Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**[Mark One]**

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

 

**For the quarterly period ended June 30, 2008**

 

**OR**

 

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

 

**For the transition period from                        to**

 

**Commission File Number: 000-53195**

 

**BehringerHarvard Multifamily REIT I, Inc.**

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

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

(Address of Principal Executive Offices) (ZIP Code)

 

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

 

**None**

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

 

Indicate by check mark whetherthe Registrant:  (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.  Yes  o   Nox

 

Theregistrant’s registration statement on Form 10, as amended, becameeffective on June 30, 2008 and therefore the registrant has not beensubject to the filing requirements for 90 days. The registrant has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 since that date.

 

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

 

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

 

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

 

Asof June 30, 2008, the Registrant had 14,267,364 shares of common stockoutstanding.

 

 

 

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

**Form 10-Q**

**Quarter Ended June 30, 2008**

 
| ** **             | ** **                                                                                                                                       | **Page** |
|------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                   | **PART 1  FINANCIAL INFORMATION**                                                                                                           |     |
|                   |                                                                                                                                             |     |
|                   |                                                                                                                                             |     |
| **Item 1.**            | **Financial  Statements (unaudited)**                                                                                                            |     |
| ** **             | ** **                                                                                                                                       |     |
|                   | Consolidated Balance Sheets as of  June 30, 2008 and December 31, 2007                                                                 | 3        |
|                   |                                                                                                                                             |     |
|                   | Consolidated Statements of  Operations for the three and six months ended June 30, 2008 and 2007                                            | 4        |
|                   |                                                                                                                                             |     |
|                   | Consolidated Statements of Stockholders’  Equity for the year ended December 31, 2007 and for the six months ended  June 30, 2008 | 5        |
|                   |                                                                                                                                             |     |
|                   | Consolidated  Statements of Cash Flows for the six months ended June 30, 2008 and 2007                                                      | 6        |
|                   |                                                                                                                                             |     |
|                   | Notes to  Consolidated Financial Statements                                                                                                      | 7        |
|                   |                                                                                                                                             |     |
| **Item 2.**            | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                                  | 29       |
|                   |                                                                                                                                             |     |
| **Item 3.**            | **Quantitative  and Qualitative Disclosures About Market Risk**                                                                                  | 47       |
|                   |                                                                                                                                             |     |
| **Item 4T.**           | **Controls and  Procedures**                                                                                                                     | 47       |
|                   |                                                                                                                                             |     |
| **PART II**       |                                                                                                                                             |
| **OTHER  INFORMATION** |                                                                                                                                             |
|                   |                                                                                                                                             |     |
| **Item 1.**            | **Legal Proceedings**                                                                                                                            | 48       |
|                   |                                                                                                                                             |     |
| **Item 1A.**           | **Risk Factors**                                                                                                                                 | 48       |
|                   |                                                                                                                                             |     |
| **Item 2.**            | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                                                 | 48       |
|                   |                                                                                                                                             |     |
| **Item 3.**            | **Defaults  Upon Senior Securities**                                                                                                             | 48       |
|                   |                                                                                                                                             |     |
| **Item 4.**            | **Submission  of Matters to a Vote of Security Holders**                                                                                         | 48       |
|                   |                                                                                                                                             |     |
| **Item 5.**            | **Other Information**                                                                                                                            | 48       |
|                   |                                                                                                                                             |     |
| **Item 6.**            | **Exhibits**                                                                                                                                     | 48       |
|                   |                                                                                                                                             |     |
| **Signature**          | 50                                                                                                                                               |

 

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**PART I**

**FINANCIALINFORMATION**

 

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

 

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

**Consolidated Balance Sheets**

(Unaudited)

 
| ** **                                                                                                                                                                                        | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2008**          | ** **  | **2007**              | ** ** |
|                                                                                                                                                                                              |       |              |        |                  |       |
| **Assets**                                                                                                                                                                                        |       |              |        |                  |       |
| Cash and cash equivalents                                                                                                                                                                         |       | $                 | 34,692,596  |                  | $          | 53,377,585 |   |
| Investments in unconsolidated real estate  joint ventures                                                                                                                                         |       | 78,173,161        |        | 60,068,633            |       |
| Restricted cash                                                                                                                                                                                   |       | —            |        | 53,300                |       |
| Receivables from affiliates                                                                                                                                                                       |       | 169,856           |        | 300,927               |       |
| Mortgage note receivable                                                                                                                                                                          |       | 1,124             |        | 70,986                |       |
| Escrow deposits                                                                                                                                                                                   |       | —            |        | 888,525               |       |
| Other assets                                                                                                                                                                                      |       | 118,826           |        | 681,917               |       |
| **Total assets**                                                                                                                                                                                  |       | $                 | 113,155,563 |                  | $          | 115,441,873 |   |
|                                                                                                                                                                                              |       |              |        |                  |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                     |       |              |        |                  |       |
|                                                                                                                                                                                              |       |              |        |                  |       |
| **Liabilities**                                                                                                                                                                                   |       |              |        |                  |       |
| Payables to affiliates                                                                                                                                                                            |       | $                 | 367,692     |                  | $          | 1,413,206 |   |
| Subscriptions for common stock                                                                                                                                                                    |       | —            |        | 53,300                |       |
| Dividends payable                                                                                                                                                                                 |       | 433,900           |        | 412,058               |       |
| Accounts payable and accrued liabilities                                                                                                                                                          |       | 72,549            |        | 143,812               |       |
| **Total liabilities**                                                                                                                                                                             |       | 874,141           |        | 2,022,376             |       |
|                                                                                                                                                                                              |       |              |        |                  |       |
| **Commitments and contingencies**                                                                                                                                                                 |       |              |        |                  |       |
|                                                                                                                                                                                              |       |              |        |                  |       |
| **Stockholders’ equity**                                                                                                                                                                     |       |              |        |                  |       |
| Preferred stock, $.0001 par value per  share; 125,000,000 shares authorized, none outstanding                                                                                                     |       | —            |        | —                |       |
| Common stock, $.0001 par value per share; 875,000,000  shares authorized, 14,267,364 and 14,272,919 shares issued and outstanding at  June 30, 2008 and December 31, 2007, respectively |       | 1,426             |        | 1,427                 |       |
| Additional paid-in capital                                                                                                                                                                        |       | 114,528,722       |        | 114,566,504           |       |
| Cumulative distributions and net loss                                                                                                                                                             |       | (2,248,726        | )           | (1,148,434            | )          |
| **Total stockholders’ equity**                                                                                                                                                               |       | 112,281,422       |        | 113,419,497           |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                               |       | $                 | 113,155,563 |                  | $          | 115,441,873 |   |
|                                                                                                                                                                                                   |            |                   |             |                       |            |  |  |  |  |

 

*See Notes to Consolidated Financial Statements.*

 

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

**Consolidated Statements of Operations**

(Unaudited)

 
| ** **                                                                  | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                  | ** ** | **June 30,**                                  | ** ** | **June 30,**                                | ** ** |
| ** **                                                                  | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                        |       |                                               |       |                                             |       |   |   |   |   |
| **Rental revenue**                                                          |       | $                                                  | —     |                                             | $          | — |   | $ | — |   | $ | — |   |
|                                                                        |       |                                               |       |                                             |       |   |   |   |   |
| **Expenses**                                                                |       |                                               |       |                                             |       |   |   |   |   |
| Asset management fees                                                       |       | 229,665                                            |       | 7,447                                            |       | 404,911 |   | 7,447 |   |
| Organization expenses                                                       |       | —                                             |       | 47,694                                           |       | — |   | 47,694 |   |
| Interest expense                                                            |       | —                                             |       | 171,359                                          |       | — |   | 171,359 |   |
| General and administrative                                                  |       | 245,361                                            |       | 154,033                                          |       | 541,263 |   | 168,283 |   |
| Depreciation and amortization                                               |       | 8,367                                              |       | —                                           |       | 29,971 |   | — |   |
| **Total expenses**                                                          |       | 483,393                                            |       | 380,533                                          |       | 976,145 |   | 394,783 |   |
|                                                                        |       |                                               |       |                                             |       |   |   |   |   |
| Interest income                                                             |       | 225,228                                            |       | 70,931                                           |       | 650,354 |   | 75,890 |   |
| Equity in earnings of unconsolidated real  estate joint venture investments |       | 1,092,875                                          |       | 30,385                                           |       | 1,857,571 |   | 30,385 |   |
| **Net income (loss)**                                                       |       | $                                                  | 834,710    |                                             | $          | (279,217 | ) | $ | 1,531,780 |   | $ | (288,508 | ) |
|                                                                        |       |                                               |       |                                             |       |   |   |   |   |
| Weighted average number of common shares  outstanding                       |       | 14,267,364                                         |       | 878,939                                          |       | 14,268,951 |   | 444,010 |   |
|                                                                        |       |                                               |       |                                             |       |   |   |   |   |
| Basic and diluted income (loss) per share                                   |       | $                                                  | 0.06       |                                             | $          | (0.32 | ) | $ | 0.11 |   | $ | (0.65 | ) |

