       |
| ** **                                                                                                                                                                                             |       |                   |       |                  |       |
| Real  estate loan receivable, net                                                                                                                                                                      |       | 12,629                 |       | —                |       |
| Total  real estate and real estate related investments, net                                                                                                                                            |       | 47,171                 |       | 34,964                |       |
|                                                                                                                                                                                                   |       |                   |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                             |       | 52,096                 |       | 47,375                |       |
| Accounts  receivable, net                                                                                                                                                                              |       | 183                    |       | 44                    |       |
| Receivable  from related party                                                                                                                                                                         |       | 764                    |       | 501                   |       |
| Interest  receivable-real estate loan receivable                                                                                                                                                       |       | 300                    |       | —                |       |
| Prepaid  expenses and other assets                                                                                                                                                                     |       | 680                    |       | 662                   |       |
| Acquisition  deposits                                                                                                                                                                                  |       | 23,696                 |       | —                |       |
| Lease  intangibles, net                                                                                                                                                                                |       | 1,886                  |       | 2,797                 |       |
| Total  assets                                                                                                                                                                                          |       | $                      | 126,776    |                  | $          | 86,343 |   |
|                                                                                                                                                                                                   |       |                   |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                          |       |                   |       |                  |       |
| Note  payable                                                                                                                                                                                          |       | $                      | 18,500     |                  | $          | 18,500 |   |
| Accounts  payable                                                                                                                                                                                      |       | 21                     |       | —                |       |
| Payables  to related parties                                                                                                                                                                           |       | 6,773                  |       | 5,519                 |       |
| Acquired  below-market leases, net                                                                                                                                                                     |       | 1,381                  |       | 2,262                 |       |
| Distributions  payable                                                                                                                                                                                 |       | 494                    |       | 181                   |       |
| Accrued  and other liabilities                                                                                                                                                                         |       | 1,493                  |       | 1,059                 |       |
| Total  liabilities                                                                                                                                                                                     |       | 28,662                 |       | 27,521                |       |
|                                                                                                                                                                                                   |       |                   |       |                  |       |
| **Stockholders’ Equity**                                                                                                                                                                          |       |                   |       |                  |       |
| Preferred  stock, $.0001 par value per share; 50,000,000 shares authorized, none  outstanding                                                                                                          |       | —                 |       | —                |       |
| Convertible  stock, $.0001 par value per share; 1,000 shares authorized, 1,000 outstanding                                                                                                             |       | —                 |       | —                |       |
| Common  stock, $.0001 par value per share; 350,000,000 shares authorized, 12,316,894  and 7,323,180 shares issued and outstanding at September 30, 2009 and  December 31, 2008, respectively |       | 1                      |       | 1                     |       |
| Additional  paid-in capital                                                                                                                                                                            |       | 103,207                |       | 59,987                |       |
| Cumulative  distributions and net loss                                                                                                                                                                 |       | (5,094                 | )          | (1,166                | )          |
| Total  stockholders’ equity                                                                                                                                                                       |       | 98,114                 |       | 58,822                |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                       |       | $                      | 126,776    |                  | $          | 86,343 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**Consolidated Statements of Operations**

**(inthousands, except per share amounts)**

(Unaudited)

 
| ** **                                             | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                             | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                   |       |                                      |       |                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                           |       |                                      |       |                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rental  revenue                                        |       | $                                         | 1,313      |                                     | $          | — |   | $ | 4,087 |   | $ | — |   |
| Interest  income from real estate loans receivable     |       | 302                                       |       | —                                   |       | 302 |   | — |   |
|                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Total  revenues                                        |       | 1,615                                     |       | —                                   |       | 4,389 |   | — |   |
|                                                   |       |                                      |       |                                     |       |   |   |   |   |
| **Expenses:**                                          |       |                                      |       |                                     |       |   |   |   |   |
| Property  operating expenses                           |       | 310                                       |       | —                                   |       | 931 |   | — |   |
| Interest  expense                                      |       | 329                                       |       | —                                   |       | 980 |   | — |   |
| Real  estate taxes                                     |       | 139                                       |       | —                                   |       | 419 |   | — |   |
| Property  management fees                              |       | 42                                        |       | —                                   |       | 132 |   | — |   |
| Asset  management fees                                 |       | 103                                       |       | —                                   |       | 275 |   | — |   |
| General  and administrative                            |       | 530                                       |       | 111                                      |       | 1,190 |   | 398 |   |
| Depreciation  and amortization                         |       | 596                                       |       | —                                   |       | 1,860 |   | — |   |
| Total  expenses                                        |       | 2,049                                     |       | 111                                      |       | 5,787 |   | 398 |   |
|                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Interest  income, net                                  |       | 149                                       |       | 198                                      |       | 374 |   | 245 |   |
|                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Net  income (loss)                                     |       | $                                         | (285       | )                                        | $          | 87 |   | $ | (1,024 | ) | $ | (153 | ) |
|                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Basic  and diluted weighted average shares outstanding |       | 11,389                                    |       | 3,864                                    |       | 9,616 |   | 1,627 |   |
|                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Basic  and diluted earnings (loss) per share           |       | $                                         | (0.03      | )                                        | $          | 0.02 |   | $ | (0.11 | ) | $ | (0.09 | ) |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**Consolidated Statement ofStockholders’ Equity**

**(inthousands)**

(Unaudited)

 
| ** **                              | ** ** | **Convertible Stock** | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **Cumulative** | ** ** | **Total**   | ** ** |
|-----------------------------------------|------------|-----------------------|------------|------------------|------------|----------------|------------|----------------|------------|-------------|------------|
| ** **                              | ** ** | **Number**            | ** ** | **Par**          | ** ** | **Number**     | ** ** | **Par**        | ** ** | **Paid-in** | ** ** | **Distributions** | ** ** | **Stockholders’** | ** ** |
| ** **                              | ** ** | **of Shares**         | ** ** | **Value**        | ** ** | **of Shares**  | ** ** | **Value**      | ** ** | **Capital** | ** ** | **and Net Loss** | ** ** | **Equity** | ** ** |
| Balance  at January 1, 2009        |       | 1                     |       | $                | —     |           | 7,323      |           | $          | 1           |       | $ | 59,987 |   | $ | (1,166 | ) | $ | 58,822 |   |
|                                    |       |                  |       |             |       |           |       |           |       |        |       |   |   |   |   |
| Issuance  of common stock, net          |       |                  |       |             |       | 5,036          |       | —         |       | 43,600      |       | — |   | 43,600 |   |
| Redemption  of common stock             |       |                  |       |             |       | (42            | )          | —         |       | (380        | )          | — |   | (380 | ) |
| Distributions  declared on common stock |       |                  |       |             |       | —         |       | —         |       | —      |       | (2,904 | ) | (2,904 | ) |
| Net  loss                               |       |                  |       |             |       |           |       |           |       |        |       | (1,024 | ) | (1,024 | ) |
| Balance  at September 30, 2009     |       | 1                     |       | $                | —     |           | 12,317     |           | $          | 1           |       | $ | 103,207 |   | $ | (5,094 | ) | $ | 98,114 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**Consolidated Statements of Cash Flows**

**(inthousands)**

(Unaudited)

 
| ** **                                                                         | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| **Cash flows from operating activities:**                                          |       |                                     |       |   |   |
| Net  loss                                                                          |       | $                                        | (1,024     | ) | $ | (153 | ) |
| Adjustments  to reconcile net loss to net cash flows used in operating activities: |       |                                     |       |   |   |
| Depreciation  and amortization                                                     |       | 981                                      |       | — |   |
| Amortization  of deferred financing fees                                           |       | 100                                      |       | — |   |
| Change  in accounts receivable                                                     |       | (138                                     | )          | — |   |
| Change  in interest receivable-real estate loan receivable                         |       | (300                                     | )          | — |   |
| Change  in prepaid expenses and other assets                                       |       | (118                                     | )          | (188 | ) |
| Change  in accounts payable                                                        |       | 21                                       |       | — |   |
| Change  in accrued and other liabilities                                           |       | 283                                      |       | 5 |   |
| Change  in net payables to related parties                                         |       | (348                                     | )          | (481 | ) |
| Addition  of lease intangibles                                                     |       | (158                                     | )          | — |   |
| Cash  used in operating activities                                                 |       | (701                                     | )          | (817 | ) |
|                                                                               |       |                                     |       |   |   |
| **Cash flows from investing activities:**                                          |       |                                     |       |   |   |
| Acquisition  deposits                                                              |       | (23,696                                  | )          | (1,006 | ) |
| Investment  in real estate loan receivable                                         |       | (12,629                                  | )          | — |   |
| Additions  of property and equipment                                               |       | (371                                     | )          | — |   |
| Cash  used in investing activities                                                 |       | (36,696                                  | )          | (1,006 | ) |
|                                                                               |       |                                     |       |   |   |
| **Cash flows from financing activities:**                                          |       |                                     |       |   |   |
| Issuance  of common stock                                                          |       | 48,280                                   |       | 55,364 |   |
| Redemptions  of common stock                                                       |       | (224                                     | )          | — |   |
| Offering  costs                                                                    |       | (5,264                                   | )          | (5,821 | ) |
| Distributions                                                                      |       | (674                                     | )          | (62 | ) |
| Cash  provided by financing activities                                             |       | 42,118                                   |       | 49,481 |   |
|                                                                               |       |                                     |       |   |   |
| Net  change in cash and cash equivalents                                           |       | 4,721                                    |       | 47,658 |   |
| Cash  and cash equivalents at beginning of period                                  |       | 47,375                                   |       | 203 |   |
| Cash  and cash equivalents at end of period                                        |       | $                                        | 52,096     |   | $ | 47,861 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

**1.****                                    ****Business and Organization**

 

***Business***

 

Behringer Harvard Opportunity REIT II, Inc.(which may be referred to as the “Company,” “we,” “us,” or “our”) was organizedas a Maryland corporation on January 9, 2007 and has elected to be taxed,and currently qualifies, as a real estate investment trust (“REIT”) for federalincome tax purposes.

 

We acquire and operate commercial real estate and realestate-related assets.  In particular, wefocus generally on acquiring commercial properties with significantpossibilities for short-term capital appreciation, such as those requiringdevelopment, redevelopment, or repositioning, those located in markets andsubmarkets with high growth potential, and those available from sellers who aredistressed or face time-sensitive deadlines. In addition, given economic circumstances as of September 30, 2009,our opportunistic investment strategy may also include investments in realestate-related assets that present opportunities for higher currentincome.  Such investments may havecapital gain characteristics, whether as a result of a discount purchase orrelated equity participations.  We mayacquire a wide variety of commercial properties, including office, industrial,retail, hospitality, recreation and leisure, single-tenant, multifamily, andother real properties.  These propertiesmay be existing, income-producing properties, newly constructed properties, orproperties under development or construction and may include multifamilyproperties purchased for conversion into condominiums and single-tenantproperties that may be converted for multi-tenant use.  Further, we may invest in real estate-relatedsecurities, including securities issued by other real estate companies, eitherfor investment or in change of control transactions completed on a negotiatedbasis or otherwise.  We also mayoriginate or invest in collateralized mortgage-backed securities, mortgage,bridge or mezzanine loans, and Section 1031 tenant-in-common interests(including those issued by affiliates of our advisor), or in entities that makeinvestments similar to the foregoing.  Weexpect to make our investments in or in respect of real estate assets locatedin the United States and other countries based on our view of existing marketconditions.  We completed our firstproperty acquisition, an office building located in Denver, Colorado, on October 28,2008.  On August 14, 2009, weentered into an agreement to provide up to $25 million of second lien financingfor the privatization of and improvements to, approximately 3,200 hotel lodgingunits located on ten U.S. Army installations. As of September 30, 2009, these are our only real estateinvestments.

 

Substantially all of our business is conducted throughBehringer Harvard Opportunity OP II LP, a limited partnership organized inDelaware on January 12, 2007 (“Behringer Harvard Opportunity OP II”).  As of September 30, 2009, ourwholly-owned subsidiary, BHO II, Inc., a Delaware corporation, was thesole general partner of Behringer Harvard Opportunity OP II and owned a 0.1%partnership interest in Behringer Harvard Opportunity OP II.  As of September 30, 2009, ourwholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, wasthe sole limited partner of Behringer Harvard Opportunity OP II and owned theremaining 99.9% interest in Behringer Harvard Opportunity OP II.

 

We are externally managed and advised by BehringerHarvard Opportunity Advisors II LP (“Behringer Opportunity Advisors II”), aTexas limited partnership formed in January 2007.  Behringer Opportunity Advisors II isresponsible for managing our affairs on a day-to-day basis and for identifyingand making acquisitions and investments on our behalf.

 

Our office is located at 15601 Dallas Parkway, Suite 600,Addison, Texas 75001, and our toll-free telephone number is (866)655-3600.  The name Behringer Harvard isthe property of Behringer Harvard Holdings, LLC (“Behringer Harvard Holdings”)and is used by permission.

 

***Organization***

 

On February 26,2007, we filed a Registration Statement on Form S-11 with the Securitiesand Exchange Commission (“SEC”) to offer up to 125,000,000 shares of commonstock for sale to the public (the “Offering”), of which 25,000,000 shares arebeing offered pursuant to our distribution reinvestment plan (the “DRP”).  We reserve the right to reallocate the shareswe are offering between our primary offering and the DRP.  The SEC declared our Registration Statementeffective on January 4, 2008, and we commenced our ongoing initial publicoffering on January 21, 2008.

 

In connection with ourinitial capitalization, on January 19, 2007, we issued 22,471 shares ofour common stock and 1,000 shares of our convertible stock to Behringer HarvardHoldings, an affiliate of our advisor.  As of September 30, 2009, we had 12,316,894shares of common stock outstanding, which includes the 22,471 shares issued toBehringer Harvard Holdings.  As of September 30,2009, we had 1,000 shares of convertible stock issued and outstanding toBehringer Harvard Holdings.

 

We commenced operations on April 1, 2008 uponsatisfaction of the conditions of our escrow agreement in all states exceptPennsylvania and our acceptance of initial subscriptions of common stock.  On September 19, 2008, we satisfied theescrow conditions for Pennsylvania.  Uponadmission of new stockholders, subscription proceeds are used for payment of 

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

dealer manager fees and selling commissions and may be utilized asconsideration for investments and the payment or reimbursement of offeringexpenses and operating expenses.  Untilrequired for such purposes, net offering proceeds are held in short-term,liquid investments.  Through September 30,2009, we had sold 12,338,736 shares in the Offering, including the DRP, forgross proceeds of $123 million.

 

Our common stock is notcurrently listed on a national securities exchange.  Depending upon then prevailing marketconditions, it is our intention to consider beginning the process ofliquidating our assets and distributing the net proceeds to our stockholderswithin three to six years after the termination of our primary offering.  If we do not begin an orderly liquidationwithin that period, we may seek to have our shares listed on a nationalsecurities exchange.

 

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

 

The accompanyingconsolidated financial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto included in our Annual Report on Form 10-Kfor the year ended December 31, 2008, which was filed with the SEC on March 31,2009.  Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of America (“GAAP”)have been condensed or omitted from this quarterly report pursuant to the rules andregulations of the SEC.