 

*See Notes to Consolidated Financial Statements.*

 

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

**Consolidated Statements of Stockholders’ Equity**

(Unaudited)

 
| ** **                                              | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **Cumulative** | ** ** | **Total**                  | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|----------------|------------|----------------|------------|----------------------------|------------|
| ** **                                              | ** ** | **Number**            | ** ** | **Par**        | ** ** | **Paid-in**    | ** ** | **Distributions and** | ** ** | **Stockholders’** | ** ** |
| ** **                                              | ** ** | **of Shares**    | ** ** | **Value**      | ** ** | **Capital**    | ** ** | **Net loss**          | ** ** | **Equity** | ** ** |
|                                                    |       |                  |       |           |       |           |       |                       |       |   |   |
| Balance at January 1, 2007                         |       | 4,249                 |       | $              | —     |           | $          | 13,059                     |       | $ | (14,055 | ) | $ | (996 | ) |
|                                                    |       |                  |       |           |       |           |       |                       |       |   |   |
| Net loss                                                |       |                  |       |           |       | —         |       | (207,107                   | )          | (207,107 | ) |
| Issuances of common stock  under:                       |       |                  |       |           |       |           |       |                       |       |   |   |
| Sale of common stock, net                               |       | 14,268,670            |       | 1,427          |       | 114,529,010    |       | —                     |       | 114,530,437 |   |
| Incentive award plan                                    |       | —                |       | —         |       | 24,435         |       | —                     |       | 24,435 |   |
| Distributions declared on  common stock                 |       | —                |       | —         |       | —         |       | (927,272                   | )          | (927,272 | ) |
|                                                    |       |                  |       |           |       |           |       |                       |       |   |   |
| Balance at December 31,  2007                      |       | 14,272,919            |       | 1,427          |       | 114,566,504    |       | (1,148,434                 | )          | 113,419,497 |   |
|                                                    |       |                  |       |           |       |           |       |                       |       |   |   |
| Net income                                              |       |                  |       |           |       | —         |       | 1,531,780                  |       | 1,531,780 |   |
| Issuances of common stock under  - incentive award plan |       | —                |       | —         |       | 12,218         |       | —                     |       | 12,218 |   |
| Shares Returned                                         |       | (5,555                | )          | (1             | )          | (50,000        | )          | —                     |       | (50,001 | ) |
| Distributions declared on  common stock                 |       | —                |       | —         |       | —         |       | (2,632,072                 | )          | (2,632,072 | ) |
|                                                    |       |                  |       |           |       |           |       |                       |       |   |   |
| Balance at June 30, 2008                           |       | 14,267,364            |       | $              | 1,426      |           | $          | 114,528,722                |       | $ | (2,248,726 | ) | $ | 112,281,422 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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

**Consolidated Statements of Cash Flows**

(Unaudited)

 
| ** **                                                                                          | ** ** | **For the Six**   | ** ** | **For the Six**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                          | ** ** | **Months Ended**       | ** ** | **Months Ended**       | ** ** |
| ** **                                                                                          | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
| **Cash flows from operating activities**                                                            |       |                        |       |                        |       |
| Net income (loss)                                                                                   |       | $                           | 1,531,780  |                        | $          | (288,508 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |       |                        |       |                        |       |
| Amortization of deferred financing costs                                                            |       | —                      |       | 79,116                      |       |
| Depreciation and amortization                                                                       |       | 29,971                      |       | —                      |       |
| Stock-based compensation                                                                            |       | 12,218                      |       | 12,217                      |       |
| Equity in earnings of unconsolidated real  estate                                                   |       |                        |       |                        |       |
| joint venture investments                                                                           |       | (1,857,571                  | )          | (30,385                     | )          |
| Distributions received from unconsolidated  real estate joint ventures                              |       | 1,857,571                   |       | —                      |       |
| Changes in operating assets and  liabilities:                                                       |       |                        |       |                        |       |
| Accrued interest on mortgage note  receivable                                                       |       | (50                         | )          | (59,356                     | )          |
| Accounts receivable                                                                                 |       | (20,460                     | )          | —                      |       |
| Other assets                                                                                        |       | (29,779                     | )          | —                      |       |
| Payables to affiliates                                                                              |       | 101,387                     |       | 101,850                     |       |
| Accounts payable and other liabilities                                                              |       | (77,412                     | )          | 4,584                       |       |
| **Cash provided by (used in) operating  activities**                                                |       | 1,547,655                   |       | (180,482                    | )          |
|                                                                                                |       |                        |       |                        |       |
| **Cash flows from investing activities**                                                            |       |                        |       |                        |       |
| Increase in receivables from affiliates                                                             |       | —                      |       | (1,336,372                  | )          |
| Issuances of mortgage notes receivable                                                              |       | —                      |       | (2,995,719                  | )          |
| Repayments of advances to unconsolidated  real estate joint ventures                                |       | 44,842                      |       | —                      |       |
| Prepaid acquisition costs                                                                           |       | —                      |       | (628,941                    | )          |
| Investments in unconsolidated real estate  joint ventures                                           |       | (18,227,082                 | )          | (2,040,824                  | )          |
| Proceeds from sales of interests in real  estate ventures                                           |       | —                      |       | 1,968,150                   |       |
| Distributions received from unconsolidated  real estate joint ventures                              |       | 831,241                     |       | —                      |       |
| Escrow deposits                                                                                     |       | —                      |       | (1,237,500                  | )          |
| **Cash used in investing activities**                                                               |       | (17,350,999                 | )          | (6,271,206                  | )          |
|                                                                                                |       |                        |       |                        |       |
| **Cash flows from financing activities**                                                            |       |                        |       |                        |       |
| Shares Returned                                                                                     |       | (50,001                     | )          | —                      |       |
| Proceeds from sales of common stock                                                                 |       | —                      |       | 14,431,978                  |       |
| Offering costs                                                                                      |       | —                      |       | (1,383,624                  | )          |
| Change in subscriptions for common stock                                                            |       | (53,300                     | )          | 157,000                     |       |
| Change in subscription cash received                                                                |       | 53,300                      |       | (156,624                    | )          |
| Dividends paid                                                                                      |       | (2,610,230                  | )          | —                      |       |
| Credit Facility:                                                                                    |       |                        |       |                        |       |
| Proceeds                                                                                            |       | —                      |       | 8,000,000                   |       |
| Repayments                                                                                          |       | —                      |       | (8,000,000                  | )          |
| Financing fees                                                                                      |       | —                      |       | (286,669                    | )          |
| Change in payables to affiliates                                                                    |       | (221,414                    | )          | —                      |       |
| **Cash provided by (used in) financing  activities**                                                |       | (2,881,645                  | )          | 12,762,061                  |       |
|                                                                                                |       |                        |       |                        |       |
| Net change in cash and cash equivalents                                                             |       | (18,684,989                 | )          | 6,310,373                   |       |
| Cash and cash equivalents at beginning of  period                                                   |       | 53,377,585                  |       | 20,004                      |       |
| Cash and cash equivalents at end of period                                                          |       | $                           | 34,692,596 |                        | $          | 6,330,377 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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**BehringerHarvard Multifamily REIT I, Inc.**

**Notes to Consolidated Financial Statements**

**(unaudited)**

 

**1.**    Organization and Business

 

***Business***

 

BehringerHarvard Multifamily REIT I, Inc. (which may be referred to as the “Company,”“we,” “us,” or “our”) was organized in Maryland on August 4, 2006 andintends to qualify as a real estate investment trust (“REIT”) for federalincome tax purposes for the taxable year ended December 31, 2007. We wereorganized to invest in and operate multifamily communities. These operating anddevelopment properties are expected to include conventional multifamily assets,such as mid-rise, high-rise, and garden style properties, and also to includestudent housing and age-restricted properties. Further, we may invest incommercial real estate, real estate related securities, collateralizedmortgage-backed securities, mortgage, bridge, mezzanine or other loans and Section 1031tenant-in-common interests, or in entities that make similar investments.