 

The results for the interimperiods shown in this report are not necessarily indicative of future financialresults.  The accompanying consolidatedbalance sheet and consolidated statement of stockholders’ equity as of September 30,2009, the consolidated statements of operations for the three and nine monthsended September 30, 2009 and 2008, and cash flows for the nine monthsended September 30, 2009 and 2008 have not been audited by our independentregistered public accounting firm.  Inthe opinion of management, the accompanying unaudited consolidated financialstatements include all adjustments necessary to fairly present our consolidatedfinancial position as of September 30, 2009 and December 31, 2008 andour consolidated results of operations and cash flows for the periods ended September 30,2009 and 2008.  Such adjustments are of anormal recurring nature.

 

We have evaluatedsubsequent events after the balance sheet date of September 30, 2009through November 12, 2009, which is the date the financial statements wereissued.

 

**3**.                                     **Summary of Significant Accounting Policies**

 

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

 

The preparation of financial statements in conformitywith GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  These estimates include such items aspurchase price allocation for real estate acquisitions, impairment oflong-lived assets, depreciation and amortization, and allowance for doubtfulaccounts.  Actual results could differfrom those estimates.

 

***Principles of Consolidation andBasis of Presentation***

 

Our consolidated financial statements include ouraccounts and the accounts of other subsidiaries over which we havecontrol.  All inter-company transactions,balances, and profits have been eliminated in consolidation.  Interests in entities acquired will be evaluatedbased on applicable GAAP, which includes the requirement to consolidateentities deemed to be variable interest entities (“VIE”) in which we are theprimary beneficiary.  If the interest inthe entity is determined not to be a VIE, then the entities will be evaluatedfor consolidation based on legal form, economic substance, and the extent towhich we have control and/or substantive participating rights under therespective ownership agreement.  In theNotes to Consolidated Financial Statements, all dollar and share amounts intabulation are in thousands of dollars and shares, respectively, unlessotherwise noted.

 

There are judgments and estimates involved indetermining if an entity in which we have made an investment is a VIE and ifso, whether we are the primary beneficiary. The entity is evaluated to determine if it is a VIE by, among otherthings, calculating the percentage of equity being risked compared to the totalequity of the entity.  Determiningexpected future losses involves assumptions of various possibilities of theresults of future operations of the entity, assigning a probability to eachpossibility, and using a discount rate to determine the net present value ofthose future losses.  A change in thejudgments, assumptions, and estimates outlined above could result inconsolidating an entity that should not be consolidated or accounting for aninvestment using the equity method that should in fact be consolidated, theeffects of which could be material to our financial statements.

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

***Real Estate***

 

Upon the acquisition of real estate properties, werecognize the assets acquired, the liabilities assumed, and any noncontrollinginterest as of the acquisition date, measured at their fair values.  The acquisition date is the date on which weobtain control of the real estate property. The assets acquired and liabilities assumed may consist of buildings,any assumed debt, identified intangible assets and asset retirementobligations.  Identified intangibleassets generally consist of the above-market and below-market leases, in-placeleases, in-place tenant improvements 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 any noncontrollinginterests in the acquiree is less than the fair value of the identifiable netassets acquired.  Acquisition-relatedcosts are expensed in the period incurred.

 

Initial valuations are subject to change until ourinformation is finalized, which is no later than twelve months from the acquisitiondate.

 

We determine the fair value of assumed debt bycalculating the net present value of the scheduled note payments using interestrates for debt with similar terms and remaining maturities that we believe wecould obtain.  Any difference between thefair value and stated value of the assumed debt is recorded as a discount orpremium and amortized over the remaining life of the loan.

 

The fair value of the tangible assets acquired,consisting of land and buildings, is determined by valuing the property as ifit were vacant, and the “as-if-vacant” value is then allocated to land andbuildings.  Land values are derived fromappraisals, and building values are calculated as replacement cost lessdepreciation or management’s estimates of the relative fair value of theseassets using discounted cash flow analyses or similar methods.  The value of the commercial office buildingis depreciated over the estimated useful life of 25 years using thestraight-line method.

 

We determine the value of above-market andbelow-market in-place leases for acquired properties based on the present value(using an interest rate that reflects the risks associated with the leasesacquired) of the difference between (1) the contractual amounts to be paidpursuant to the in-place leases and (2) management’s estimate of currentmarket lease rates for the corresponding in-place leases, measured over aperiod equal to (a) the remaining non-cancelable lease term forabove-market leases, or (b) the remaining non-cancelable lease term plusany fixed rate renewal option for below-market leases.  We record the fair value of above-market andbelow-market leases as intangible assets or intangible liabilities,respectively, and amortize them as an adjustment to rental income over theabove determined lease term.

 

The total value of identified real estate intangibleassets acquired is further allocated to in-place lease values and tenantrelationships based on our evaluation of the specific characteristics of eachtenant’s lease and our overall relationship with that respective tenant.  The aggregate value of in-place leasesacquired and tenant relationships is determined by applying a fair valuemodel.  The estimates of fair value ofin-place leases include an estimate of carrying costs during the expectedlease-up periods for the respective spaces, considering current marketconditions.  In estimating fair value ofin-place leases, we consider items such as real estate taxes, insurance andother operating expenses, as well as lost rental revenue during the expectedlease-up period and carrying costs that would have otherwise been incurred hadthe leases not been in place, including tenant improvements andcommissions.  The estimates of the fairvalue of tenant relationships also include costs to execute similar leases,including leasing commissions, legal costs and tenant improvements as well asan estimate of the likelihood of renewal as determined by management on atenant-by-tenant basis.

 

We amortize the value of in-place leases to expenseover the term of the respective leases. The value of tenant relationship intangibles is amortized to expenseover the initial term and any anticipated renewal periods, but in no event doesthe amortization period for intangible assets exceed the remaining depreciablelife of the building.  Should a tenantterminate its lease, the unamortized portion of the in-place lease value andtenant relationship intangibles is charged to expense.  As of September 30, 2009, the estimatedremaining useful life for acquired lease intangibles was approximately 1.5years.

 

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**Behringer Harvard OpportunityREIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

Anticipated amortization expense associated with theacquired lease intangibles as of September 30, 2009 is as follows:

 

| ** **                                     | ** ** | **Lease  Intangibles** | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| October 1,  2009 - December 31, 2009 |       | $                      | 35         |   |
| 2010                                           |       | 228                    |       |
| 2011                                           |       | 38                     |       |
| 2012                                           |       | —                 |       |
| 2013                                           |       | —                 |       |
|                                                |            |                        |            |  |

 

Accumulated depreciation and amortization related toour consolidated investments in real estate assets and intangibles were asfollows:

 
| ** **                                       | ** ** | ** **             | ** ** | ** **      | ** ** | **Acquired**     | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                       | ** ** | **Buildings and** | ** ** | **Lease**       | ** ** | **Below-Market** | ** ** |
| **As of September 30, 2009** | ** ** | **Improvements**       | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** |
| Cost                                             |       | $                      | 26,509     |            | $          | 2,584            |       | $ | (1,900 | ) |
| Less: depreciation and  amortization             |       | (967                   | )          | (698            | )          | 519              |       |
|                                             |       |                   |       |            |       |             |       |
| Net                                              |       | $                      | 25,542     |            | $          | 1,886            |       | $ | (1,381 | ) |

 
| ** **                           | ** ** | ** **        | ** ** | ** **      | ** ** | **Acquired**     | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| ** **                           | ** ** | **Buildings and** | ** ** | **Lease**       | ** ** | **Below-Market** | ** ** |
| **As of December 31, 2008**     | ** ** | **Improvements**  | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** |
| Cost                                 |       | $                 | 26,138     |            | $          | 3,021            |       | $ | (2,441 | ) |
| Less: depreciation and  amortization |       | (174              | )          | (224            | )          | 179              |       |
|                                 |       |              |       |            |       |             |       |
| Net                                  |       | $                 | 25,964     |            | $          | 2,797            |       | $ | (2,262 | ) |

 

***Cash and Cash Equivalents***

 

We consider investments in highly-liquid money marketfunds or investments with original maturities of three months or less to becash equivalents.  The carrying amount ofcash and cash equivalents reported on the balance sheet approximates fairvalue.

 

***Investment Impairment***

 

For real estate we wholly own, we monitor events andchanges in circumstances indicating that the carrying amounts of the realestate assets may not be recoverable. When such events or changes in circumstances are present, we assesspotential impairment by comparing estimated future undiscounted operating cashflows expected to be generated over the life of the asset and from its eventualdisposition to the carrying amount of the asset.  In the event that the carrying amount exceedsthe estimated future undiscounted operating cash flows, we recognize an impairmentloss to adjust the carrying amount of the asset to estimated fair value.  We consider projected future undiscountedcash flows, trends, strategic decisions regarding future development plans, andother factors in our assessment of whether impairment conditions exist.  While we believe our estimates of future cashflows are reasonable, different assumptions regarding factors such as marketrents, economic conditions, and occupancy rates could significantly affectthese estimates.

 

In addition, we evaluate our investment in the realestate loan receivable each reporting date and if it is probable we will notcollect all principal and interest in accordance with the terms of the loan, wewill record an impairment charge based on these evaluations.  While we believe it is currently probable wewill collect all scheduled principal and interest with respect to our realestate loan receivable, current market conditions with respect to creditavailability and with respect to real estate market fundamentals create asignificant amount of uncertainty.  Giventhis, any future adverse development in market conditions may cause us tore-evaluate our conclusions, and could result in material impairment chargeswith respect to our real estate loan receivable.

 

In evaluating our investments for impairment,management may use appraisals and makes estimates and assumptions, including,but not limited to, the projected date of disposition of the properties, theestimated future cash flows of the properties during our ownership, and theprojected sales price of each of the properties.  A change in these estimates 

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

and assumptions could result in understating or overstating the bookvalue of our investments, which could be material to our financial statements.

 

We believe the carrying value of our operating realestate and loan investments is currently recoverable.  Accordingly, there were no impairment chargesfor the nine months ended September 30, 2009 or 2008.  However, if market conditions worsen beyondour current expectations, or if changes in our strategy significantly affectany key assumptions used in our fair value calculations, we may need to takecharges in future periods for impairments related to our existinginvestments.  Any such non-cash chargeswould have an adverse effect on our consolidated financial position and resultsof operations.

 

***Revenue Recognition***

 

We recognizerental income generated from leases on real estate assets on a straight-linebasis over the terms of the respective leases, including the effect of rentholidays, if any.  Straight-line rentalrevenue of less than $0.1 million was recognized in rental revenues forthe nine months ended September 30, 2009. There was no straight-line rental revenue recognized for the nine monthsended September 30, 2008.

 

***Organization and OfferingExpenses***

 

We reimburse our advisor or its affiliates for anyorganization and offering expenses incurred on our behalf in connection withthe primary offering (other than selling commissions and the dealer managerfee).  Through September 30, 2009 wedid not reimburse expenses that caused our total organization and offeringexpenses (other than selling commissions and the dealer manager fee) related toour primary offering to exceed 1.5% of gross offering proceeds from the primaryoffering as of the date of reimbursement. At each balance sheet date, we estimated the total gross public offeringproceeds expected to be received under the Offering and recognized the amountof organization and offering reimbursement. We recorded the amount of reimbursement at the lower of (a) 1.5% ofthe estimated gross public offering proceeds, or (b) the actualorganization and offering costs incurred by our advisor or its affiliates.  Effective October 2, 2009, we changedthe timing in determining the limit on the amount of the reimbursement oforganization and offering expenses (other than selling commissions and thedealer manager fee) as described in Note 9.

 

Organization and offering expenses are definedgenerally as any and all costs and expenses incurred by us in connection withour formation, preparing for the Offering, the qualification and registrationof the Offering, and the marketing and distribution of our shares.  Organization and offering expenses include,but are not limited to, accounting and legal fees, costs to amend theregistration statement and supplement the prospectus, printing, mailing anddistribution costs, filing fees, amounts to reimburse our advisor or itsaffiliates for the salaries of employees, and other costs in connection withpreparing supplemental sales literature, telecommunication costs, fees of thetransfer agent, registrars, trustees, escrow holders, depositories and experts,and fees and costs for employees of our advisor or its affiliates to attendindustry conferences.

 

All offering costs are recorded as an offset toadditional paid-in capital, and all organization costs are recorded as anexpense at the time we become liable for the payment of these amounts.

 

***Income Taxes***

 

We have elected to be taxedas a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986,as amended (the “Code”), and have qualified as a REIT since the year ended December 31,2008.  To qualify as a REIT, we must meeta number of organizational and operational requirements, including arequirement that we distribute at least 90% of our REIT taxable income to ourstockholders.  As a REIT, we generallywill not be subject to federal 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 intend to continue tooperate in such a manner, but no assurance can be given that we will operate ina manner so as to qualify or remain qualified as a REIT.

 

***Stock-Based Compensation***

 

We have adopted a stock-based incentive award plan forour directors and consultants and for employees, directors and consultants ofour affiliates.  We have not issued anystock-based awards under the plan as of September 30, 2009.

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

***Concentration of Credit Risk***

 

At September 30, 2009, we had cash and cashequivalents deposited in certain financial institutions in excess of federallyinsured levels.  We have diversified ourcash and cash equivalents among several banking institutions in an attempt to minimizeexposure to any one of these entities. We regularly monitor the financial stability of these financialinstitutions and believe that we are not exposed to any significant credit riskin cash and cash equivalents or restricted cash.  The Federal Deposit Insurance Corporation, or“FDIC,” generally only insures limited amounts per depositor per insuredbank.  Beginning October 3, 2008 through December 31, 2009, theFDIC will insure up to $250,000 per depositor per insured bank; on January 1,2010, the standard coverage limit will return to $100,000 for most depositcategories.  Unlimited deposit insurancecoverage will be available to our non-interest bearing transaction accountsheld at those institutions participating in FDIC’s Temporary LiquidityGuarantee Program through December 31, 2009.

 

***Earnings per Share***

 

Earnings (loss) per share is calculated based on theweighted average number of common shares outstanding during each period.  The weighted average shares outstanding usedto calculate both basic and diluted income (loss) per share were the same forthe three and nine months ended September 30, 2009 and 2008 as there wereno stock-based awards outstanding.

 

**4.****                                    ****New Accounting Pronouncements**

 

In November 2008, the Financial AccountingStandards Board (“FASB”) issued a standard which clarifies that an entity shallcontinue to use the cost accumulation model for its equity methodinvestments.  It also confirms pastaccounting practices related to the treatment of contingent consideration andthe use of the impairment model for equity method accounting. Additionally, itrequires an equity method investor to account for a share issuance by aninvestee as if the investor had sold a proportionate share of theinvestment.  This standard was effective January 1,2009, and applies prospectively.  Theimplementation of this guidance did not have a material impact on ourconsolidated financial statements.