 

Substantiallyall business of Behringer Harvard Multifamily REIT I, Inc. is conductedthrough our operating partnership Behringer Harvard Multifamily OP I LP (“BehringerHarvard Multifamily OP I”). Behringer Harvard Multifamily REIT I, Inc. hascontributed initial capital contributions of $10,000 to Behringer HarvardMultifamily OP I through two wholly owned subsidiaries, BHMF, Inc., aDelaware corporation (“BHMF Inc.”) and BHMF Business Trust, a Maryland businesstrust. BHMF, Inc. owns approximately 0.1% of our interest in BehringerHarvard Multifamily OP I as its sole general partner. The remaining approximate99.9% of our interest in Behringer Harvard Multifamily OP I is held as alimited partner’s interest by BHMF Business Trust. BHMF, Inc.’s interestwill be subject to dilution as we raise offering proceeds. The consolidatedfinancial statements of Behringer Harvard Multifamily REIT I, Inc.includes the accounts of Behringer Harvard Multifamily OP I.

 

Wehave no employees and are supported by related party arrangements. We areexternally managed by Behringer Harvard Multifamily Advisors I LP (“BehringerHarvard Multifamily Advisors I”), a Texas limited partnership organized in2006. Behringer Harvard Multifamily Advisors I is responsible for managing ouraffairs on a day-to-day basis and for identifying and making real estateinvestments on our behalf.

 

***Organization***

 

*Offering of our common stock*

 

Weare authorized to issue 875,000,000 shares of common stock, 1,000 shares ofconvertible stock and 124,999,000 shares of preferred stock. All shares ofcommon stock have a par value of $.0001 per share. On August 4, 2006 (dateof inception), we sold 1,249 shares of our common stock to Behringer HarvardHoldings, LLC (“Behringer Harvard”) for cash of $10,004. On November 28,2007, we sold an additional 23,720 shares of our common stock to BehringerHarvard for cash of $189,997. Our Board of Directors may authorize additionalshares of capital stock and their characteristics without obtaining shareholderapproval.

 

OnNovember 22, 2006, we commenced a private offering to sell a maximum ofapproximately $400 million of common stock to accredited investors (the “PrivateOffering”). We held all Private Offering proceeds in escrow until after we hadsold our initial $1.5 million of shares of common stock. In April 2007,the Company released the proceeds from escrow and began issuing shares of ourcommon stock. We terminated the Private Offering on December 28, 2007. Wesold a total of approximately 14.2 million shares of common stock and raised atotal of approximately $127.3 million in gross offering proceeds in the PrivateOffering. Commissions, dealer manager fees, and other offering costs wereapproximately $13 million.

 

OnDecember 31, 2007, we filed an initial registration statement pursuant to Form S-11filed under the Securities Act of 1933, as amended, for a public offering of upto 120,000,000 shares of common stock offered at a price of $10.00 per share(the “Public Offering”). The Public Offering, if it becomes effective, alsocovers the registration of up to 30,000,000 shares of common stock pursuant toour distribution reinvestment plan at $9.50 per share. We reserve the right toreallocate the shares we are offering between the primary offering and ourdistribution reinvestment plan. The minimum purchase is $2,000 per investorexcept in New York where it is $2,500. On June 6, 2008, 

 

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ourboard of directors approved an amendment to our Public Offering which willprovide up to 250,000,000 shares of common stock, including 200,000,000 sharesof common stock offered at a price of $10.00 per share and 50,000,000 shares ofcommon stock offered at $9.50 per share as part of our distributionreinvestment plan.

 

Weintend to use the proceeds from our private and public offerings of our commonstock, after deducting offering expenses, primarily to acquire apartmentcommunities, with a particular focus on using multiple strategies to acquirehigh quality apartment communities that will produce rental income. We willacquire a blended portfolio consisting of core, stabilized income generatingassets, assets that may benefit from enhancement or repositioning and developmentassets for stabilization to retain as core assets generating income withpotential capital appreciation.

 

# **While conducting an offering, we admit new stockholders atleast monthly. All subscription proceeds are held in a separate account untilthe subscribing investors are admitted as stockholders. Upon admission of newstockholders, subscription proceeds are transferred to operating cash and maybe utilized as consideration for investments and the payment or reimbursementof dealer manager fees, selling commissions, offering expenses and operatingexpenses. Until required for such purposes, net offering proceeds are held inshort-term, liquid investments.**

 

# **Our common stock is not currently listed on a nationalsecurities exchange. However, management anticipates within four to six yearsafter the termination of our public offering to begin the process of eitherlisting the common stock on a national securities exchange or liquidating ourassets, depending on then-prevailing market conditions.**

 

**2.****    ****Interim Unaudited Financial Information**

 

Theaccompanying consolidated financial statements should be read in conjunctionwith the consolidated financial statements and notes thereto included in ourAmendment No. 1 to Form 10 filed pursuant to Section 12(g) ofthe Security and Exchange Act of 1934, as amended for the year ended December 31,2007, which was filed with the Securities and Exchange Commission (“SEC”) on June 09,2008. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) have been condensedor omitted from this report.

 

Theresults for the interim periods shown in this report are not necessarilyindicative of future financial results. The accompanying consolidated balancesheet and consolidated statement of stockholders’ equity as of June 30,2008 and consolidated statements of operations and cash flows for the periodsended June 30, 2008 and 2007 have not been audited by our independentregistered public accounting firm. In the opinion of management, theaccompanying unaudited consolidated financial statements include alladjustments necessary to present fairly our consolidated financial position asof June 30, 2008 and December 31, 2007 and our consolidated resultsof operations and cash flows for the periods ended June 30, 2008 and 2007.Such adjustments are of a normal recurring nature.

 

**3****.****     Summary ofSignificant Accounting Policies**

 

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

 

The preparation of financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. These estimates include such items as the purchase price allocation forreal estate acquisitions, impairment of long-lived assets and equity-methodreal estate investments, depreciation and amortization and allowance fordoubtful accounts.  Actual results coulddiffer from those estimates.

 

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

 

Ourconsolidated financial statements include our accounts, the accounts ofvariable interest entities in which we are the primary beneficiary and theaccounts of other subsidiaries over which we have control.  All inter-company transactions, balances andprofits have been eliminated in consolidation. Interests in entities acquired are evaluated based on FinancialAccounting Standards Board Interpretation (“FIN”) 46R “Consolidation ofVariable 

 

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InterestEntities,” which requires the consolidation of variable interest entities inwhich we are deemed to be the primary beneficiary.  If the interest in the entity is determinedto not be a variable interest entity under FIN 46R, then the entities areevaluated for consolidation under the American Institute of Certified PublicAccountants’ (“AICPA”) Statement of Position (“SOP”) 78-9, “Accounting forInvestments in Real Estate Ventures,” and by Emerging Issues Task Force (“EITF”)04-5, “Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights.”

 

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

 

If,in the future, we acquire real estate properties, we will allocate the purchaseprice of those properties to the tangible assets acquired, consisting of land,inclusive of associated rights, and buildings, any assumed debt, identifiedintangible assets and asset retirement obligations based on their relative fairvalues in accordance with SFAS No. 141, “Business Combinations” and No. 142,“Goodwill and Other Intangible Assets.” Identified intangible assets consist of the fair value of above-marketand below-market leases, and in-place leases.

 

Initialvaluations are subject to change until our information is finalized, which isno later than 12 months from the acquisition date.

 

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

 

Thefair value of any tangible assets that will be acquired, expected to consist ofland 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, andbuilding values are calculated as replacement cost less depreciation ormanagement’s estimates of the relative fair value of these assets usingdiscounted cash flow analyses or similar methods.  The values of buildings are depreciated overthe estimated useful lives ranging from 25-35 years using the straight-linemethod.

 

Wewill determine 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 options forbelow market leases. We record thefair value of above-market and below-market leases as intangible assetsor intangible liabilities, respectively, and amortize them as an adjustment torental income over the above determined lease term.

 

Thetotal value of identified real estate intangible assets that we may acquire inthe future 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 includes 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 leasesincluding leasing commissions, legal and tenant improvements as well as anestimate of the likelihood of renewal as determined by management on atenant-by-tenant basis.

 

Wewill amortize the value of in-place leases acquired in the future to expenseover the term of the respective leases. The value of tenant relationshipintangibles is amortized to expense over the initial term and any anticipatedrenewal periods, but in no event does the amortization period for intangibleassets exceed the remaining depreciable life of the building. Should a tenantterminate their lease, the unamortized portion of the in-place lease value andtenant relationship intangibles would be charged to expense.