 

In April 2009, the FASB issued a staff positionproviding additional guidance for estimating fair value when there has been asignificant decrease in market activity for a financial asset.  This staff position re-emphasizes thatregardless of market conditions the fair value measurement is an exit priceconcept.  It clarifies and includes additional factors to consider indetermining whether there has been a significant decrease in market activityfor an asset or liability and provides additional clarification on estimatingfair value when the market activity for an asset or liability has declinedsignificantly.  This guidance is applied prospectively to all fairvalue measurements where appropriate and is effective for interim and annualperiods ending after June 15, 2009.  The implementation of thisguidance on June 30, 2009 did not have a material impact on ourconsolidated financial statements.

 

In June 2009, the FASB issued an amendment to theaccounting and disclosure requirements for the consolidation of variableinterest entities.  The guidanceeliminates exceptions to consolidating qualifying special-purpose entities,contains new criteria for determining the primary beneficiary, and increasesthe frequency of required reassessments to determine whether a company is theprimary beneficiary of a variable interest entity.  It also contains a new requirement that anyterm, transaction, or arrangement that does not have a substantive effect on anentity’s status as a variable interest entity, a company’s power over avariable interest entity, or a company’s obligation to absorb losses or itsrights to receive benefits of an entity must be disregarded.  The guidance is applicable for annual periodsafter November 15, 2009 and interim periods thereafter.  We are currently assessing the impact, ifany, that this new guidance will have on our consolidated financial statements.

 

**5.****                                    ****Note Receivable**

 

On August 14, 2009, we entered into a loanagreement with an unaffiliated third party to provide up to $25 million ofsecond lien financing (“PAL Loan”) for the privatization of, and improvementsto, approximately 3,200 hotel lodging units on ten U.S. Army installations.

 

The PAL Loan will be used to finance costs related tothe construction, revitalization, renovation, and development of improvementsof hotel lodging units located on U.S. Army installations at Fort Hood, Texas;Fort Leavenworth, Kansas; Fort Myer, Virginia; Fort Polk, Louisiana; FortRiley, Kansas; Fort Rucker, Alabama; Fort Sam Houston, Texas; Tripler ArmyMedical Center and Fort Shafter, Hawaii; Fort Sill, Oklahoma; and Yuma ProvingGround, Arizona, through the U.S. Army’s Privatization of Army Lodging (“PAL”)program.

 

The aggregate principal amount available under theloan agreement is $25 million, of which approximately $12.8 million wasoutstanding as of September 30, 2009. Future advances may be made not more frequently than monthly in accordancewith the terms and conditions of the loan agreement.  Proceeds of our ongoing public offering wereused to fund

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

the PAL Loan.  The PAL Loan accrues interest at 18% per annum andmatures on September 1, 2016.  ThePAL Loan is payable as follows:

 

·                  Monthly payments of interest only calculated at the rate of 10% perannum (the “Minimum Monthly Payment”) are required beginning on October 1,2009 through September 1, 2011;

 

·                  Beginning on October 1, 2011, and ending on September 1,2013, payments of the Minimum Monthly Payment, and (after payment of the seniorindebtedness described below) accrued and unpaid interest to the extent ofavailable cash flow;

 

·                  Beginning on October 1, 2013, and ending on August 1, 2016,payments of the Minimum Monthly Payment, and accrued and unpaid interest andprincipal to the extent of available cash flow; and

 

·                  Any remaining principal amount and accrued and unpaid interest are dueand payable on September 1, 2016.

 

The loan may be prepaid at any time after the full $25million has been disbursed, upon the fulfillment of certain conditions asdescribed in the related promissory note and the payment of a prepaymentpremium in the circumstances described in such promissory note.  The loanis secured by a second lien leasehold mortgage encumbering certain real andpersonal property comprising approximately 3,200 hotel lodging units on the tenU.S. Army installations.  An affiliate of the borrower has provided alimited guaranty for payment of the full amount of the PAL Loan should theborrower file for bankruptcy and in certain other limited circumstances relatedto bankruptcy of the borrower.

 

The PAL Loan is subordinate to a $35 million seniorcredit facility provided by Bank of America, N.A., an unrelated third partylender, and is senior to a $21.5 million subordinate loan provided by anaffiliate of the borrower.

 

**6****.****                                    ****Note Payable**

 

The following table setsforth our note payable on 1875 Lawrence as of September 30, 2009.

 
| ** **      | ** ** | ** **  | ** ** | **Interest** | ** **            | **Maturity** | ** ** |
|-----------------|------------|-------------|------------|--------------|-----------------------|--------------|------------|
| **Description** | ** ** | **Balance** | ** ** | **Rate**     | ** **            | **Date**     | ** ** |
| 1875 Lawrence   |       | $           | 18,500     |         | 30-day LIBOR+ 2.5%(1) |         | 12/31/12   |   |
|                 |            |             |            |              |                       |              |            |  |

 

----

(1) 30-day LIBOR was 0.246% at September 30,2009. The loan has a minimum interest rate of 6.25%.

 

We have unconditionally guaranteed payment of the loanfor an amount not to exceed the lesser of (i) $11.75 million and (ii) 50%of the total amount advanced under the loan agreement if the aggregate amountadvanced is less than $23.5 million.

 

We are subject to certain reporting and financialcovenants, all as set forth in the loan agreement.  As of September 30, 2009, we believe wewere in compliance with the covenants under our loan agreement.

 

The following table summarizes our contractualobligations for principal payments as of September 30, 2009:

 

| **Year** | ** ** | **Amount Due** | ** ** |
|----------|------------|----------------|------------|
| 2011     |       | $              | 740        |   |
| 2012     |       | 17,760         |       |
|     |       |           |       |
|     |       | $              | 18,500     |   |

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

**7.****                                    ****Leasing Activity**

 

Future minimum base rental payments due to us undernon-cancelable leases in effect as of September 30, 2009 for 1875 Lawrenceare as follows:

 

| ** **                                     | ** ** | **Minimum  Rental  Payments** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|
| October 1,  2009 - December 31, 2009 |       | $                             | 893        |   |
| 2010                                           |       | 3,202                         |       |
| 2011                                           |       | 1,957                         |       |
| 2012                                           |       | 1,415                         |       |
| 2013                                           |       | 699                           |       |
| Thereafter                                     |       | 225                           |       |
|                                           |       |                          |       |
| Total                                          |       | $                             | 8,391      |   |

 

As of September 30,2009, one of our tenants accounted for 10% or more of our aggregate annualrental revenues from our consolidated property, 1875 Lawrence.  Policy Studies, Inc. accounted forrental revenue of approximately $0.6 million, or approximately 15%, of ouraggregate rental revenues for the nine months ended September 30,2009.  There was no contingent rentincluded in rental revenue for the three and nine months ended September 30,2009 or 2008.

 

**8.****                                    ****Distributions**

 

We initiated the paymentof monthly distributions in April 2008 in the amount of a 3% annualizedrate of return, based on an investment in our common stock of $10.00 per shareand calculated on a daily record basis of $0.0008219 per share.  The annualized rate of return was raised to5% effective June 1, 2009, calculated on a daily record basis of$0.0013699 per share.  A portion of eachdistribution is expected to constitute a return of capital for taxpurposes.  Pursuant to the DRP,stockholders may elect to reinvest any cash distribution in additional sharesof common stock.  We record alldistributions when declared, except that the stock issued through the DRP isrecorded when the shares are actually issued. Distributions declared and payable as of September 30, 2009 were$0.5 million, which included $0.1 million of cash distributions payable.

 

The following are thedistributions declared by quarter for the nine months ended September 30,2009 and 2008.

 
| **2009**    | ** ** | **Cash** | ** ** | **DRP** | ** ** | **Total** | ** ** |
|-------------|------------|----------|------------|---------|------------|-----------|------------|
| 3rd Quarter |       | $        | 392        |    | $          | 1,045     |       | $ | 1,437 |   |
| 2nd Quarter |       | 227      |       | 654     |       | 881       |       |
| 1st Quarter |       | 147      |       | 439     |       | 586       |       |
| Total       |       | $        | 766        |    | $          | 2,138     |       | $ | 2,904 |   |

 
| **2008**    | ** ** | **Cash** | ** ** | **DRP** | ** ** | **Total** | ** ** |
|-------------|------------|----------|------------|---------|------------|-----------|------------|
| 3rd Quarter |       | $        | 75         |    | $          | 222       |       | $ | 297 |   |
| 2nd Quarter |       | 17       |       | 57      |       | 74        |       |
| 1st Quarter |       | —   |       | —  |       | —    |       |
| Total       |       | $        | 92         |    | $          | 279       |       | $ | 371 |   |

 

On September 29, 2009, the Company’s board ofdirectors declared distributions payable to the stockholders of record each dayduring the months of October, November, and December 2009.  Distributions payable to each stockholder ofrecord will be paid on or before the 16th day of the following month.

 

**9.****                                    ****Related Party Transactions**

 

Our advisor and certainof its affiliates will receive fees and compensation in connection with theOffering, and in connection with the acquisition, management, and sale of ourassets.

 

Behringer Securities LP (“Behringer Securities”), thedealer-manager and an affiliate of our advisor, receives commissions of up to7% of gross offering proceeds.  BehringerSecurities reallows 100% of selling commissions earned to participatingbroker-dealers.  In addition, we payBehringer Securities a dealer manager fee of up to 2.5% of gross offeringproceeds.  Pursuant to separatelynegotiated agreements, Behringer Securities may reallow a portion of its dealermanager fee 

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

in an aggregate amount up to 2% of gross offering proceeds tobroker-dealers participating in the Offering; provided, however, that BehringerSecurities may reallow, in the aggregate, no more than 1.5% of gross offeringproceeds for marketing fees and expenses, conference fees and non-itemized,non-invoiced due diligence efforts and no more than 0.5% of gross offeringproceeds for out-of-pocket and bona fide, separately invoiced due diligenceexpenses incurred as fees, costs or other expenses from third parties.  Further, in special cases pursuant toseparately negotiated agreements and subject to applicable limitations imposedby the Financial Industry Regulatory Authority, Behringer Securities may use a portionof its dealer manager fee to reimburse certain broker-dealers participating inthe Offering for technology costs and expenses associated with the Offering andcosts and expenses associated with the facilitation of the marketing andownership of our shares by such broker-dealers’ customers.  No selling commissions or dealer manager feewill be paid for sales under the DRP. For the nine months ended September 30, 2009, BehringerSecurities earned selling commissions and dealer manager fees of $3.3 millionand $1.2 million, respectively, which were recorded as a reduction to additionalpaid-in capital.  For the nine monthsended September 30, 2008, Behringer Securities earned selling commissionsand dealer manager fees of $3.7 million and $1.4 million, respectively, whichwere recorded as a reduction to additional paid-in capital.

 

We reimburse Behringer Opportunity Advisors II or itsaffiliates for any organization and offering expenses incurred on our behalf inconnection with our primary offering (other than selling commissions and thedealer manager fee).  Through September 30,2009 we would not reimburse expenses that would cause our total organizationand offering expenses related to the primary offering (other than sellingcommissions and the dealer manager fee) to exceed 1.5% of gross offeringproceeds from the primary offering as of the date of reimbursement.  Since our inception through September 30, 2009,approximately $8.5 million of organization and offering expenses had beenincurred by Behringer Opportunity Advisors II or its affiliates on ourbehalf.  Of this amount, $1.8 million hadbeen reimbursed by us and $6.7 million of reimbursements payable is included inpayables to affiliates on our balance sheet. Of the $6.7 million of reimbursements payable as of September 30,2009, $0.1 million had been expensed as organizational costs with the remainderrecorded as a reduction of additional paid-in capital.  Behringer Opportunity Advisors II or itsaffiliates determines the amount of organization and offering expenses owedbased on specific invoice identification as well as an allocation of costs tous and other Behringer Harvard programs, based on respective equity offeringresults of those entities in offering.

 

On October 2, 2009, we entered into an Amendedand Restated Advisory Management Agreement with Behringer Opportunity AdvisorsII.  The Amended and Restated AdvisoryManagement Agreement changes the timing in determining the reimbursement oforganization and offering expenses by us during the offering and waives thereimbursement of $3.5 million of organization and offering expenses (other thanselling commissions and the dealer manager fee) the advisor incurred on ourbehalf through December 31, 2008. Pursuant to the Amended and Restated Advisory Management Agreement wewill reimburse our advisor for organization and offering expenses (other thanselling commissions and the dealer manager fee) incurred on our behalf until anaggregate of $7.5 million of such organization and offering expenses have beenreimbursed to our advisor.  Thereafter,we will not reimburse any such organization and offering expenses until thecompletion of our primary offering.  Uponcompletion of our primary offering, we will reimburse our advisor for anyadditional organization and offering expenses (other than selling commissionsand the dealer manager fee) incurred up to 1.5% of the gross proceeds from thecompleted primary offering; provided however, we will not be required toreimburse our advisor any additional amounts and our advisor will be requiredto reimburse us to the extent that the total amount spent by us on organizationand offering expenses (other than selling commissions and the dealer managerfee) would exceed 1.5% of the gross proceeds from the completed primaryoffering.  In connection with the Amendedand Restated Advisory Management Agreement, we reimbursed $2.7 million oforganization and offering expenses to Behringer Opportunity Advisors II on October 20,2009.

 

Our advisor or its affiliates will also receiveacquisition and advisory fees of 2.5% of the amount paid and/or budgeted inrespect of the purchase, development, construction, or improvement of eachasset we acquire, including any debt attributable to these assets.  Our advisor and its affiliates will alsoreceive acquisition and advisory fees of 2.5% of the funds advanced in respectof a loan or other investment.

 

Our advisor or its affiliates also receive anacquisition expense reimbursement in the amount of 0.25% of the funds paid forpurchasing an asset, including any debt attributable to the asset, plus 0.25%of the funds budgeted for development, construction, or improvement in the caseof assets that we acquire and intend to develop, construct, or improve. Our advisor or its affiliates will also receive an acquisition expensereimbursement in the amount of 0.25% of the funds advanced in respect of a loanor other investment.  In addition, to the extent our advisor or itsaffiliates directly provide services formerly provided or usually provided bythird parties, including without limitation accounting services related to thepreparation of audits required by the SEC, property condition reports, titleservices, title insurance, insurance brokerage or environmental servicesrelated to the preparation of environmental assessments in connection with aprospective or completed investment the direct employee costs and burden to ouradvisor of providing these services will be acquisition expenses.  We also pay 

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

third 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.  In addition, acquisition expenses include anypayments made to (i) a prospective seller of an asset, (ii) an agentof a prospective seller of an asset, or (iii) a party that has the rightto control the sale of an asset intended for investment by us that are notrefundable and that are not ultimately applied against the purchase price forsuch asset.  Except as described abovewith respect to services customarily or previously provided by third parties,our advisor is responsible for paying all of the expenses it incurs associatedwith persons employed by the advisor to the extent dedicated to makinginvestments for us, such as wages and benefits of the investment personnel.  Our advisor or its affiliates are alsoresponsible for paying all of the investment-related expenses that we or ouradvisor or its affiliates incur that are due to third parties with respect toinvestments we do not make.  For the ninemonths ended September 30, 2009, we incurred $0.3 million in acquisitionand advisory fees and $0.1 million in acquisition expense reimbursements.  We incurred no acquisition and advisory feesor acquisition expense reimbursements for the nine months ended September 30,2008.

 

We pay our advisor or its affiliates a debt financingfee of 1% of the amount available under any loan or line of credit madeavailable to us.  It is anticipated thatour advisor will pay some or all of these fees to third parties with whom itsubcontracts to coordinate financing for us. We incurred no such fees for thenine months ended September 30, 2009 or 2008.

 

We pay our advisor or its affiliates a development feein an amount that is usual and customary for comparable services rendered tosimilar projects in the geographic market of the project if such affiliateprovides the development services and if a majority of our independentdirectors determines that such development fee is fair and reasonable and onterms and conditions not less favorable than those available from unaffiliatedthird parties.  We incurred no such feesfor the nine months ended September 30, 2009 or 2008.

 

We pay our property manager and affiliate of ouradvisor, Behringer Harvard Opportunity II Management Services, LLC (“BHO IIManagement”), or its affiliates, fees for the management, leasing, andconstruction supervision of our properties. Property management fees are 4.5% of the gross revenues of theproperties managed by BHO II Management or its affiliates plus leasingcommissions based upon the customary leasing commission applicable to the samegeographic location of the respective property. In the event that we contract directly with a third-party propertymanager in respect of a property, BHO II Management or its affiliates receivesan oversight fee equal to 0.5% of the gross revenues of the propertymanaged.  In no event will BHO IIManagement or its affiliates receive both a property management fee and anoversight fee with respect to any particular property.  In the event we own a property through ajoint venture that does not pay BHO II Management directly for its services, wewill pay BHO II Management a management fee or oversight fee, as applicable,based only on an economic interest in the property.  We incurred and expensed property managementfees or oversight fees to BHO II Management of less than $0.1 million for thenine months ended September 30, 2009. We incurred no such fees for the nine months ended September 30,2008.

 

We pay our advisor or its affiliates a monthly asset managementfee of one-twelfth of 1.0% of the sum of the higher of the cost or value ofeach asset.  For the nine months ended September 30,2009, we expensed $0.3 million of asset management fees.  We incurred no such fees for the nine monthsended September 30, 2008.

 

Our advisor or its affiliates also will be paid adisposition fee if the advisor or its affiliates provide a substantial amountof services, as determined by our independent directors, in connection with thesale of one or more assets.  In suchevent, our advisor or its affiliates will receive a disposition fee equal to (1) inthe case of the sale of real property, the lesser of: (A) one-half of theaggregate brokerage commission paid (including the disposition fee) or, if noneis paid, the amount that customarily would be paid, or (B) 3% of the salesprice of each property sold, and (2) in the case of the sale of any assetother than real property, 3% of the sales price of such asset.

 

We reimburse our advisor or its affiliates for allexpenses paid or incurred by the advisor in connection with the servicesprovided to us, subject to the limitation that we will not reimburse ouradvisor for any amount by which its operating expenses (including the assetmanagement fee) at the end of the four preceding fiscal quarters exceeds thegreater of:  (A) 2% of our averageinvested assets, or (B) 25% of our net income determined without reductionfor any additions to reserves for depreciation, bad debts or other similarnon-cash reserves and excluding any gain from the sale of our assets for thatperiod.  Notwithstanding the above, wemay reimburse the advisor for expenses in excess of this limitation if amajority of our independent directors determines that such excess expenses arejustified based on unusual and non-recurring factors.  For the nine months ended September 30,2009 and 2008, we incurred and expensed such costs for administrative servicestotaling $0.3 million and $0.1 million, respectively.

 

We are dependent on Behringer Securities, BehringerOpportunity Advisors II, and BHO II Management for certain services that areessential to us, including the sale of shares of our common stock, assetacquisition and disposition decisions, 

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

property management and leasing services, and other generaladministrative responsibilities.  In theevent that these companies were unable to provide us with their respectiveservices, we would be required to obtain such services from other sources.

 

**10.****                             ****Fair Value Disclosure ofFinancial Instruments**

 

We determined the following disclosure of estimatedfair values using available market information and appropriate valuationmethodologies.  However, considerablejudgment is necessary to interpret market data and develop the related estimatesof fair value.  Accordingly, the estimatespresented herein are not necessarily indicative of the amounts that could berealized upon disposition of the financial instruments.  The use of different market assumptionsand/or estimation methodologies may have a material effect on the estimated fairvalue amounts.

 

As of September 30, 2009 and December 31,2008, management estimated that the carrying value of cash and cashequivalents, accounts receivable, accounts payable, accrued expenses, otherliabilities, payables/receivables from related parties, and distributionspayable were at amounts that reasonably approximated their fair value based ontheir highly-liquid nature and/or short-term maturities.

 

As of September 30, 2009 and December 31,2008, our note payable totaled $18.5 million and consisted of one variableinterest loan that we entered into on December 31, 2008.  The loan has a variable interest rate with aminimum rate of 6.25%.  We believe thatthe carrying value of this loan approximates its fair value at September 30,2009 and December 31, 2008.

 

As of September 30, 2009, the principal balanceof our real estate loan receivable totaled $12.8 million.  The loan is a fixed rate loan and accruesinterest at 18% per annum.  We investedin this loan on August 14, 2009.  Webelieve that the carrying value of the real estate loan receivable approximatesits fair value as of September 30, 2009. We did not have any real estate loans receivable outstanding as of December 31,2008.

 

The fair value estimates presented herein are based oninformation available to our management as of September 30, 2009 and December 31, 2008.  Although our management is not aware of anyfactors that would significantly affect the estimated fair value amounts, suchamounts have not been comprehensively revalued for purposes of theseconsolidated financial statements since that date, and current estimates offair value may differ significantly from the amounts presented herein.

 

**11.****                             ****Supplemental Cash FlowInformation**

 

Supplemental cash flow information is summarized below:

 
| ** **                                                                            | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2009**                                                | ** ** | **2008** | ** ** |
| Interest paid                                                                         |       | $                                                       | 784        |   | $ | — |   |
|                                                                                  |       |                                                    |       |   |   |
| **Non-cash  investing activities:**                                                   |       |                                                    |       |   |   |
| Property and  equipment additions and purchases of real estate in accrued liabilities |       | $                                                       | —     |   | $ | 44 |   |
|                                                                                  |       |                                                    |       |   |   |
| **Non-cash  financing activities:**                                                   | * *   | * *                                                | * *   | * * | * * |
| Common stock  issued in distribution reinvestment plan                                |       | $                                                       | 1,918      |   | $ | 183 |   |
| Accrued  dividends payable                                                            |       | $                                                       | 494        |   | $ | 127 |   |
| Offering costs  payable to related parties                                            |       | $                                                       | 1,335      |   | $ | 3,937 |   |
| Redemption of  stock in accrued liabilities                                           |       | $                                                       | 156        |   | $ | — |   |

 

**12.****                             ****Subsequent Event**

 

On October 2, 2009, we purchased through a jointventure, at a discount, a 90% interest in a promissory note secured by a firstlien mortgage for $25.4 million plus closing costs from the Federal DepositInsurance Corporation as Receiver for Corus Bank, N.A.  The borrower is currently in default underthe promissory note and the principal balance and accrued interest owed at thedate of purchase was $65.8 million.  Thecollateral for the promissory note is a 408-unit multi-family complex, Palms ofMonterrey, on a 28-acre site located in Fort Myers, Florida.  We are pursuing remedies available under thepromissory note, including enforcement of the first lien mortgage throughjudicial foreclosure, involuntary receivership, or accepting a deed-in-lieu offoreclosure of the property securing the loan. The investment was funded with proceeds from our ongoing publicoffering.

 

*****

 

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**Item 2.****                                                         ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

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

 

**Forward-LookingStatements**

 

Thissection contains forward-looking statements, including discussion and analysisof us and our subsidiaries, our financial condition, anticipated capital expendituresrequired to complete projects, amounts of anticipated cash distributions to ourstockholders in the future and other matters. These forward-looking statements are not historical facts but are theintent, belief or current expectations of our management based on theirknowledge and understanding of the business and industry.  Words such as “may,” “anticipates,” “expects,”“intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,”and variations of these words and similar expressions are intended to identifyforward-looking statements.  Thesestatements are not guarantees of future performance and are subject to risks,uncertainties and other factors, some of which are beyond our control, aredifficult to predict and could cause actual results to differ materially fromthose expressed or forecasted in the forward-looking statements.

 

### **Forward-lookingstatements that were true at the time made may ultimately prove to be incorrector false.  We caution investors not toplace undue reliance on forward-looking statements, which reflect ourmanagement’s view only as of the date of this Quarterly Report on Form 10-Q.  We undertake no obligation to update orrevise forward-looking statements to reflect changed assumptions, the occurrenceof unanticipated events or changes to future operating results.  Factors that could cause actual results todiffer materially from any forward-looking statements made in the Form 10-Qinclude changes in general economic conditions, changes in real estateconditions, construction costs that may exceed estimates, construction delays,increases in interest rates, lease-up risks, inability to obtain new tenantsupon the expiration of existing leases, and the potential need to fund tenantimprovements or other capital expenditures out of operating cash flow.  The forward-looking statements should be readin light of the risk factors identified in the “Risk Factors” section of ourAnnual Report on Form 10-K for the year ended December 31, 2008, andthe risks identified in Part II, Item 1A of our Quarterly Report on Form 10-Qfor the quarter ended March 31, 2009, each as filed with the SEC and therisks identified in Part II, Item 1A of this Quarterly Report on Form 10-Q.**

 

### **Cautionary Note**

### ** **

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

 

**ExecutiveOverview**

 

Wewere formed primarily to acquire and operate commercial real estate and realestate-related assets on an opportunistic basis.  In particular, we focus generally onacquiring commercial properties with significant possibilities for short-termcapital appreciation, such as those requiring development, redevelopment orrepositioning, those located in markets and submarkets with high growthpotential, and those available from sellers who are distressed or facetime-sensitive deadlines.  ****In addition, given currenteconomic circumstances, our opportunistic investment strategy may also includeinvestments in loans secured by or related to real estate at more attractiverates of current return than have been available for some time.  Such loan investments may have capital gaincharacteristics, whether as a result of a discount purchase or related equityparticipations.****  We may acquire a widevariety of commercial properties, including office, industrial, retail,hospitality, recreation and leisure, single-tenant, multifamily, and other realproperties.  These properties may beexisting, income-producing properties, newly constructed properties orproperties under development or construction, and may include multifamilyproperties purchased for conversion into condominiums and single-tenantproperties that may be converted for multi-tenant use.  Further, we may invest in real estate-relatedsecurities, including securities issued by other real estate companies, eitherfor investment or in change of control transactions completed on a negotiatedbasis or otherwise.  We also mayoriginate or invest in collateralized mortgage-backed securities, mortgage,bridge or mezzanine loans, and Section 1031 tenant-in-common interests(including those issued by affiliates of our advisor), or in entities that makeinvestments similar to the foregoing.  Weexpect to make our investments in or in respect of real estate assets locatedin the United States and other countries based on our new and existing marketconditions.  We completed our firstproperty acquisition, an office building located in Denver, Colorado, on October 28,2008.  On August 14, 2009, weentered into an agreement to provide up to $25 million of second lien financingfor the privatization of and improvements to, approximately 3,200 hotel lodgingunits located on ten U.S. Army installations. As of September 30, 2009, these are our only real estateinvestments.  On October 2, 2009, wepurchased through a joint venture, at a discount, a 90% interest in apromissory note secured by a first lien 

 

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mortgage for $25.4million plus closing costs from the Federal Deposit Insurance Corporation asReceiver for Corus Bank, N.A.

 

On February 26,2007, we filed a Registration Statement on Form S-11 with the SEC to offerup to 125,000,000 shares of common stock for sale to the public, of which25,000,000 shares are being offered pursuant to our DRP.  We reserve the right to reallocate the shareswe are offering between our primary offering and the DRP.  The SEC declared our Registration Statementeffective on January 4, 2008, and we commenced our ongoing initial publicoffering on January 21, 2008.  Wecommenced operations on April 1, 2008 upon satisfaction of the conditionsof our escrow agreement and acceptance of initial subscriptions of commonstock.

 

*MarketOutlook*

 

During 2008 and continuing into 2009, the U.S. andglobal economy experienced a significant downturn.  This downturn included disruptions in thebroader financial and credit markets, declining consumer confidence, and anincrease in unemployment rates.  Theseconditions have contributed to weakened market conditions.  Due to the struggling U.S. and globaleconomies, we believe that overall demand across most real estate sectorsincluding office, multifamily, hospitality, and retail will continue to declinedue to losses in the financial and professional services industries andincreasing unemployment.  Further, webelieve that corresponding rental rates will also remain weak at least throughthe remainder of the current year.  Thenational vacancy percentage for office space increased from 14.5% in the fourthquarter of 2008 to 15.9% in the second quarter of 2009.  We also believe that tenant defaults acrossthe nation are likely to increase in the short-term.  To date, we have not experienced anysignificant tenant defaults.

 

Our operating real estate asset is located in Denver,Colorado.  According to Property andPortfolio Research (“PPR”), although the Denver market has been hit hard by thecurrent economic crisis, this market is expected to be one of the first torebound with the recovery beginning in mid-2010.  It is anticipated that any rebound will beled in large part by increases in jobs in business and professional servicesand government hiring, as well as the education, health services, and informationindustries.  According to PPR, officevacancy rates in the Denver market will continue to rise through the remainderof 2009.

 

While it is unclear as to when the overall economywill recover, we do not expect conditions to improve significantly in the nearfuture.  Management expects that thecurrent volatility in the capital markets will continue, at least in theshort-term.  This volatility hassignificantly impacted the availability of credit for borrowers. Thistightening of credit may hinder our ability to take advantage of current opportunitiesin the marketplace.  We have placed ahigh priority on maintaining strong relationships with banks and otherlenders.  We believe, though theopportunities for obtaining new credit have diminished, that our strongrelationships with our lenders will enhance our opportunities for securingcredit for future investments.

 

As a result of the existing economic conditions, ourprimary objectives are to raise capital and to take advantage of favorableinvestment opportunities.  We believethat the current economic environment will result in investment opportunitiesfor many high-quality real estate and real estate-related assets.  To the extent that we have capital availableto invest, we plan to actively pursue investment opportunities.

 

**Liquidityand Capital Resources**

 

Ourprincipal demands for funds will be for the acquisition of real estate and realestate-related assets, for the payment of operating expenses and distributions,and for the payment of interest on our outstanding indebtedness.  Generally, we expect to meet cash needs foritems other than acquisitions from our cash flow from operations, and we expectto meet cash needs for acquisitions from the net proceeds of the Offering andfrom financings.

 

Weexpect to fund our short-term liquidity requirements by using the net proceedsrealized from the Offering and cash flow from the operations of investments weacquire.  Operating cash flows are expected to increase as additional realestate assets are added to the portfolio.  For both our short-term andlong-term liquidity requirements, other potential future sources of capital mayinclude proceeds from secured or  unsecured financings from banks or otherlenders, proceeds from the sale of our investments, if and when any are sold,and undistributed funds from operations.  If necessary, we may usefinancings or other sources of capital in the event of unforeseen significantcapital expenditures.