 

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***Impairment of Long Lived Assets and Mortgage NotesReceivable***

 

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

 

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

 

Weassess impairment at the individual project basis. In evaluating the investmentin real estate venture and mortgage note for impairment, management makesseveral estimates and assumptions about the financial condition of the borrowerand the guarantor. In addition, management makes several estimates andassumptions about the property and the additional collateral provided by theguarantor, including but not limited to, the projected disposition dates,estimated future cash flows, and the projected sales prices.  A change in these estimates and assumptionscould result in understating or overstating the book value of the mortgage notewhich could be material to our financial statements.

 

We review the terms andconditions underlying the outstanding balances of mortgage notes receivable onan individual basis. If we determine that it is probable that all amounts dueunder the terms of a loan will not be collected, an impairment charge isrecorded to the extent that the investment in the note exceeds our estimate ofthe fair value of the collateral securing such note.

 

Recently,domestic financial markets have experienced unusual volatility and uncertainty.Although this condition has occurred most visibly within the “subprime”single-family mortgage lending sector of the credit market, liquidity has tightenedin overall domestic financial markets, including the investment grade debt andequity capital markets. Consequently, there is greater uncertainty regardingour ability to access the credit market in order to attract financing onreasonable terms. Investment returns on our assets and our ability to makeacquisitions could be adversely affected by our inability to secure financingon reasonable terms, if at all.

 

Noimpairment charges have been recorded as of June 30, 2008 and December 31,2007.

*** ***

***Cash and Cash Equivalents***

 

Thecarrying amount of cash and cash equivalents reported on the balance sheetapproximates fair value due to their short-term maturities. We considerinvestments in highly-liquid money market funds with original maturities ofthree months or less to be cash equivalents.

 

***Restricted Cash***

*** ***

Restrictedcash includes subscription proceeds that are held in a separate account untilthe subscribing investors are admitted as stockholders.  While in an offering, we admit newstockholders at least monthly.  Uponacceptance of stockholders, shares of stock are issued, and we receive thesubscription proceeds.

*** ***

***Mortgage Note Receivable***

*** ***

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

 

Weand our joint ventures have issued mortgage notes and/or mezzanine loans withrespect to certain development projects. Each borrower remains obligated to payprincipal and interest due on the loans regardless of its intent or ability tosell or refinance the property. In addition, these loans do not contain a rightto participate in expected residual profit as defined within Exhibit I ofAICPA Practice Bulletin 1, “Accounting of Real Estate Acquisition, Development,or Construction Arrangements” and EITF 86-21, “Application of the AICPA Noticeto Practitioners Regarding Acquisition, Development, and ConstructionArrangements to Acquisition of an Operating Property.” As a result, we accountfor our Lovers Lane Town Homes Junior Mezzanine Loan, and the joint venturesaccount for all of their loans, as a loan, and not as an investment in realestate pursuant to Exhibit I of AICPA Practice Bulletin 1 and EITF 86-21.

 

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***Escrow Deposits***

 

Wehave refundable amounts deposited in escrow for contracts to potentiallyacquire interests in properties and entities that own real estate anddevelopment projects.  As of December 31,2007, we had $888,000 in escrow deposits related to the Russell Roaddevelopment in Nevada.  As of June 30,2008, we had no escrow deposits.

 

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

 

Weaccount for certain investments in unconsolidated real estate joint venturesusing the equity method of accounting because we exercise significant influenceover, but do not control these entities. These investments are initially recorded at cost and are adjusted forour share of equity in earnings and distributions.  We report our share of income and lossesbased on our ownership interests in the entities.

 

Inconnection with the acquisition of investments in unconsolidated real estatejoint ventures, we incur certain acquisition and advisory fees that are paid toBehringer Harvard Multifamily Advisors I or an affiliate.  These fees arecapitalized as part of our basis in the investments in joint ventures.  Weamortize any excess of the carrying value of our investments in joint venturesover the book value of the underlying equity over the estimated useful lives ofthe underlying operating property, which represents the assets to which theexcess is most clearly related.

*** ***

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

 

Behringer Harvard Multifamily Advisors I or its affiliates wereobligated to pay all of the private offering organization and offering costs.Private offering costs include items such as legal and accounting fees,marketing, promotional and printing costs. Total organization and offeringcosts incurred by Behringer Harvard Multifamily Advisors I in connection with ourprivate offering are approximately $3.5 million and $3.0 million as of June 30,2008 and December 31, 2007, respectively. Our only obligation for thosecosts was to pay a fee to Behringer Harvard Multifamily Advisors I under ouradvisory management agreement with Behringer Harvard Multifamily Advisors I.Under our advisory management agreement, we incurred this fee obligation at therate of 1.5% of the actual gross private offering proceeds (the “O&O Fee”),regardless of whether the actual amount of private offering costs incurred byBehringer Harvard Multifamily Advisors I or its affiliates was higher or lowerthan the O&O Fee. We have recorded the pro-rated share of offering costsembedded in the O&O Fee as an offset to additional paid-in capital in accordancewith Staff Accounting Bulletin (“SAB”) Topic 5.A, Miscellaneous Accounting —Expenses of Offering. Paid and accrued O&O Fees recorded as an offset toadditional paid-in capital as of December 31, 2007 were $1.9 million, and$50,000, respectively. We have not incurred additional O&O Fees subsequentto December 31, 2007 because the private offering terminated on December 28,2007. We have no obligation for private organization and offering costsincurred by Behringer Harvard Multifamily Advisors I and its affiliates inexcess of total amounts due under the O&O Fee. As of June 30, 2008 andDecember 31, 2007, approximately $1.6 million and $1.1 million,respectively, of organization and offering costs had been incurred by BehringerHarvard Multifamily Advisors I and its affiliates for which we had noobligation. The amount of O&O Fees recorded is determined as 1.5% of theactual private offering proceeds received to date; no other amounts areconsidered by management to be probable of reimbursement as of December 31,2007.

 

Behringer Harvard Multifamily Advisors I or its affiliates areobligated to pay all of our organizational expenses. Our only obligation forthese costs is the O&O Fee to Behringer Harvard Multifamily Advisors I asdiscussed above. We have no other obligations for these costs. Our organizationcosts are recorded as an expense in accordance with Statement of Position 98-5,Reporting on the Costs of Start-up Activities. We have recorded the pro-ratedshare of organization expenses embedded in the O&O Fee as an expense. Wehave no obligation for organization costs incurred by Behringer HarvardMultifamily Advisors I and its affiliates in excess of total amounts due underthe O&O Fee, which are approximately $9,500. Accordingly, this amount hasnot been recognized in our consolidated financial statements.

 

Behringer Harvard Multifamily Advisors I or its affiliates areobligated to pay all of our public organization and offering costs. As of June 30,2008, our public offering has not commenced; upon commencement, we intend toamend and restate our advisory management agreement with Behringer HarvardMultifamily Advisors I. Our obligation for these public offering costs isanticipated to be to reimburse Behringer Harvard Multifamily Advisors I 

 

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under a set amount pursuant to the amended and restated advisorymanagement agreement (the “O&O Reimbursement”). Beginning with thecommencement of our public offering, at each balance sheet date we willestimate the total gross public offering proceeds expected to be received underthe public offering and recognize the amount of O&O Reimbursement asdetermined under Statement of Financial Accounting Standards (“SFAS”) No. 5,“Accounting for Contingencies”. We will record the amount of O&OReimbursement at the lower amount of (a) 1.5% of the estimated total grosspublic offering proceeds, or (b) the actual public organization andoffering costs incurred by Behringer Harvard Multifamily Advisors I. Our publicoffering has not commenced and accordingly, no amounts have been recognized inour consolidated financial statements. As of June 30, 2008 and December 31,2007, amounts incurred by Behringer Harvard Multifamily Advisors I for ourpublic organization and offering costs were approximately $2 million and $0.5million, respectively.

 

As of June 30, 2008 and December 31, 2007, the amount of ouraccrued obligation under the O&O Fee for the private offering costs andO&O Reimbursement for the public offering costs has been recognized in ourconsolidated statements in accordance with SFAS No. 5.

 

***Income Taxes***

 

We intend to make an election to be taxed as a real estate investmenttrust (“REIT”) under Sections 856 through 860 of the Internal Revenue Codecommencing with our taxable year ended December 31, 2007.  If we qualify for taxation as a REIT, wegenerally will not be subject to federal corporate income tax to the extent wedistribute our REIT taxable income to our stockholders.  REITs are subject to a number of otherorganizational and operational requirements. Even if we qualify for taxation as a REIT, we may be subject to certainstate and local taxes on our income and property, and federal income and excisetaxes on our undistributed income.