 

Ouradvisor may, but is not required to, establish capital reserves from grossoffering proceeds, out of cash flow generated by operating properties and otherinvestments, or out of non-liquidating net sale proceeds from the sale of ourproperties and other investments. Capital reserves are typically utilized for non-operating expenses suchas tenant improvements, leasing commissions and major capitalexpenditures.  Alternatively, a lendermay require its own formula for escrow of capital reserves.

 

Weintend to borrow money to acquire properties and make other investments.  There is no limitation on the amount we mayinvest in any single property or other asset or on the amount we can borrow forthe purchase of any individual 

 

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property or otherinvestment.  Under our charter, themaximum amount of our indebtedness shall not exceed 300% of our “net assets”(as defined by the NASAA REIT Guidelines) as of the date of any borrowing;however, we may exceed that limit if approved by a majority of our independentdirectors.  In addition to our charterlimitation, our board of directors has adopted a policy to generally limit ouraggregate borrowings to approximately 75% of the aggregate value of our assetsunless substantial justification exists that borrowing a greater amount is inour best interests.  Our policy limitation, however, does not apply toindividual real estate assets and will only apply once we have ceased raisingcapital under the Offering or any subsequent offering and investedsubstantially all of our capital.  As a result, we expect to borrow morethan 75% of the contract purchase price of each real estate asset we acquireduring the early periods of our operations to the extent our board of directorsdetermines that borrowing at these levels is prudent.

 

Recently,the U.S. credit markets and the sub-prime residential mortgage market haveexperienced severe dislocations and liquidity disruptions. Sub-prime mortgageloans have experienced increasing rates of delinquency, foreclosure and loss.These and other related events continue to have a significant impact on thecapital markets associated not only with sub-prime mortgage-backed securities,asset-backed securities and collateralized debt obligations, but also with theU.S. housing, credit and financial markets as a whole.

 

Thecommercial real estate debt markets are currently experiencing volatility as aresult of certain factors, including the tightening of underwriting standardsby lenders and credit rating agencies and the significant inventory of unsoldcollateralized mortgage-backed securities in the market.  Credit spreads for major sources of capitalhave widened significantly as investors have demanded a higher riskpremium.  This is resulting in lendersincreasing the cost for debt financing. Consequently, there is greater uncertainty regarding our ability toaccess the credit markets in order to attract financing on reasonable terms.Our ability to borrow funds to finance future acquisitions could be adverselyaffected by our inability to secure permanent financing on reasonable terms, ifat all.

 

Shouldthe overall cost of borrowings increase, either by increases in the index ratesor by increases in lender spreads, we will need to factor such increases intothe economics of our acquisitions, developments and propertycontributions.  This may result in ourinvestment operations generating lower overall economic returns and a reducedlevel of cash flow, which could potentially impact our ability to makedistributions to our stockholders at current levels.  In addition, the recent dislocations in thedebt markets have reduced the amount of capital that is available to financereal estate, which, in turn: (i) leads to a decline in real estate valuesgenerally; (ii) slows real estate transaction activity; (iii) reduces theloan to value upon which lenders are willing to extend debt; and, (iv) resultsin difficulty in refinancing debt as it becomes due, all of which mayreasonably be expected to have a material adverse impact on the value of realestate investments and the revenues, income or cash flow from the acquisitionand operations of real properties and mortgage loans.  In addition, the current state of the debt marketshas negatively impacted the ability to raise equity capital.

 

If thecurrent debt market environment persists, we may modify our investmentstrategies in order to seek to optimize our portfolio performance.  Our strategies may include, among otheroptions, limiting or eliminating the use of debt and focusing on thoseinvestments that do not require the use of leverage to meet our portfoliogoals.

 

*Debt Financings*

 

Wemay, from time to time, make mortgage, bridge, or mezzanine loans and otherloans for acquisitions and investments as well as property development.  We may obtain financing at the time an assetis acquired or an investment is made or at such later time as determined to benecessary, depending on multiple factors.

 

At September 30,2009, our note payable balance was $18.5 million and consisted of the notepayable related to 1875 Lawrence.  Wehave unconditionally guaranteed payment of the loan for an amount not to exceedthe lesser of (i) $11.75 million and (ii) 50% of the total amount advancedunder the loan agreement if the aggregate amount advanced is less than $23.5million.  At September 30, 2009, theinterest rate on this note was 6.25%, and the loan matures on December 31,2012.  Our loan agreement stipulates thatwe comply with certain reporting and financial covenants.  These covenants include, among other things,maintaining minimum debt service coverage ratios.  As of September 30, 2009, we believe wewere in compliance with the debt covenants under our loan agreement.

 

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One ofour principal long-term liquidity requirements includes the repayment ofmaturing debt.  The following tableprovides information with respect to the maturities and scheduled principalrepayments of our indebtedness as of September 30, 2009.  The table does not represent any extensionoptions.

 
| ** **                                                                                       | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2009**                                  | ** ** | **2010-2011** | ** ** | **2012-2013** | ** ** | **After 2013** | ** ** | **Total** | ** ** |
| Principal payments - variable rate debt                                                          |       | $                                         | —     |   | $ | 740 |   | $ | 17,760 |   | $ | — |   | $ | 18,500 |   |
| Interest payments - variable rate debt (based on  rates in effect as of September 30, 2009) |       | 292                                       |       | 2,323 |   | 1,196 |   | — |   | 3,811 |   |
|                                                                                             |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                                                                                            |       | $                                         | 292        |   | $ | 3,063 |   | $ | 18,956 |   | $ | — |   | $ | 22,311 |   |

 

**Resultsof Operations**

 

As of September 30,2009, we had invested in two real estate assets:  1875 Lawrence, an office building located inDenver, Colorado, and a real estate loan receivable to provide up to $25million of second lien financing (“PAL Loan”) for the privatization of andimprovements to, approximately 3,200 hotel lodging units on ten U.S. Armyinstallations.  As of September 30,2008, we had no real estate or real estate-related assets.  Accordingly, our results of operations forthe respective periods presented reflect increases in most categories due tothe growth of our portfolio.  Managementexpects increases in most categories in the future as we purchase additionalreal estate and real estate-related assets and as we begin to realize the fullyear impact of our existing acquisitions.

 

*Three months ended September 30, 2009 ascompared to the three months ended September 30, 2008*

 
| ** **                                        | ** ** | **Three  Months Ended** | ** ** | ** **               | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                        | ** ** | **September 30,**  | ** ** | **Increase  (Decrease)** | ** ** |
| ** **                                        | ** ** | **2009**                | ** ** | **2008**                 | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Revenues:                                         |       |                    |       |                     |       |       |       |   |   |
| Rental revenue                                    |       | $                       | 1,313      |                     | $          | —     |       | $ | 1,313 |   | n/a |   |
| Interest income from real estate loans receivable |       | 302                     |       | —                   |       | 302        |       | n/a |   |
| Total revenue                                     |       | $                       | 1,615      |                     | $          | —     |       | $ | 1,615 |   | n/a |   |
|                                              |       |                    |       |                     |       |       |       |   |   |
| Expenses:                                         |       |                    |       |                     |       |       |       |   |   |
| Property operating expenses                       |       | $                       | 310        |                     | $          | —     |       | $ | 310 |   | n/a |   |
| Interest expense                                  |       | 329                     |       | —                   |       | 329        |       | n/a |   |
| Real estate taxes                                 |       | 139                     |       | —                   |       | 139        |       | n/a |   |
| Property management fees                          |       | 42                      |       | —                   |       | 42         |       | n/a |   |
| Asset management fees                             |       | 103                     |       | —                   |       | 103        |       | n/a |   |
| General and administrative                        |       | 530                     |       | 111                      |       | 419        |       | 377 | % |
| Depreciation and amortization                     |       | 596                     |       | —                   |       | 596        |       | n/a |   |
| Total expenses                                    |       | $                       | 2,049      |                     | $          | 111        |       | $ | 1,938 |   | 1746 | % |

 

*Revenues.* Revenues for the three months ended September 30, 2009 were $1.6million and were generated by our two consolidated real estateinvestments.  Of the total $1.6 millionin revenue, $0.3 million was interest income from the PAL Loan, a real estateloan receivable entered into on August 14, 2009.  No revenue was generated for the three monthsended September 30, 2008.  We expectincreases in revenue in the future as we purchase additional real estateassets.

 

*Property Operating Expenses.*  Property operating expenses for the threemonths ended September 30, 2009 were $0.3 million and were comprisedof operating expenses of 1875 Lawrence. We incurred no property operating expenses for the three months ended September 30,2008. We expect increases in property operating expenses in the future as wepurchase additional real estate assets.

 

*Interest Expense. *Interest expense for the three months ended September 30,2009 was $0.3 million and was comprised of interest related to our note payableon 1875 Lawrence.  There was no interestexpense for the three months ended September 30, 2008.  We expect increases in interest expense inthe future as we purchase additional real estate assets and assume additionaldebt.

 

*Property Management Fees. *Property management feesfor the three months ended September 30, 2009 were less than $0.1 millionand were comprised of fees related to 1875 Lawrence.  There were no property management fees forthe 

 

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three months ended September 30, 2008.  We expect increases in property managementfees in the future as we purchase additional real estate assets.

 

*Asset Management Fees. *Asset management fees forthe three months ended September 30, 2009 were $0.1 million and werecomprised of fees related to 1875 Lawrence and the PAL Loan.  There were no asset management fees for thethree months ended September 30, 2008. We expect increases in asset management fees in the future as wepurchase additional real estate assets.

 

*Generaland Administrative Expenses.* General andadministrative expenses for the three months ended September 30, 2009were $0.5 million as compared to $0.1 million for the three months ended September 30,2008, and were comprised of auditing fees, legal fees, board of directors’fees, and other administrative expenses. We expect increases in general and administrative expenses in the futureas we purchase additional real estate assets.

 

*Nine months ended September 30, 2009 ascompared to nine months ended September 30, 2008*

 
| ** **                                        | ** ** | **Nine  Months Ended** | ** ** | ** **               | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                        | ** ** | **September 30,** | ** ** | **Increase  (Decrease)** | ** ** |
| ** **                                        | ** ** | **2009**               | ** ** | **2008**                 | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Revenues:                                         |       |                   |       |                     |       |       |       |   |   |
| Rental revenue                                    |       | $                      | 4,087      |                     | $          | —     |       | $ | 4,087 |   | n/a |   |
| Interest income from real estate loans receivable |       | 302                    |       | —                   |       | 302        |       | n/a |   |
| Total revenue                                     |       | $                      | 4,389      |                     | $          | —     |       | $ | 4,389 |   | n/a |   |
|                                              |       |                   |       |                     |       |       |       |   |   |
| Expenses:                                         |       |                   |       |                     |       |       |       |   |   |
| Property operating expenses                       |       | $                      | 931        |                     | $          | —     |       | $ | 931 |   | n/a |   |
| Interest expense                                  |       | 980                    |       | —                   |       | 980        |       | n/a |   |
| Real estate taxes                                 |       | 419                    |       | —                   |       | 419        |       | n/a |   |
| Property management fees                          |       | 132                    |       | —                   |       | 132        |       | n/a |   |
| Asset management fees                             |       | 275                    |       | —                   |       | 275        |       | n/a |   |
| General and administrative                        |       | 1,190                  |       | 398                      |       | 792        |       | 199 | % |
| Depreciation and amortization                     |       | 1,860                  |       | —                   |       | 1,860      |       | n/a |   |
| Total expenses                                    |       | $                      | 5,787      |                     | $          | 398        |       | $ | 5,389 |   | 1354 | % |

 

*Revenues.* Revenues for the nine months ended September 30, 2009 were $4.4million and were generated by our consolidated real estate investments, 1875Lawrence and the PAL Loan.  No revenuewas generated for the nine months ended September 30, 2008.  We expect increases in revenue in the futureas we purchase additional real estate assets.

 

*Property Operating Expenses.*  Property operating expenses for the ninemonths ended September 30, 2009 were $0.9 million and were comprisedof operating expenses of 1875 Lawrence. We incurred no property operating expenses for the nine months ended September 30,2008. We expect increases in property operating expenses in the future as wepurchase additional real estate assets.

 

*Interest Expense. *Interest expense for the nine months ended September 30,2009 was $1 million and was comprised of interest related to our note payableon 1875 Lawrence.  There was no interestexpense for the nine months ended September 30, 2008.  We expect increases in interest expense inthe future as we purchase additional real estate assets and assume additionaldebt.

 

*Property Management Fees. *Property management feesfor the nine months ended September 30, 2009 were      $0.1 million and were comprised of feesrelated to 1875 Lawrence.  There were noproperty management fees for the nine months ended September 30,2008.  We expect increases in propertymanagement fees in the future as we purchase additional real estate assets.

 

*Asset Management Fees. *Asset management fees forthe nine months ended September 30, 2009 were $0.3 million and werecomprised of fees related to 1875 Lawrence and the PAL Loan.  There were no asset management fees for thenine months ended September 30, 2008. We expect increases in asset management fees in the future as wepurchase additional real estate assets.

 

*Generaland Administrative Expenses.* General andadministrative expenses for the nine months ended September 30, 2009were $1.2 million, as compared to $0.4 million for the nine months ended September 30,2008, and were comprised of auditing fees, legal fees, board of directors’fees, and other administrative expenses. We expect increases in general and administrative expenses in the futureas we purchase additional real estate assets.

 

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**Cash Flow Analysis**

 

Cashused in operating activities for the nine months ended September 30, 2009was $0.7 million, and was comprised primarily of the net loss of $1 million,changes in prepaid expenses and other assets of $0.1 million, an increase ininterest receivable of $0.3 million principally related to the PAL Loan, andchanges in net payables to related parties of $0.3 million, offset bydepreciation and amortization of $1 million and changes in accrued liabilitiesof $0.3 million.  Cash used in operatingactivities for the nine months ended September 30, 2008 was $0.8 millionand was comprised of the net loss of $0.2 million, changes in net payables torelated parties of $0.5 million and changes in prepaid expenses and otherassets of $0.2 million.

 

Cashused in investing activities for the nine months ended September 30, 2009was $36.7 million, and was comprised primarily of acquisition deposits for thepurchase of a 90% interest in a discounted promissory note (see Note 12 to theunaudited financial statements) of $23.7 million, and the net investment inreal estate loan receivable of $12.6 million. Cash used in investing activities for the nine months ended September 30,2008 was $1 million which was escrow deposits and other assets related to ouracquisition of 1875 Lawrence.

 

Cashprovided by financing activities for the nine months ended September 30,2009 was $42.1 million, and was comprised of the issuance of common stock, netof offering costs, of approximately $43 million offset by distributions of $0.7million and redemptions of common stock of $0.2 million.  Cash provided by financing activities for thenine months ended September 30, 2008 was $49.5 million, and was primarilycomprised of the issuance of common stock, net of offering costs, of$49.5 million.

 

**TotalOperating Expenses**

 

In accordance with theStatement of Policy Regarding Real Estate Investment Trusts published by theNorth American Securities Administrators Association, also known as the NASAAREIT Guidelines, our charter requires that we monitor our expenses on atrailing 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 trailing twelve months ended September 30,2009, TOE of $1.8 million exceeded the greater of 2% of our AIA or 25% of ourNI by $1 million.  Our Board of Directors, including all of ourindependent directors, have reviewed this analysis and unanimously determinedthe excess to be justified because the Company did not acquire its first realestate or real estate-related asset until October 28, 2008, which causedthe expenses it incurred in connection with its organization and as a result ofbeing a public company for audit and legal services, director and officerliability insurance, and fees and expenses for board members in connection withservice on the board and its committees to be disproportionate to the Company’sAIA and its NI.

 

**Fundsfrom Operations and Modified Funds from Operations**

 

Fundsfrom operations (“FFO”) is a non-GAAP financial measure that is widelyrecognized as a measure of REIT operating performance.  We use FFO, defined by the NationalAssociation of Real Estate Investment Trusts as net income (loss), computed inaccordance with GAAP, excluding extraordinary items, as defined by GAAP, andgains (or losses) from sales of property, plus depreciation and amortization onreal estate assets, and after adjustments for unconsolidated partnerships,joint ventures, and subsidiaries, as one measure to evaluate our operatingperformance.  In addition to FFO, we usemodified funds from operations (“Modified Funds from Operations” or “MFFO”),which excludes from FFO acquisition-related costs, impairment charges, andadjustments to fair value for derivatives not qualifying for hedge accounting,to further evaluate our operating performance.

 

Historicalcost accounting for real estate assets in accordance with GAAP implicitly assumesthat 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 and MFFO, together with the required GAAP presentations, provides amore complete understanding of our performance.

 

We believethat FFO is helpful to investors and our management as a measure of operatingperformance because it excludes 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 is not immediatelyapparent from net income.  We believeMFFO is helpful to our investors and our management as a measure of operatingperformance because it excludes costs that management considers more reflectiveof investing activities and other non-operating items included in FFO.  By providing MFFO, we present informationwhich assists investors in aligning their analysis with management’s analysisof long term, core operating activities. We believe fluctuations in MFFO are more indicative of changes inoperating activities and provide comparability in evaluating our performanceover time and as compared to other real estate companies that may not haveacquisition activities, derivatives, or affected by impairments.

 

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As explained below, management’s evaluation of ouroperating performance excludes the items considered in the calculation of MFFObased on the following economic considerations:

 

·                  Acquisition-related costs.  Inevaluating investments in real estate, including both business combinations andinvestments accounted for under the equity method of accounting, management’sinvestment models and analysis differentiates costs to acquire the investmentfrom the operations derived from the investment.  Prior to 2009, acquisition costs for thesetypes of investments were capitalized; however beginning in 2009 acquisitioncosts related to business combinations are expensed.  We believe by excluding expensed acquisitioncosts, MFFO provides useful supplemental information that is comparable foreach type of our real estate investments and is consistent with management’sanalysis of the investing and operating performance of our properties.

 

·                  Impairment charges.  Animpairment charge represents a downward adjustment to the carrying amount of along-lived asset to reflect the current valuation of the asset even when theasset is intended to be held long-term. Such adjustment, when properly recognized under GAAP, may lag theunderlying consequences related to rental rates, occupancy and other operatingperformance trends.  The valuation isalso based, in part, on the impact of current market fluctuations and estimatesof future capital requirements and long-term operating performance that may notbe directly attributable to current operating performance.  Because MFFO excludes impairment charges,management believes MFFO provides useful supplemental information by focusingon the changes in our operating fundamentals rather than changes that mayreflect only anticipated losses.

 

·                  Adjustments to fair value for derivatives not qualifying for hedgeaccounting.  Management uses derivativesin the management of our debt and interest rate exposure.  We do not intend to speculate in theseinterest rate derivatives and accordingly period-to-period changes inderivative valuations are not primary factors in management’s decision-makingprocess.  We believe by excluding thegains or losses from these derivatives, MFFO provides useful supplementalinformation on the realized economic impact of the hedges independent ofshort-term market fluctuations.

 

FFO or MFFO should not be considered as an alternativeto net income (loss), as an indication of our liquidity, nor as an indicationof funds available to fund our cash needs, including our ability to makedistributions and should be reviewed in connection with other GAAPmeasurements.  For the three and ninemonths ended September 30, 2009 and 2008, we present only FFO as we didnot report any such acquisition-related expenses, impairment charges, oradjustments to fair value for derivatives not qualifying for hedge accountingin our Consolidated Statements of Operations nor did we have any derivativefinancial instruments for the periods presented.  Our FFO as presented may not be comparable toamounts calculated by other REITs.

 

For the three and ninemonths ended September 30, 2009, FFO per share has been impacted by theincrease in net proceeds realized from our existing offering of shares.  For the three and nine months ended September 30,2009, we sold 1.8 million and 4.8 million shares of our common stock,respectively, increasing our outstanding shares by 24% and 65%,respectively.  The proceeds from the issuanceare temporarily invested in short-term cash equivalents until they can beinvested in real estate and real estate-related assets.  Due to lower interest rates on cashequivalent investments, interest earnings were minimal.  We expect to invest these proceeds in higherearning real estate and real estate-related assets consistent with ourinvestment policy.  We believe this willadd value to our stockholders over our longer term investment horizon, even ifthis results in less current period earnings.

 

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Ourcalculation of FFO for the three and nine months ended September 30, 2009and 2008 is presented below (amounts in thousands except per share amounts):

 
| ** **                    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                    | ** ** | **2009**                                                 | ** ** | **2008**                                                | ** ** | **2009** | ** ** | **2008** | ** ** |
|                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Net loss, as reported         |       | $                                                        | (285       | )                                                       | $          | 87 |   | $ | (1,024 | ) | $ | (153 | ) |
| Adjustments for:              |       |                                                     |       |                                                    |       |   |   |   |   |
| Real estate depreciation (1)  |       | 270                                                      |       | —                                                  |       | 793 |   | — |   |
| Real estate amortization (1)  |       | 326                                                      |       | —                                                  |       | 1,067 |   | — |   |
|                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Funds from operations (FFO)   |       | $                                                        | 311        |                                                    | $          | 87 |   | $ | 836 |   | $ | (153 | ) |
|                          |       |                                                     |       |                                                    |       |   |   |   |   |
| GAAP weighted average shares: |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic and diluted             |       | 11,389                                                   |       | 3,864                                                   |       | 9,616 |   | 1,627 |   |
| FFO per share                 |       | $                                                        | 0.03       |                                                    | $          | 0.02 |   | $ | 0.09 |   | $ | (0.09 | ) |

 

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(1) This representsthe depreciation and amortization expense of the property we consolidate.

 

Provided below is additional information related toselected non-cash items included in net loss above, which may be helpful inassessing our operating results.

 

·                  Straight-linerental revenue of less than $0.1 million was recognized for both the three andnine months ended September 30, 2009. There was no straight-line rental revenue recognized for the three and ninemonths ended September 30, 2008.

 

·                  Amortizationof intangible lease assets and liabilities was recognized as a net increase torental revenues of $0.3 million and $0.9 million, respectively, for the threeand nine months ended September 30, 2009. There was no amortization of intangible lease assets for the three andnine months ended September 30, 2008.

 

·                  Amortizationof deferred financing costs of approximately $0.1 million was recognized asinterest expense for our note payable for both the three and nine months ended September 30,2009.  No such charges were incurred forthe three and nine months ended September 30, 2008.

 

In addition, cash flows generated from FFO may be usedto fund all or a portion of certain capitalizable items that are excluded fromFFO, such as capital expenditures and payments of principal on debt, eachof which may impact the amount of cash available for distribution to ourstockholders.

 

**Distributions**

 

Distributionsare authorized at the discretion of our board of directors based on itsanalysis of our performance over the previous period, expectations ofperformance for future periods, including actual and anticipated operating cashflow, changes in market capitalization rates for investments suitable for ourportfolio, capital expenditure needs, general financial condition, and otherfactors that our board deems relevant. The board’s decision will be influenced, in substantial part, by itsobligation to ensure that we maintain our status as a REIT.  In light of the pervasive and fundamentaldisruptions in the global financial and real estate markets, we cannot provideassurance that we will be able to achieve expected cash flows necessary tocontinue to pay distributions at any particular level, or at all.  If the current economic conditions continue,our board could determine to reduce our current distribution rate or ceasepaying distributions in order to conserve cash.

 

Untilproceeds from our offering are fully invested and generating sufficientoperating cash flow to fully fund the payment of distributions to stockholders,we have and will continue to pay some or all of our distributions from sourcesother than operating cash flow.  We may,for example, generate cash to pay distributions from financing activities,components of which may include proceeds from our offering and borrowings(including borrowings secured by our assets) in anticipation of futureoperating cash flow.  In addition, fromtime to time, our advisor and its affiliates may agree to waive or defer all,or a portion, of the acquisition, asset management or other fees or incentivesdue to them, pay general administrative expenses or otherwise supplementinvestor returns in order to increase the amount of cash that we have availableto pay distributions to our stockholders.

 

Cash amounts distributed to stockholders during thenine months ended September 30, 2009 and 2008 were $674,000 and $62,000,respectively.  For the nine months ended September 30,2009 and 2008, cash flows used in operating activities were $701,000 and$818,000, respectively.  Accordingly,none of the cash flows from operating activities exceeded 

 

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cash amounts distributed to stockholders for the ninemonths ended September 30, 2009 or 2008. All such shortfalls were funded from proceeds from our offering.

 

The amount by which our distributions paid exceededcash flow from operating activities has increased due to a higher distributionrate and increased proceeds from our offering.  Effective on June 1, 2009, ourboard of directors increased our distribution rate from an annual effectiverate of 3.0% to 5.0%.  As a result,future distributions declared and paid may continue to exceed cash flow fromoperating activities until such time that we invest in additional real estateor real estate-related assets at favorable yields.

 

The following are the distributions paid and declaredas of September 30, 2009 and 2008.

 
| ** **     | ** ** | ** **              | ** ** | ** **        | ** ** | ** **       | ** ** | **Total**    | ** ** | **Declared**  | ** ** |
|----------------|------------|-------------------------|------------|-------------------|------------|------------------|------------|--------------|------------|---------------|------------|
| ** **     | ** ** | **Distributions  Paid** | ** ** | **Distributions** | ** ** | **Distribution** | ** ** |
| **2009**       | ** ** | **Cash**                | ** ** | **Reinvested**    | ** ** | **Total**        | ** ** | **Declared** | ** ** | **Per Share** | ** ** |
| Third Quarter  |       | $                       | 364        |              | $          | 997              |       | $            | 1,361      |          | $          | 1,437 |   | $ | 0.13 |   |
| Second Quarter |       | 172                     |       | 505               |       | 677              |       | 881          |       | 0.09          |       |
| First Quarter  |       | 138                     |       | 416               |       | 554              |       | 586          |       | 0.07          |       |
| Total          |       | $                       | 674        |              | $          | 1,918            |       | $            | 2,592      |          | $          | 2,904 |   | $ | 0.29 |   |

 
| ** **     | ** ** | ** **              | ** ** | ** **        | ** ** | ** **       | ** ** | **Total**    | ** ** | **Declared**  | ** ** |
|----------------|------------|-------------------------|------------|-------------------|------------|------------------|------------|--------------|------------|---------------|------------|
| ** **     | ** ** | **Distributions  Paid** | ** ** | **Distributions** | ** ** | **Distribution** | ** ** |
| **2008**       | ** ** | **Cash**                | ** ** | **Reinvested**    | ** ** | **Total**        | ** ** | **Declared** | ** ** | **Per Share** | ** ** |
| Third Quarter  |       | $                       | 54         |              | $          | 158              |       | $            | 212        |          | $          | 297 |   | $ | 0.08 |   |
| Second Quarter |       | 8                       |       | 25                |       | 33               |       | 74           |       | 0.08          |       |
| First Quarter  |       | —                  |       | —            |       | —           |       | —       |       | —        |       |
| Total          |       | $                       | 62         |              | $          | 183              |       | $            | 245        |          | $          | 371 |   | $ | 0.16 |   |

 

Distributionsdeclared per share assumes the share was issued and outstanding each day duringthe period and was based on a declared daily distribution of $0.0008219 pershare per day for the period through May 31, 2009.  As of June 1, 2009, the effective dailyrate is $0.0013699.  Each day during thefirst, second, and third quarters of 2009 was a record date fordistributions.  On September 29,2009, the Company’s board of directors declared distributions payable to thestockholders of record each day during the months of October, November, and December 2009.  Distributions payable to each stockholder ofrecord will be paid in cash on or before the 16th day of the following month.

 

Over the long term, we expect that more of ourdistributions will be paid from cash flow from operating activities (except with respect todistributions related to sales of our assets). However, operating performance cannot be accurately predicted due tonumerous factors, including our ability to raise and invest capital atfavorable yields, the financial performance of our investments in the currentreal estate environment, the types and mix of investments in our portfolio andthe accounting treatment of our investments in accordance with our accountingpolicies.

 

**Off-BalanceSheet Arrangements**

 

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

 

**CriticalAccounting Policies and Estimates**

 

Management’sdiscussion and analysis of financial condition and results of operations arebased upon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires our management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities.  On a regular basis, we evaluate theseestimates, including investment impairment. These estimates are based on management’s historical industry experienceand on various other assumptions that are believed to be reasonable under thecircumstances.  Actual results may differfrom these estimates.

 

Belowis a discussion of the accounting policies that we consider to be critical inthat they may require complex judgment in their application or requireestimates about matters that are inherently uncertain.

 

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

 

Ourconsolidated financial statements include our accounts, the accounts of VIE inwhich we are the primary beneficiary, and the accounts of other subsidiariesover which we have control.  Allinter-company transactions, balances and profits have been eliminated inconsolidation.

 

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Thereare judgments and estimates involved in determining if an entity in which wehave made an investment is a VIE and, if so, whether we are the primarybeneficiary.  The entity is evaluated todetermine if it is a VIE by, among other things, calculating the percentage ofequity being risked compared to the total equity of the entity.  Determining expected future losses involvesassumptions of various possibilities of the results of future operations of theentity, assigning a probability to each possibility and using a discount rateto determine the net present value of those future losses.  A change in the judgments, assumptions, andestimates outlined above could result in consolidating an entity that shouldnot be consolidated or accounting for an investment using the equity methodthat should in fact be consolidated, the effects of which could be material toour financial statements.

 

***Real Estate***

 

Upon the acquisition of real estate properties, werecognize the assets acquired, the liabilities assumed, and any noncontrollinginterest as of the acquisition date, measured at their fair values.  The acquisition date is the date on which weobtain control of the real estate property. The assets acquired and liabilities assumed may consist of buildings,any assumed debt, identified intangible assets and asset retirementobligations.  Identified intangibleassets generally consist of the above-market and below-market leases, in-placeleases, in-place tenant improvements 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 interests in the acquiree is less than the fair value of theidentifiable net assets acquired. Acquisition-related costs are expensed in the period incurred.