 

We have evaluated the current and deferredincome tax related to the Texas margin tax and we have no significant taxliability or benefit as of June 30, 2008 and December 31, 2007. Inaddition, we recognized no current tax expense for the six months ended June 30,2008 and 2007 related to the Texas margin tax.

 

On January 1, 2007 we adopted the provisions of FASBInterpretation No. 48 Accounting for uncertainty in income taxes – aninterpretation of FASB statement No 109 (“FIN 48”). Under FIN 48, we recognizethe financial statement benefit of an uncertain tax position only afterdetermining that the relevant tax authority would more likely then not sustainthe position following an audit. To date, we are unaware of any uncertain taxpositions.

 

***Stock Based Compensation***

 

Wehave a stock-based incentive award plan for our directors and consultants andfor employees, directors and consultants of our affiliates, and our advisor andits affiliates.  We account for this planunder the modified prospective method of Financial Accounting Standards Board (“FASB”)SFAS No. 123R, “Share-Based Payment.” In the modified prospective method,compensation cost is recognized for all share-based payments granted after theeffective date and for all unvested awards granted prior to the effective date.In accordance with SFAS No. 123R, prior period amounts were not restated.SFAS No. 123R also requires the tax benefits associated with theseshare-based payments to be classified as financing activities in theConsolidated Statements of Cash Flows, rather than as operating cash flows asrequired under previous regulations.

 

OnNovember 14, 2006, we issued a total of 3,000 shares of restricted stockto our independent directors.  On November 28,2007 we issued an additional total of 3,000 shares of restricted stock to ourindependent directors. These restricted share issuances each require a 12 monthservice and vesting period, have no exercise price, and each had an estimatedfair value of approximately $24,000, for a total fair value of $48,000, usingsimilar share prices at the time of $8.15 per share. The fair value of eachissuance is being recognized as compensation expense on a straight-line basis overthe required service period. For the six months ended June 30, 2008 and2007, we recognized stock-based compensation expense of approximately $12,000,respectively.

 

Noother stock-based compensation has been issued.

 

***Concentration of Credit Risk***

 

AtJune 30, 2008 and December 31, 2007 we had cash and cash equivalentsand restricted cash deposited in certain financial institutions in excess offederally insured levels.  We regularlymonitor the financial stability of 

 

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thesefinancial institutions and believe that we are not exposed to any significantcredit risk in cash and cash equivalents or restricted cash.

 

***Earnings per Share***

 

Wecalculate earnings per share in accordance with FAS No. 128, Earnings PerShare. Basic earnings per share is calculated by dividing net earningsavailable to common shares by the weighted-average common shares outstandingduring the period. Diluted earnings per share is calculated similarly, exceptthat it includes the dilutive effect of the assumed exercise of securities,including the effect of shares issuable under our stock-based incentive plans.Upon our adoption of a share redemption plan, the weighted-average commonshares redeemable during the period will be excluded from basic earnings pershare, and included in diluted earnings per share.

 

OnNovember 14, 2006, we issued a total of 3,000 shares of restricted stockto our independent directors, which require a 12 month service and vestingperiod.  On November 28, 2007 weissued an additional total of 3,000 shares of restricted stock to ourindependent directors. The restricted shares have no exercise price and arepresented as issued shares on our balance sheet. However, as a result of theoutstanding performance requirements the number of shares are excluded from ourbasic earnings per share calculation until performance is achieved. At the timesuch shares have a dilutive effect, they will be included in the dilutiveearnings per share calculation.

 

The Behringer Harvard Multifamily REIT I, Inc. 2006 IncentiveAward Plan (“Incentive Award Plan”) was approved by the board of directors on November 14,2006 and by the stockholders on November 15, 2006.  The Incentive Award Plan authorizes the grantof non-qualified and incentive stock options, restricted stock awards,restricted stock units, stock appreciation rights, dividend equivalents andother stock-based awards.  A total of 10,000,000shares have been authorized and reserved for issuance under the Incentive AwardPlan.

 

Asof June 30, 2008 and December 31, 2007 we had 1,000 shares ofconvertible stock issued and outstanding, no shares of preferred stock issuedand outstanding, and had no options to purchase shares of common stockoutstanding.

 

***Reportable Segments***

 

SFASNo. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” establishes standard for reporting and financial and descriptiveinformation about an enterprise’s reportable segments. Our current businessconsists of owning, managing, operating, leasing, acquiring, developing,investing in and disposing of real estate assets. Substantially all of ourconsolidated income is from real estate properties that we own through ajoint-venture, and we account for each joint venture under the equity method ofaccounting. Management evaluates operating performance on an individual jointventure level. However, as each of our joint ventures has similar economiccharacteristics in our financial statements, our joint ventures have beenaggregate into one reportable segment.

** **

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

 

InSeptember 2006, the FASB issued Statement No. 157, “Fair ValueMeasurements” (“SFAS 157”). SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  We adopted the provisions of SFAS 157effective January 1, 2008, and did not have a material effect on ourconsolidated results of operations or financial position.

 

InFebruary 2008, the FASB staff issued Staff Position No. 157-2 “EffectiveDate of FASB Statement No. 157” (“FSP SFAS 157-2”).  FSP SFAS 157-2 delayed the effective date ofSFAS 157 for nonfinancial assets and nonfinancial liabilities, except for itemsthat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually).  Theprovisions of FSP SFAS 157-2 will expire for the Company’s fiscal yearbeginning January 1, 2009.  We arecurrently assessing the effect FSP SFAS 157-2 may have on our financialstatement disclosure.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - Including an Amendment ofFASB Statement No. 115.”  The fairvalue option established by SFAS No. 

 

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159permits all entities to choose to measure eligible items at fair value atspecified election dates.  A businessentity will report unrealized gains and losses on items for which the fairvalue option has been elected in earnings (or another performance indicator ifthe business entity does not report earnings) at each subsequent reportingdate.  SFAS No. 159 is effective forfiscal years beginning after November 15, 2007.  We have not elected the fair valuemeasurement option for any financial assets or liabilities at the present time.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations.”  This Statement replacesSFAS No. 141 “Business Combinations” but retains the fundamentalrequirement that the acquisition method of accounting, or purchase method, beused for all business combinations and for an acquirer to be identified foreach business combination.  ThisStatement is broader in scope than that of Statement 141, which applied only tobusiness combinations in which control was obtained by transferringconsiderations.  SFAS No. 141(R)applies the same method of accounting (the acquisition method) to alltransactions and other events in which one entity obtains control over one ormore other businesses.  This Statementalso makes certain other modifications to Statement 141, including a broaderdefinition of a business and the requirement that acquisition related costs areexpensed as incurred.  This statementapplies to business combinations occurring on or after the beginning of thefirst annual reporting period beginning on or after December 15,2008.  Early adoption is notallowed.  We expect SFAS No. 141(R) willhave a material effect on our accounting for future acquisitions of propertiesif they fall under the definition of a business combination.

 

InDecember 2007, the FASB issued SFAS No. 160, Non-controllingInterests in Consolidated Financial Statements- An amendment of ARB No. 51.  This Statement amends ARB No. 51 toestablish accounting and reporting standards for the non-controlling interestin a subsidiary and for the deconsolidation of a subsidiary. It clarifies thata non-controlling interest in a subsidiary, which is sometimes referred to asminority interest, is an ownership interest in the consolidated entity thatshould be reported as equity in the consolidated financial statements.  Among other requirements, this statementrequires consolidated net income to be reported at amounts that include theamounts attributable to both the parent and the non-controlling interest. Italso requires disclosure, on the face of the consolidated income statement, ofthe amounts of consolidated net income attributable to the parent and to thenon-controlling interest.  This Statementis effective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008 (that is, January 1, 2009,for entities with calendar year-ends). Earlier adoption is prohibited. We arecurrently assessing the effect SFAS No. 160 may have on our consolidated resultsof operations and financial position.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”.  SFASNo. 161 requires entities to provide greater transparency about how andwhy the entity uses derivative instruments, how the instruments and relatedhedged items are accounted for under SFAS No. 133, and how the instrumentsand related hedged items affect the financial position, results of operations,and cash flows of the entity.  SFAS No. 161 is effective forfiscal years beginning after November 15, 2008.  The principalimpact to us would be to expand our disclosures regarding derivativeinstruments.   We had no derivativeinstruments during the six-month period ended June 30, 2008 or the yearended December 31, 2007.