 

Priorto January 1, 2009, we allocated the purchase price of the real estateproperty we acquired to the tangible assets acquired, consisting of land,inclusive of associated rights, and buildings, and identified intangible assetsbased on their relative fair values.

 

Initialvaluations are subject to change until our information is finalized, which isno later than twelve months from the acquisition date.

 

Wedetermine the fair value of assumed debt by calculating the net present valueof the scheduled note payments using interest rates for debt with similar termsand remaining maturities that we believe we could obtain.  Any difference between the fair value andstated value of the assumed debt is recorded as a discount or premium andamortized over the remaining life of the loan.

 

Thefair value of the tangible assets acquired, consisting of land and buildings,is determined by valuing the property as if it were vacant, and the “as-if-vacant”value is then allocated to land and buildings. Land values are derived from appraisals, and building values arecalculated as replacement cost less depreciation or management’s estimates ofthe relative fair value of these assets using discounted cash flow analyses orsimilar methods.  The value of thecommercial office building is depreciated over the estimated useful life of 25years using the straight-line method.

 

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

 

Thetotal value of identified real estate intangible assets acquired is furtherallocated to in-place lease values and tenant relationships based on ourevaluation of the specific characteristics of each tenant’s lease and ouroverall relationship with that respective tenant.  The aggregate value of in-place leasesacquired and tenant relationships is determined by applying a fair value model.  The estimates of fair value of in-placeleases include an estimate of carrying costs during the expected lease-upperiods for the respective spaces, considering current market conditions.  In estimating fair value of in-place leases,we consider items such as real estate taxes, insurance and other operatingexpenses, as well as lost rental revenue during the expected lease-up periodand carrying costs that would have otherwise been incurred had the leases notbeen in place, including tenant improvements and commissions.  The estimates of the fair value of tenantrelationships also include costs to execute similar leases, including leasingcommissions, legal costs and tenant improvements as well as an estimate of thelikelihood of renewal as determined by management on a tenant-by-tenant basis.

 

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

 

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***Investment Impairment***

 

Forreal estate we wholly own, we monitor events and changes in circumstancesindicating that the carrying amounts of the real estate assets may not berecoverable.  When such events or changesin circumstances are present, we assess potential impairment by comparingestimated future undiscounted operating cash flows expected to be generated overthe life of the asset and from its eventual disposition to the carrying amountof the asset.  In the event that thecarrying amount exceeds the estimated future undiscounted operating cash flows,we recognize an impairment loss to adjust the carrying amount of the asset toestimated fair value.  We considerprojected future undiscounted cash flows, trends, strategic decisions regardingfuture development plans, and other factors in our assessment of whether impairmentconditions exist.  While we believe ourestimates of future cash flows are reasonable, different assumptions regardingfactors such as market rents, economic conditions, and occupancy rates couldsignificantly affect these estimates.

 

Inaddition, we evaluate our investment in the real estate loan receivable eachreporting date and if it is probable we will not collect all principal andinterest in accordance with the terms of the loan, we will record an impairmentcharge based on these evaluations.  Whilewe believe it is currently probable we will collect all scheduled principal andinterest with respect to our real estate loan receivable, current marketconditions with respect to credit availability and with respect to real estatemarket fundamentals create a significant amount of uncertainty.  Given this, any future adverse development inmarket conditions may cause us to re-evaluate our conclusions, and could resultin material impairment charges with respect to our real estate loan receivable.

 

Inevaluating our investments for impairment, management may use appraisals andmakes estimates and assumptions, including, but not limited to, the projecteddate of disposition of the properties, the estimated future cash flows of theproperties during our ownership, and the projected sales price of each of theproperties.  A change in these estimatesand assumptions could result in understating or overstating the book value ofour investments, which could be material to our financial statements.

 

Webelieve the carrying value of our operating real estate and loan investments iscurrently recoverable.  Accordingly,there were no impairment charges for the nine months ended September 30,2009 or 2008.  However, if marketconditions worsen beyond our current expectations, or if changes in ourstrategy significantly affect any key assumptions used in our fair valuecalculations, we may need to take charges in future periods for impairmentsrelated to our existing investments.  Anysuch non-cash charges would have an adverse effect on our consolidated financialposition and results of operations.

 

**Item 3.****                                                         ****Quantitative and QualitativeDisclosures About Market Risk.**

 

*Interest Rate Risk*

 

We maybe exposed to interest rate changes primarily as a result of long-term debtused to acquire properties and make loans and other permitted investments.  Our management’s objectives, with regard tointerest rate risks, are to limit the impact of interest rate changes onearnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, we will borrowprimarily at fixed rates or variable rates with the lowest margins availableand in some cases, with the ability to convert variable rates to fixedrates.  With regard to variable ratefinancing, we will assess interest rate cash flow risk by continuallyidentifying and monitoring changes in interest rate exposures that mayadversely impact expected future cash flows and by evaluating hedgingopportunities.  We may enter intoderivative financial instruments such as options, forwards, interest rate swaps,caps, or floors to mitigate our interest rate risk on a related financialinstrument or to effectively lock the interest rate portion of our variablerate debt.  At September 30, 2009,we had one note payable outstanding which was subject to a variable interestrate based on LIBOR plus a margin of 2.5%. However, the note payable has a minimum interest rate of 6.25%, which ifthe LIBOR rate increased 100 basis points, would not result in an increase to arate above the minimum.

 

Interestrate fluctuations will generally not affect our future earnings or cash flowson our fixed rate real estate loan receivable unless such instruments mature orare otherwise terminated.  However, interest rate changes will affect thefair value of our fixed rate instrument. As we expect to hold our fixed rate real estate loan receivable tomaturity and the amounts due under such instruments would be limited to theoutstanding principal balance and any accrued and unpaid interest, we do notexpect that fluctuations in interest rates would have a significant impact onthe cash flows of our fixed rate real estate loan receivable.

 

At September 30,2009, our fixed rate real estate loan receivable, which totaled $12.6 million,has a maturity date of September 1, 2016, and accrues interest at 18% perannum, is subject to market risk to the extent that the stated interest ratevaries from current market rates for loans made under similar terms.  Theestimated fair value of our real estate loan receivable approximated the carryingvalue at September 30, 2009.

 

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**Item 4T.****                                                 ****Controls and Procedures.**

 

*Evaluationof Disclosure Controls and Procedures*

 

Asrequired by Rule 13a-15(b) and Rule 15d-15(b) under theExchange Act, our management, including our Chief Executive Officer and ChiefFinancial Officer, evaluated, as of September 30, 2009, the effectivenessof our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) andRule 15d-15(e). Based on that evaluation, our Chief Executive Officer andChief Financial Officer concluded that our disclosure controls and procedureswere effective, as of September 30, 2009, to provide reasonable assurancethat information required to be disclosed by us in this report is recorded,processed, summarized and reported within the time periods specified by the rules andforms of the Exchange Act and is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosures.

 

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

 

*Changes in Internal Control overFinancial Reporting*

 

Therehas been no change in internal control over financial reporting that occurredduring the quarter ended September 30, 2009 that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

 

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**PART II**

 

**OTHER INFORMATION**

 

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

 

We arenot a party to, and none of our properties are subject to, any material pendinglegal proceedings.

 

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

 

Thefollowing risk factors update and should be read in conjunction with the riskfactors contained in the “Risk Factors” section set forth in our Annual Reporton Form 10-K for the year ended December 31, 2008, and the risksidentified in Part II, Item 1A of our Quarterly Report on Form 10-Qfor the quarter ended March 31, 2009.

 

*You maynot be able to sell your shares under the share redemption program and, if youare able to sell your shares under the program, you may not be able to recoverthe amount of your investment in our shares.*

 

Ourboard of directors approved the share redemption program, but may amend,suspend or terminate our share redemption program at any time.  Our board of directors may reject any requestfor redemption of shares.  Further, thereare many limitations on your ability to sell your shares pursuant to the shareredemption program.  Any stockholderrequesting repurchase of their shares pursuant to our share redemption programwill be required to certify to us that such stockholder either (1) acquiredthe shares requested to be repurchased directly from us or (2) acquiredthe shares from the original investor by way of a bona fide gift not for valueto, or for the benefit of, a member of the stockholder’s immediate or extendedfamily, or through a transfer to a custodian, trustee or other fiduciary forthe account of the stockholder or his or her immediate or extended family inconnection with an estate planning transaction, including by bequest orinheritance upon death or operation of law.

 

Inaddition, our share redemption program contains other restrictions andlimitations.  We cannot guarantee that wewill accommodate all redemption requests made in any particular redemptionperiod.  If we do not redeem all sharespresented for redemption during any period in which we are redeeming shares,then all shares will be redeemed on a pro rata basis during the relevantperiod.  You must hold your shares for atleast one year prior to seeking redemption under the share redemption program,except that our board of directors will waive this one-year holding requirementwith respect to redemptions sought upon the death or qualifying disability of astockholder or redemptions sought upon a stockholder’s confinement to along-term care facility.  Our board ofdirectors may also waive this one-year holding requirement for other exigentcircumstances affecting a stockholder such as bankruptcy or a mandatorydistribution requirement under a stockholder’s IRA, or with respect to sharespurchased through our distribution reinvestment plan. We will not redeem,during any twelve-month period, more than 5% of the weighted average number ofshares outstanding during the twelve-month period immediately prior to the dateof redemption.  Generally, the cashavailable for redemption on any particular date will be limited to the proceedsfrom our distribution reinvestment plan during the period consisting of thepreceding four fiscal quarters for which financial statements are available,less any cash already used for redemptions during the same period, plus, if wehad positive operating cash flow during such preceding four fiscal quarters, 1%of all operating cash flow during such preceding four fiscal quarters.

 

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

 

*If youare able to resell your shares to us pursuant to our share redemption program,you will likely receive substantially less than the amount paid to acquire theshares from us or the fair market value of your shares, depending upon how longyou owned the shares.*

 

Exceptfor redemptions sought upon a stockholder’s death or qualifying disability orredemptions sought upon a stockholder’s confinement to a long-term care facility,the purchase price per share redeemed under our share redemption program willequal 90% of (i) the most recently disclosed estimated value per share asdetermined in accordance with our valuation policy, less (ii) the aggregatedistributions per share of any net sale proceeds from the sale of one or moreof our assets, or other special distributions so designated by our board ofdirectors, distributed to stockholders after the valuation was determined;provided, however, that the purchase price per share shall not exceed: (1) priorto the first valuation conducted by our board of directors, or a committeethereof (the “Initial Board Valuation”), under the valuation policy, 90% of (i) theaverage price per share the original purchaser or purchasers of shares paid tous for all of his or her shares (as adjusted for any stock dividends,combinations, splits, recapitalizations and the like with respect to our commonstock) less (ii) the aggregate distributions per share of any net saleproceeds from the sale of one or more of our assets, or other specialdistributions so designated by our board of directors, distributed tostockholders prior to the redemption date (the “Special 

 

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Distributions”); or (2) onor after the Initial Board Valuation, the average price per share the originalpurchaser or purchasers of shares paid to us for all of his or her shares (asadjusted for any stock dividends, combinations, splits, recapitalizations andthe like with respect to our common stock) less any Special Distributions.  Accordingly, you may receive less by sellingyour shares back to us than you would receive if our investments were sold fortheir estimated values and such proceeds were distributed in our liquidation.

 

*Weestablished the offering price for the shares on an arbitrary basis; as aresult, the offering price of the shares is not related to any independentvaluation.*

 

Ourboard of directors arbitrarily set the offering price of our shares of commonstock for this offering, and this price bears no relationship to the book ornet value of our assets or to our expected operating income.  To assist fiduciaries in discharging theirobligations under the Employee Retirement Income Security Act of 1974, asamended, and to assist broker-dealers in connection with their obligationsunder applicable Financial Industry Regulatory Authority rules, we adopted avaluation policy in respect of estimating the per share value of our commonstock.  Until 18 months have passedwithout a sale in an offering of our common stock (or other securities fromwhich our board of directors believes the value of a share of common stock canbe estimated), not including any offering related to a distributionreinvestment plan, employee benefit plan or the redemption of interests in ouroperating partnership, we generally will use the gross offering price of ashare of the common stock in our most recent offering as the per shareestimated value thereof or, with respect to an offering of other securitiesfrom which the value of a share of common stock can be estimated, the valuederived from the gross offering price of the other security as the per shareestimated value of the common stock. This estimated value is not likely to reflect the proceeds you wouldreceive upon our liquidation or upon the sale of your shares.  In addition, this per share valuation methodis not designed to arrive at a valuation that is related to any individual oraggregated value estimates or appraisals of the value of our assets.

 

**Item 2.****                                                         ****Unregistered Sales of EquitySecurities and Use of Proceeds.**

 

**Use ofProceeds from Registered Securities**

 

On January 4, 2008, our Registration Statementon Form S-11 (File No. 333-140887), covering a public offering of upto 125,000,000 shares of common stock, was declared effective under theSecurities Act of 1933. The Offering commenced on January 21, 2008 and isongoing.  We expect to sell the sharesoffered in our public offering over a three-year period.  Under rules promulgated by the SEC, insome circumstances 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 DRP up to the sixthanniversary of the termination of the primary offering.  We may reallocate the shares of common stockbeing offered between the primary offering and the DRP.

 

We are offering a maximum of 100,000,000 shares inour primary offering at an aggregate offering price of up to $1 billion,or $10.00 per share with discounts available to certain categories ofpurchasers.  The 25,000,000 sharesoffered under the DRP are initially being offered at an aggregate offering priceof $237.5 million, or $9.50 per share. Behringer Securities LP, an affiliate of our advisor, is the dealermanager of the Offering.  As of September 30,2009, we had sold 12,338,736 shares of our common stock, net of the 22,471shares issued to Behringer Harvard Holdings, on a best efforts basis pursuantto the Offering for gross offering proceeds of approximately $123 million.

 

From the effectiveness of the Offering through September 30,2009, we incurred the following expenses in connection with the issuance anddistribution of the registered securities pursuant to the Offering:

 
| **Type of Expense**    | ** ** | **Amount** | ** ** |
|----------------------------------|------------|------------|------------|
| Other expenses to affiliates (1) |       | $          | 19,736     |   |
| Other expenses to non-affiliates |       | —     |       |
|                             |       |       |       |
| Total expenses                   |       | $          | 19,736     |   |

 

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(1) “Other expenses to affiliates” includescommissions and dealer manager fees paid to Behringer Securities, whichreallowed all or a portion of the commissions and fees to soliciting dealers.

 

Fromthe effectiveness of the Offering through September 30, 2009, the netoffering proceeds to us from the Offering, including the DRP, after deductingthe total expenses incurred described above, were $103.3 million.  From the effectiveness of the Offeringthrough September 30, 2009, we had used $17.3 million of such net proceedsto purchase interests in real estate, net of notes payable.  Of the amount used for the purchase of theseinvestments, $1.3 million was paid to Behringer Opportunity Advisors II, asacquisition and advisory fees and acquisition expense reimbursement.

 

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**RecentShares of Unregistered Securities**

 

Duringthe period covered by this quarterly report, we did not sell any equity securitiesthat were not registered under the Securities Act of 1933.

 

**ShareRedemption Program**

 

Ourboard of directors has authorized a share redemption program for stockholderswho have held their shares for more than one year, subject to the significantconditions and limitations of the program. On November 10, 2009, our board of directors adopted a valuationpolicy and approved certain amendments to the share redemption program to beeffective immediately.  The terms of theshare redemption program through November 10, 2009, are summarized below,followed by information regarding the amendments.

 

*Summaryof share redemption program through November 10, 2009:*

 

Theterms on which we redeem shares may differ between redemptions upon the deathor “qualifying disability” (as defined in the share redemption program) of thestockholder or requests for redemption sought upon a stockholder’s confinementto a long-term care facility (collectively referred to herein as “ExceptionalRedemptions”) and all other redemptions (referred to herein as “OrdinaryRedemptions”).

 

ForOrdinary Redemptions, the purchase price for shares redeemed under the shareredemption program will equal:

 

·                  prior to the time we begin obtaining appraisals of the value of ourproperties and our other assets, the amount by which (a) the lesser of (1) 90%of the average gross price per share the original purchaser or purchasers ofyour shares paid to us, which we refer to as the “issue price,” for all of yourshares (as adjusted for any stock dividends, combinations, splits,recapitalizations and the like with respect to our shares of common stock) or (2) 90%of the offering price of shares in our most recent primary offering exceeds (b) theaggregate amount of net sale proceeds per share, if any, distributed toinvestors prior to the redemption date as a result of the sale of one or moreof our investments; or

 

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

 

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

 

Ourboard of directors reserves the right in its sole discretion at any time, andfrom time to time, to (1) waive the one-year holding period in the eventof other exigent circumstances affecting a stockholder such as bankruptcy or amandatory distribution requirement under the stockholder’s IRA, (2) rejectany request for redemption, (3) change the purchase price for redemptions,or (4) otherwise amend the terms for the share redemption program.  Under the terms of the program, we will notredeem in excess of 5% of the weighted average number of shares outstandingduring the twelve-month period immediately prior to the date of redemption.  In addition, our board of directors willdetermine at least quarterly whether we have sufficient cash to repurchaseshares, and such purchases will generally be limited to proceeds from theDRP  plus 1% of operating cash flow forthe previous fiscal year.  The provisionsof the share redemption program in no way limit our ability to repurchaseshares from stockholders by any other legally available means for any reasonthat our board of directors, in its discretion, deems to be in our bestinterest.

 

*Summaryof amendments effective as of November 10, 2009:*

 

On November 10,2009, our board of directors approved certain amendments to the program to beeffective immediately.  Under the amendedand restated share redemption program, the per share redemption price willequal:

 

·                  in the case of Ordinary Redemptions, 90% of (i) the most recentlydisclosed estimated value per share (the “Valuation”) as determined inaccordance with our valuation policy (the “Valuation Policy”), as suchValuation Policy is amended from time to time, less (ii) the aggregatedistributions per share of any net sale proceeds from the sale of one or moreof our assets, or other special distributions so designated by our board ofdirectors, distributed to stockholders after the Valuation was determined (the “ValuationAdjustment”); provided, however, that the purchase price per share shall notexceed: (1) prior to the first 

 

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Valuation conducted by our board of directors, or acommittee thereof (the “Initial Board Valuation”), under the Valuation Policy,90% of (i) the Original Share Price (as defined herein) less (ii) theaggregate distributions per share of any net sale proceeds from the sale of oneor more of our assets, or other special distributions so designated by ourboard of directors, distributed to stockholders prior to the redemption date(the “Special Distributions”); or (2) on or after the Initial BoardValuation, the Original Share Price less any Special Distributions; and

 

·                  in the case of Exceptional Redemptions, (1) prior to the InitialBoard Valuation, the Original Share Price less any Special Distributions; or (2) onor after the Initial Board Valuation, the most recently disclosed Valuationless any Valuation Adjustment, provided, however, that the purchase price pershare shall not exceed the Original Share Price less any Special Distributions.

 

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

 

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

 

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

 

Finally,under the amended and restated share redemption program, the cash available forredemption on any particular date will generally be limited to the proceedsfrom the DRP during the period consisting of the preceding four fiscal quartersfor which financial statements are available, less any cash already used forredemptions during the same period, plus, if we had positive operating cashflow during such preceding four fiscal quarters, 1% of all operating cash flowduring such preceding four fiscal quarters.

 

In allother material respects, the terms of our share redemption program remainunchanged.  The information set forthherein with respect to the amendments does not purport to be complete in scopeand is qualified in its entirety by the full text of the Amended and RestatedShare Redemption Program, which is being filed as Exhibit 99.2 and isincorporated into this report by reference.

 

Duringthe quarter ended September 30, 2009, we redeemed shares as follows:

 
| **2009**  | ** ** | **Total Number of  Shares Redeemed** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly  Announced Plans  or Programs** | ** ** | **Maximum  Number of Shares  That May Be  Purchased Under  the Plans or  Programs** | ** ** |
|-----------|------------|-----------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
| July      |       | —                                              |       | $                                                | —     |                                                                                                                         | —     |                                                                                                                   |       |   |
| August    |       | 17,392                                              |       | $                                                | 8.99       |                                                                                                                         | 17,392     |                                                                                                                   |       | (1) |
| September |       | —                                              |       | $                                                | —     |                                                                                                                         | —     |                                                                                                                   |       |   |
|      |       |                                                |       |                                             |       |                                                                                                                         |       |                                                                                                                   |       |
|      |       | 17,392                                              |       | $                                                | 8.99       |                                                                                                                         | 17,392     |                                                                                                                   |       | (1) |

 

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(1) Under the terms of the program, in effect asof September 30, 2009, we will not redeem in excess of 5% of theweighted-average number of shares outstanding during the twelve-month periodimmediately prior to the date of redemption. In addition, our board of directors will determine at least quarterlywhether we have sufficient cash to repurchase shares, and such purchases willgenerally be limited to proceeds from the DRP plus 1% of operating cash flowfor the previous fiscal year.

 

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

 

None.

 

**Item 4.****                                                         ****Submission of Matters to a Voteof Security Holders.**

 

None.

 

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

 

**Adoptionof Valuation Policy**

 

On November 10,2009, our board of directors adopted the Valuation Policy, a valuation policyin respect of estimating the per share value of our common stock in order toassist fiduciaries in discharging their obligations under the EmployeeRetirement Income Security Act of 1974, as amended, and to assistbroker-dealers in connection with their obligations under applicable FinancialIndustry Regulatory Authority rules with respect to customer accountstatements.

 

Underthe Valuation Policy, we are required to provide to our stockholders a pershare estimated value of our common stock on a periodic basis, generallyannually.  Until 18 months have passedwithout a sale in an offering of our common stock (or other securities fromwhich our board of directors believes the value of a share of common stock canbe estimated), not including any offering related to a distributionreinvestment plan, employee benefit plan or the redemption of interests in ouroperating partnership, we generally will use the gross offering price of ashare of the common stock in our most recent offering as the per shareestimated value thereof or, with respect to an offering of other securitiesfrom which the value of a share of common stock can be estimated, the valuederived from the gross offering price of the other security as the per shareestimated value of the common stock.  Nolater than 18 months after the last sale in an offering, we will disclose anestimated per share value that is not based solely on the offering price ofsecurities in such offering.  Thisestimate will be determined by our board of directors, or a committee thereof,after consultation with Behringer Opportunity Advisors II, or if we are nolonger advised by Behringer Opportunity Advisors II, our officers, andemployees, subject to the restrictions and limitations set forth in thevaluation policy.  After first publishingan estimate by our board of directors within 18 months after an offering, wewill repeat the process of estimating share value of our common stockperiodically thereafter, generally annually.

 

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

 

**Adoptionof Amended and Restated Distribution Reinvestment Plan**

 

On November 10,2009, our board of directors adopted the Amended and Restated DistributionReinvestment Plan (the “Amended and Restated DRP”).  We expect that the Amended and Restated DRPwill be effective no later than March 1, 2010 upon giving participants therequisite notice under the current plan.

 

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

 

Aftertermination of our current public offering, participants may invest theirdistributions in shares that may (but are not required to) be supplied fromeither (i) shares registered with the Securities and Exchange Commission(the “SEC”) pursuant to an effective registration statement for shares for usein the distribution reinvestment plan (a “Future Registration”) or (ii) sharespurchased by the plan administrator in a secondary market (if available) or ona national stock exchange (if listed) (collectively, the “Secondary Market”)and registered with the SEC for resale pursuant to the plan.  Shares registered in a Future Registrationthat are not purchased by the plan administrator in the Secondary Market willbe issued at a price equal to 100% of (A) the most recently disclosedValuation less (B) any Valuation Adjustment.  Shares purchased on the Secondary Market asset forth in (ii) above will be purchased at the then-prevailing marketprice, and the 

 

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average price paid by theplan administrator for all such purchases for a single distribution will beutilized for purposes of determining the purchase price for shares purchasedunder the distribution reinvestment plan on such investment date; however, inno event will the purchase price for shares purchased under the distributionreinvestment plan be less than 100% of the market price for shares on suchinvestment date.

 

Regardlessof the pricing determined above, our board of directors may determine, fromtime to time, in its sole discretion, the price at which the plan administratorwill invest distributions in shares; provided that if the new price sodetermined by our board of directors varies more than 5% from the pricing thatwould have resulted pursuant to the two paragraphs above, as applicable, itwill deliver a notice regarding the new price to each plan participant at least30 days prior to the effective date of the new price.

 

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

 

In allother material respects, the terms of our distribution reinvestment plan willremain unchanged.  The information setforth herein with respect to the Amended and Restated DRP does not purport tobe complete in scope and is qualified in its entirety by the full text of theAmended and Restated DRP, which is being filed as Exhibit 4.2 and isincorporated into this report by reference.

 

**Adoptionof Amendment and Restated Automatic Purchase Plan**

 

On November 10,2009, our board of directors adopted the Amended and Restated AutomaticPurchase Plan (the “Amended and Restated APP”). We expect that the Amended and Restated APP will be effective no laterthan March 1, 2010 upon giving participants the requisite notice under thecurrent plan.  The Amended and RestatedAPP clarifies that any notice to a participant under the automatic purchaseplan may be given by letter addressed to the participant, delivered byelectronic means, or given by including such information in a Current Report onForm 8-K or in our annual or quarterly reports, all publicly filed withthe SEC.  In all other material respects,the terms of our automatic purchase plan will remain unchanged.  The information set forth herein with respectto the Amended and Restated APP does not purport to be complete in scope and isqualified in its entirety by the full text of the Amended and Restated APP,which is being filed as Exhibit 4.3 and is incorporated into this reportby reference.

 

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

 

Theexhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Indexattached hereto.

 

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**SIGNATURE**

 

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

 

 
|                           | **BEHRINGER  HARVARD OPPORTUNITY REIT II, INC.** |
|--------------------------------|--------------------------------------------------|
|                           |                                             | ** ** |
|                           |                                             | ** ** |
| Dated:  November 12, 2009 | By:                                              | /s/ Gary S.  Bresky |
|                           |                                             | Gary S. Bresky |
|                           |                                             | Executive Vice  President and Chief Financial Officer |
|                           |                                             | (Principal  Financial Officer) |

 

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**Index to Exhibits**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                |
|-------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1                     |       | Second Articles of Amendment and Restatement as amended by the First  Articles of Amendment and the Second Articles of Amendment (incorporated by  reference to Exhibit 3.1 to Form 10-Q filed on November 14,  2008)                                                                                                                                                                           |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2                     |       | Amended and Restated Bylaws (incorporated by reference to  Exhibit 3.2 to Pre-Effective Amendment No. 3 to the Company’s  Registration Statement on Form S-11, Commission File  No. 333-140887)                                                                                                                                                                                       |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1                     |       | Form of Subscription Agreement (included as Exhibit A to  prospectus, incorporated by reference to Exhibit 4.1 to Post-Effective  Amendment No. 7 to the Company’s Registration Statement on  Form S-11, Commission File No. 333-140887)                                                                                                                                    |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2*                    |       | Amended and Restated Distribution Reinvestment Plan                                                                                                                                                                                                                                                                                                                                                            |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.3*                    |       | Amended and Restated Automatic Purchase Plan                                                                                                                                                                                                                                                                                                                                                                   |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.4                     |       | Form of Escrow Agreement (incorporated by reference to  Exhibit 4.4 to Pre-Effective Amendment No. 2 to the Company’s  Registration Statement on Form S-11, Commission File  No. 333-140887)                                                                                                                                                                                     |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.5                     |       | Statement regarding restrictions on transferability of shares of common  stock (to appear on stock certificate or to be sent upon request and without  charge to stockholders issued shares without certificates) (incorporated by  reference to Exhibit 4.5 to Pre-Effective Amendment No. 3 to the  Company’s Registration Statement on Form S-11, Commission File  No. 333-140887) |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1*                   |       | Amended and Restated Advisory Management Agreement                                                                                                                                                                                                                                                                                                                                                             |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2*                   |       | Junior Loan Agreement (related to the PAL Loan) by and between Rest  Easy LLC and Behringer Harvard PAL I, LLC, dated as of August 14, 2009                                                                                                                                                                                                                                                               |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3*                   |       | Promissory Note (related to the PAL Loan) between Rest Easy LLC, and  Behringer Harvard PAL I, LLC                                                                                                                                                                                                                                                                                                             |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4*                   |       | Intercreditor and Subordination Agreement (related to the PAL Loan) by  and among Bank of America, N.A., Behringer Harvard PAL I, LLC, and Lend Lease  (US) Capital, Inc., dated as of August 14, 2009                                                                                                                                                                                               |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5*                   |       | Construction Leasehold Deed of Trust, Assignment, Security Agreement  and Fixture Filing (related to the PAL Loan Fort Hood, TX property) by Rest  Easy LLC, as Grantor, to and in favor of Stephen J. Hughes, as Trustee, and  Behringer Harvard PAL I, LLC, as Lender, dated as of August 14, 2009  with schedule disclosing other substantially identical Deeds of Trust omitted                       |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6*                   |       | Construction Leasehold Mortgage, Assignment, Security Agreement and  Fixture Filing (related to the PAL Loan Fort Sill, OK property) by Rest Easy  LLC, as Borrower, to and in favor of Behringer Harvard PAL I, LLC, as Lender,  dated as of August 14, 2009 with schedule disclosing other substantially  identical Mortgages omitted                                                                   |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1*                   |       | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                                                                                                                                                               |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2*                   |       | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                                                                                                                                                               |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1*                   |       | Section 1350  Certifications**                                                                                                                                                                                                                                                                                                                                                                            |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 99.1*                   |       | Valuation Policy                                                                                                                                                                                                                                                                                                                                                                                               |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 99.2*                   |       | Amended and  Restated Share Redemption Program                                                                                                                                                                                                                                                                                                                                                                 |

 

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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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