** **

**5.**    Unconsolidated Real EstateJoint Ventures

 

***PGGM Joint Venture***

 

Wehave entered into joint ventures with Behringer Harvard Master Partnership I LP(“Behringer Harvard Master Partnership I”) in which we are the manager. The 1%general partner of Behringer Harvard Master Partnership I is Behringer HarvardInstitutional GP LP, a related party that is indirectly owned by our sponsor,Behringer Harvard Holdings, LLC and the 99% limited partner of BehringerHarvard Master Partnership I is an unaffiliated social work sector pension fundbased in The Netherlands, Stichting Pensioenfonds Zorg en Welijn (“PGGM”).Substantially all of the capital provided to Behringer Harvard MasterPartnership I is from PGGM. We have no direct financial or other ownershipinterest in either of these entities.

 

DuringApril 2007 we entered into commitments for and partially funded, equityinvestments in unconsolidated real estate joint ventures and interest-bearingloans to real estate joint ventures with two separate commercial real estatedevelopers in our real estate development business (the “Two DevelopmentContracts”). These Two Development Contracts were held by two separatesubsidiaries that we fully consolidated in our financial statements (the “TwoSubsidiaries”).

 

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Priorto June 1, 2007, our consolidated financial statements recognized 100% ofthese equity investments in real estate joint ventures as investments inunconsolidated real estate joint ventures, and, 100% of these interest-bearingreal estate loans to real estate joint ventures as mortgage notes receivable,recognizing accrued interest income on a monthly basis.

 

DuringJune 2007, Behringer Harvard Master Partnership I purchased for cashapproximately 45% of the ownership interest in each of our two subsidiariesthat held the Two Development Contracts. Subsequent to June 1, 2007, we nolonger consolidate those two subsidiaries and prospectively recognize ourremaining approximate 55% ownership interest under the equity method ofaccounting as investments in unconsolidated real estate joint ventures (the “Ventures”).We believe the carrying values of the Ventures’ equity interests soldapproximated fair value because of the short duration and lack of change in theentity’s underlying assets—the Two Development Contracts. We recorded BehringerHarvard Master Partnership I’s purchase as a reduction in the carrying value ofour real estate investment balance; no gains or losses were incurred orrecognized.

 

Untilthe maximum funding commitment from the PGGM joint venture of $200 million hasbeen placed, we expect substantially all of our future real estate acquisitionsand real estate under development activities will use the above Venturestructure with the PGGM Joint Venture. The maximum funding commitment from thePGGM Joint Venture may be increased to $300 million.

 

We maychoose other combinations of financing any of our business transactions,including but not limited to using cash, debt, and securing additional jointventure partners for current and/or future real estate projects that may or maynot have a similar structure.

 

Wehave determined that our Ventures are not variable interest entities under FIN46R, and thus have evaluated them for consolidation under SOP 78-9. EachVenture has two partners, and each Venture partner possesses equal substantiveparticipating rights to make decisions which constitute routine occurrences ineach Venture’s ordinary course of business. These decisions include therequirement to approve initial and annual operating plans, initial and annualcapital expenditures, any sales or dispositions of investments, and, any methodof refinancing or raising additional debt or equity capital. As a result ofthese equal substantive participating rights, no single party controls eachVenture; accordingly, we account for each Venture using the equity method ofaccounting pursuant to SOP 78-9.

 

*Mortgagenotes receivable*

 

Asdiscussed above, one of the two Subsidiaries held an interest-bearing mortgageloan (the “Senior Mezzanine Loan”). Prior to the transaction with the PGGMjoint venture, we fully consolidated this subsidiary into our consolidatedfinancial statements and recorded its earnings as interest income. As a resultof the PGGM joint venture purchasing an equity ownership in the subsidiarywhich held the Senior Mezzanine Loan, we deconsolidated that subsidiary as of June 1,2007 and began accounting for our investment as an equity investment inunconsolidated real estate joint ventures under the equity method of accounting.The December 31, 2007 balance of approximately $70,000 was reclassifiedfrom mortgage note receivable to investments in unconsolidated real estatejoint ventures as of June 30, 2008.

 

*Investmentsin unconsolidated real estate joint ventures*

 

Wehave established one unconsolidated real estate joint venture for each separateproject or property. Each of these unconsolidated real estate joint venturesown 100% of the voting equity interest in one subsidiary REIT and substantiallyall business is conducted through its subsidiary REIT. Each subsidiary REIT hasmade equity investments and/or mortgage loans to entities that own theparticular real estate project (the “Project Entities”). Prior to our equityinvestments, the Project Entities were owned by the commercial developers andwere organized to own, construct, and finance only one particular real estateproject. The Project Entities are not consolidated in our financial statements.

 

Ourinterests in the Ventures are recorded as investments in unconsolidated realestate joint ventures and use the equity method of accounting. Our balancesinclude our deferred charges of approximately $4.0 million, net ofamortization. The following presents the condensed combined balance sheet dataof the Ventures:

 

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| ** **                                                | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| **Balance sheet data:**                         | ** ** | **2008**          | ** **  | **2007**              | ** ** |
|                                                      |       |              |        |                  |       |
| Cash and  restricted cash                                 |       | $                 | 1,775,285   |                  | $          | 1,796,624 |   |
| Accounts  receivable                                      |       | 29,186            |        | 385,004               |       |
| Accrued interest  receivable                              |       | 2,057,865         |        | 686,807               |       |
| Mortgage notes  receivable                                |       | 97,874,567        |        | 76,378,734            |       |
| Investments in  unconsolidated real estate joint ventures |       | 25,133,653        |        | 14,981,406            |       |
| Deferred  financing costs and other assets, net           |       | 500,839           |        | 472,415               |       |
| Land and  buildings, net                                  |       | 31,804,530        |        | 32,813,280            |       |
| Total assets                                              |       | $                 | 159,175,925 |                  | $          | 127,514,270 |   |
|                                                      |       |              |        |                  |       |
| Accrued liabilities                                       |       | 357,488           |        | 312,881               |       |
| Mortgage note  payable                                    |       | 23,000,000        |        | 23,000,000            |       |
| Other  liabilities                                        |       | 109,315           |        | 103,511               |       |
| Minority  interest                                        |       | 1,910,944         |        | 2,085,194             |       |
| Members’ equity                                      |       | 133,798,178       |        | 102,012,684           |       |
| Total  liabilities and members’ equity               |       | $                 | 159,175,925 |                  | $          | 127,514,270 |   |

 

A wholly-owned subsidiaryof one of our Ventures owns The Reserve at Johns Creek Walk, currently our onlyoperating property. This subsidiary consolidates The Reserve at Johns CreekWalk and has recorded a minority interest for the remaining 20% equityownership. This subsidiary and its property, including an operating receiptslock-box account, serve as collateral for a non-recourse bank loan of $23million from an unaffiliated lender. This bank loan was entered into during August 2007,matures in March 2013, and bears interest at a rate of 6.461%. The lenderhas no recourse to the Venture or us, only to the subsidiary and its property.Breaching the loan agreement’s restrictions on encumbrances, sale, transfer, orrefinancing of the property could constitute an event of default and increasethe interest rate by 5%; uncured events of default can accelerate the loan’smaturity date. No events of default have occurred. As a result of the Ventureconsolidating this subsidiary, the bank loan and minority interest arepresented in the above combined balance sheet data as mortgage note payable andminority interest, respectively.

 

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The following presentsthe combined income statement data of the Ventures:

 
| ** **                         | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **June 30,**                                  | ** ** | **June 30,**                                | ** ** |
| ** **                         | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                               |       |                                               |       |                                             |       |   |   |   |   |
| **Revenues:**                      |       |                                               |       |                                             |       |   |   |   |   |
| Rent                               |       | $                                                  | 766,446    |                                             | $          | — |   | $ | 1,474,009 |   | $ | — |   |
| Interest                           |       | 2,385,419                                          |       | 26,453                                           |       | 4,490,738 |   | 26,453 |   |
|                               |       | 3,151,865                                          |       | 26,453                                           |       | 5,964,747 |   | 26,453 |   |
|                               |       |                                               |       |                                             |       |   |   |   |   |
| **Operating  costs and expenses:** |       |                                               |       |                                             |       |   |   |   |   |
| General and  operating             |       | 194,589                                            |       | 685                                              |       | 655,263 |   | 685 |   |
| Real estate  taxes                 |       | 110,000                                            |       | —                                           |       | 200,000 |   | — |   |
| Interest expense                   |       | 375,635                                            |       | —                                           |       | 751,271 |   | — |   |
| Depreciation                       |       | 512,150                                            |       | —                                           |       | 1,033,212 |   | — |   |
|                               |       | 1,192,374                                          |       | 685                                              |       | 2,639,746 |   | 685 |   |
|                               |       |                                               |       |                                             |       |   |   |   |   |
| Minority  interest                 |       | (82,726                                            | )          | —                                           |       | (174,249 | ) | — |   |
| **Net income**                     |       | $                                                  | 2,042,217  |                                             | $          | 25,768 |   | $ | 3,499,250 |   | $ | 25,768 |   |

 

Includedin our equity in earnings of unconsolidated real estate joint ventureinvestments for the three months ended June 30, 2008 and 2007 is our shareof the above Ventures’ net income in the amount of $1,092,875 and $30,385,respectively. Net operating losses attributable to the interest held by theminority shareholder were $82,726 and $0, respectively.

 

Includedin our equity in earnings of unconsolidated real estate joint ventureinvestments for the six months ended June 30, 2008 and 2007 is our shareof the above Ventures’ net income in the amount of $1,857,571 and $30,385,respectively. Net operating losses attributable to the interest held by theminority shareholder were $174,249 and $0, respectively.

 

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*TheVentures’ Loans to and Equity investments in Project Entities*

 

Includedin the Ventures financial statements are loans to and equity investments in theProject Entities. Below are the Ventures’ uncollected loan principal balanceand equity investments in the Project Entities, exclusive of loan commitmentfees received as of June 30, 2008 and December 31, 2007:

 
| **Name of development and related investments**                                        | ** ** | **Location**         | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                                                                                            |       |                 |       |                    |       |                        |       |
| Lovers Lane  Townhomes                                                                                          |       | Dallas, TX           |       |                    |       |                        |       |
| Interest-bearing  Senior Mezzanine Loan;  10% annual  interest; principal and interest due April 2012 |       |                 |       | $                       | 4,519,828  |                        | $          | 2,994,719 |   |
|                                                                                                            |       |                 |       |                    |       |                        |       |
| The Eclipse                                                                                                     |       | Houston, TX          |       |                    |       |                        |       |
| Interest-bearing  loan; 9.5% annual interest;                                                                   |       |                 |       |                    |       |                        |       |
| principal due  April 2012                                                                                  |       |                 |       | 8,147,435               |       | 3,486,564                   |       |
|                                                                                                            |       |                 |       |                    |       |                        |       |
| Alexan St. Rose                                                                                                 |       | Henderson, NV        |       |                    |       |                        |       |
| Interest-bearing  loan; 10% annual interest;                                                                    |       |                 |       |                    |       |                        |       |
| principal due  December 2012                                                                               |       |                 |       | 4,691,255               |       | 4,691,255                   |       |
|                                                                                                            |       |                 |       |                    |       |                        |       |
| Fairfield at  Bailey’s Crossing                                                                            |       | Fairfax County, VA   |       |                    |       |                        |       |
| Interest-bearing  loan; 9.5% annual interest;                                                                   |       |                 |       | 22,138,172              |       | 22,138,172                  |       |
| principal due  July 2012                                                                                   |       |                 |       |                    |       |                        |       |
|                                                                                                            |       |                 |       |                    |       |                        |       |
| Tower 55 Hundred                                                                                                |       | Arlington County, VA |       |                    |       |                        |       |
| Interest-bearing  loan; 9.5% annual interest;                                                                   |       |                 |       |                    |       |                        |       |
| principal due  October 2012                                                                                |       |                 |       | 19,954,854              |       | 19,954,854                  |       |
|                                                                                                            |       |                 |       |                    |       |                        |       |
| Fairfield at  Cameron House                                                                                     |       | Silver Spring, MD    |       |                    |       |                        |       |
| Interest-bearing  loan; 9.5% annual interest;                                                                   |       |                 |       |                    |       |                        |       |
| principal due  December 2012                                                                               |       |                 |       | 17,458,257              |       | 12,416,760                  |       |
|                                                                                                            |       |                 |       |                    |       |                        |       |
| Satori                                                                                                          |       | Broward County, FL   |       |                    |       |                        |       |
| Interest-bearing  loan; 10% annual interest;                                                                    |       |                 |       |                    |       |                        |       |
| principal due  October 2012                                                                                |       |                 |       | 14,775,000              |       | 12,432,034                  |       |
|                                                                                                            |       |                 |       |                    |       |                        |       |
| Alexan Prospect                                                                                                 |       | Denver, CO           |       |                    |       |                        |       |
| Interest-bearing  loan; 10% annual interest;                                                                    |       |                 |       |                    |       |                        |       |
| principal due  April 2013                                                                                  |       |                 |       | 4,854,474               |       | —                      |       |
|                                                                                                            |       |                 |       |                    |       |                        |       |
| Alexan Russell  Lofts                                                                                           |       | Clark County, NV     |       |                    |       |                        |       |
| Interest-bearing  loan; 10% annual interest;                                                                    |       |                 |       |                    |       |                        |       |
| principal due  June 2013                                                                                   |       |                 |       | 3,709,348               |       | —                      |       |
|                                                                                                            |       |                 |       |                    |       |                        |       |
| The Ventures’  total loans to unconsolidated real estate joint ventures                                    |       |                 |       | 100,248,623             |       | 78,114,358                  |       |
|                                                                                                            |       |                 |       |                    |       |                        |       |
| The Eclipse                                                                                                     |       | Houston, TX          |       |                    |       |                        |       |
| Limited  partnership interest of 49.6%                                                                          |       |                 |       | 4,023,717               |       | 4,023,717                   |       |
|                                                                                                            |       |                 |       |                    |       |                        |       |
| Tower 55 Hundred                                                                                                |       | Arlington County, VA |       |                    |       |                        |       |
| Limited  partnership interest of 50%                                                                            |       |                 |       | 3,552,938               |       | 3,552,938                   |       |
|                                                                                                            |       |                 |       |                    |       |                        |       |
| Satori                                                                                                          |       | Broward County, FL   |       |                    |       |                        |       |
| Limited  partnership interest of 50%                                                                            |       |                 |       | 7,350,000               |       | 7,350,000                   |       |
|                                                                                                                 |            |                      |            |                         |            |                             |            |  |  |

 

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| Alexan Prospect                                                                           |   | Denver, CO       |   |       |        |       |   |
|-------------------------------------------------------------------------------------------|--------|------------------|--------|------------|-------------|------------|--------|
| Limited  partnership interest of 50%                                                      |   |             |   | 7,301,115  |        | —     |   |
|                                                                                      |   |             |   |       |        |       |   |
| Alexan Russell  Lofts                                                                     |   | Clark County, NV |   |       |        |       |   |
| Limited  partnership interest of 50%                                                      |   |             |   | 2,905,883  |        | —     |   |
|                                                                                      |   |             |   |       |        |       |   |
| The Ventures’  total equity investments in unconsolidated real estate joint ventures |   |             |   | 25,133,653 |        | 14,926,655 |   |
|                                                                                      |   |             |   |       |        |       |   |
| The Ventures’  total loans and equity investments                                    |   |             |   | $          | 125,382,276 |       | $      | 93,041,013 |   |
|                                                                                           |        |                  |        |            |             |            |        |  |  |

 

Our involvement with eachof the Project Entities began at the time we committed to making ourinvestments, and our potential loss exposure is limited to the funded portionof our commitments. The Project Entities also owe amounts under other mortgageloans, bank loans, and other liabilities balances—these are obligations of theProject Entities. Neither we nor the Ventures have a primary or secondaryobligation on those obligations of the Project Entities. The following tableincludes estimated information about the nature and size of the activities ofthe Project Entities:

 

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| **Project Name / Location  Description**                                                                                                                                      | ** ** | **Estimated Project  Completion Date** | ** ** | **Construction Cost  (millions)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------|------------|
|                                                                                                                                                                                         |       |                                             |       |                                   |       |
| Lovers Lane  Townhomes / Dallas, Texas                                                                                                                                                       |       | 1st Quarter  2010                                |       | $                                      | 38.7       |   |
| Previously developed land which is in process of  being demolished and is expected to be a 2 story townhome community with  approximately 149 rental units                                   |       |                                             |       |                                   |       |
|                                                                                                                                                                                         |       |                                             |       |                                   |       |
| The Eclipse / Houston, Texas                                                                                                                                                                 |       | 4th Quarter  2008                                |       | 35.7                                   |       |
| Undeveloped land expected to be a 3 story apartment  community with approximately 330 rental units                                                                                           |       |                                             |       |                                   |       |
|                                                                                                                                                                                         |       |                                             |       |                                   |       |
| Fairfield at Baileys Crossing / Fairfax County,  Virginia                                                                                                                                    |       | 1st Quarter 2010                                 |       | 147.6                                  |       |
| Undeveloped land, expected to be a 3, 4 and 7 story  structure apartment community with approximately 414 rental units and an  attached parking structure                                    |       |                                             |       |                                   |       |
|                                                                                                                                                                                         |       |                                             |       |                                   |       |
| Alexan St. Rose / Clark County, Virginia                                                                                                                                                     |       | 3rd Quarter  2010                                |       | 75.7                                   |       |
| Undeveloped land, expected to be a 3 story apartment  community with approximately 430 rental units                                                                                          |       |                                             |       |                                   |       |
|                                                                                                                                                                                         |       |                                             |       |                                   |       |
| The Reserve at Johns Creek Walk / Fulton County,  Georgia                                                                                                                                    |       | Operating                                        |       | 33.5                                   |       |
| A 3 story operating apartment community with 210  rental units within an overall mixed-use development containing retail and  for-sale townhomes                                             |       |                                             |       |                                   |       |
|                                                                                                                                                                                         |       |                                             |       |                                   |       |
| Satori / Broward County, Florida                                                                                                                                                             |       | 2nd Quarter  2009                                |       | 98.5                                   |       |
| Previously developed land which has been demolished  and is expected to be a 3 and 9 story structure apartment community with  approximately 279 rental units                                |       |                                             |       |                                   |       |
|                                                                                                                                                                                         |       |                                             |       |                                   |       |
| Tower 55 Hundred / Arlington County, Virginia                                                                                                                                                |       | 3rd Quarter  2009                                |       | 99.8                                   |       |
| Previously developed land which has been demolished  and is expected to be a 10 story high-rise apartment community with  approximately 234 rental units and an underground parking facility |       |                                             |       |                                   |       |
|                                                                                                                                                                                         |       |                                             |       |                                   |       |
| Fairfield at Cameron House / Silver Spring, Maryland                                                                                                                                         |       | 1st Quarter  2010                                |       | 128.9                                  |       |
| Previously developed land which has been demolished  and is expected to be a 15 story high-rise apartment community with  approximately 325 rental units                                     |       |                                             |       |                                   |       |
|                                                                                                                                                                                         |       |                                             |       |                                   |       |
| Alexan Prospect / Denver, Colorado                                                                                                                                                           |       | 3rd Quarter  2010                                |       | 94.8                                   |       |
| Undeveloped land expected to be a 4 story apartment  structure with approximately 400 units                                                                                                  |       |                                             |       |                                   |       |
|                                                                                                                                                                                         |       |                                             |       |                                   |       |
| Alexan Russell Lofts / Clark County, Nevada                                                                                                                                                  |       | 4th Quarter  2009                                |       | 29.1                                   |       |
| Undeveloped land expected to be a 3 story apartment  structure with approximately 168 units                                                                                                  |       |                                             |       |                                   |       |
|                                                                                                                                                                                              |            |                                                  |            |                                        |            |  |

 

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*Disclosureof summarized financial information of the Project Entities*

 

The Project Entities own development projects and hadno operational income or loss. The following presents the combined unauditedsummarized financial information of all Project Entities:

 
| ** **                           | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Cash                                 |       | $                       | 1,535,335  |                        | $          | 4,063,022 |   |
| Prepaid taxes  and other assets      |       | 287,521                 |       | 110,847                     |       |
| Land and  construction in progress   |       | 283,387,979             |       | 197,952,435                 |       |
| Accounts payable  and other          |       | 12,827,108              |       | 32,826,504                  |       |
| Mortgage loans  and interest payable |       | 208,061,705             |       | 123,786,136                 |       |
|                                      |            |                         |            |                             |            |  |  |

 

**6.     Credit Facility with Behringer Harvard Operating Partnership ILP**

 

On April 2,2007, our operating partnership, Behringer Harvard Multifamily OP I, enteredinto a one-year credit facility with the operating partnership of BehringerHarvard REIT I, Inc., Behringer Harvard Operating Partnership I LP (the “CreditFacility”). The Credit Facility was terminated on December 20, 2007.During 2007 we paid cash for interest and other fees of approximately $925,000.As of June 30, 2008 and December 31, 2007, our investments inunconsolidated real estate joint ventures include approximately $283,000 ofcapitalized interest costs.

 

**7.     Stockholders Equity**

 

***Capitalization***

 

As of June 30,2008 and December 31, 2007, we had 14,267,364 and 14,272,919 shares ofcommon stock outstanding, respectively, including 6,000 shares of restrictedstock issued to our independent directors for no cash, and 24,969 shares ownedby Behringer Harvard Holdings for cash of $200,001. As of December 31,2006, we had 4,249 shares of our common stock outstanding, including 3,000shares of restricted stock issued to our independent directors for no cash, and1,249 shares owned by Behringer Harvard Holdings for cash of $10,004. As of June 30,2008 and December 31, 2007, we had 1,000 shares of convertible stock andno shares of preferred stock issued and outstanding.

 

In2006, Behringer Harvard Multifamily Advisors I purchased a special limitedpartnership interest in our operating partnership, Behringer HarvardMultifamily OP I, for cash of $10,000 (the “Incentive Unit”). This IncentiveUnit entitled the special limited partner to receive an amount when certainevents occur, including the sale of our assets, whether directly or through thesale of our company, the listing of our common stock for trading on a nationalsecurities exchange, a termination of the advisory management agreement, or achange in control, if such an amount is available after stockholders havereceived distributions equal to or greater than the sum of their aggregatecapital contributions plus a 7% annual, cumulative, non-compounded return onsuch capital contributions. The Incentive Unit was then convertible into anequivalent value of partnership units of Behringer Harvard Multifamily OP Ibased on this available amount plus the initial $10,000 contribution. After theIncentive Unit converted to partnership units, those partnership units would beconvertible into cash or shares of our common stock. Management has reviewedthe terms of the underlying shares and determined the fair value under GAAPapproximated the nominal value paid for the shares.

 

On November 28,2007 the Incentive Unit was canceled and the $10,000 cash purchase price wasreturned to Behringer Harvard Multifamily Advisors I. Concurrently, BehringerHarvard Multifamily REIT I, Inc. sold 1,000 shares of non-participating,non-voting convertible stock to Behringer Harvard Multifamily Advisors I for$1,000. Management has reviewed the terms of the underlying shares anddetermined the fair value under GAAP approximated the nominal value paid forthe shares.

 

Uponthe occurrence of (A) our making total distributions on the thenoutstanding shares of our common stock equal to the issue price of those shares(that is, the price paid for those shares) plus a 7% cumulative,non-compounded, annual return on the issue price of those outstanding shares;or (B) the listing of the shares of common stock for trading on a nationalsecurities exchange, each outstanding share of our convertible stock willconvert into the number of shares of our common stock described below unlessour advisory management agreement with 

 

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Behringer HarvardMultifamily Advisors I has been terminated or not renewed on account of amaterial breach by our advisor (each of these two events is a “Triggering Event”).

 

Uponthe occurrence of a Triggering Event, each share of convertible stock shall beconverted into a number of shares of common stock equal to 1/1000 of thequotient of (A) 15% of the amount, if any, by which (1) the value ofthe company (determined in accordance with the provisions of our charter) as ofthe date of the event triggering the conversion plus the total distributionspaid to our stockholders through such date on the then outstanding shares ofour common stock exceeds (2) the sum of the aggregate issue price of thoseoutstanding shares plus a 7% cumulative, non-compounded, annual return on theissue price of those outstanding shares as of the date of the event triggeringthe conversion, divided by (B) the value of the company divided by thenumber of outstanding shares of common stock, in each case, as of the date ofthe event triggering the conversion. In the case of conversion upon the listingof our shares, the conversion of the convertible stock will not occur until the31st trading day after the date of such listing.

 

Uponthe occurrence of the termination or expiration without renewal of our advisorymanagement agreement with Behringer Harvard Multifamily Advisors I, other thana termination by us because of a material breach by our advisor, eachoutstanding share of our convertible stock will become convertible (but willnot convert) into the number of shares of our common stock equal to 1/1000 ofthe quotient of (A) 15% of the amount, if any, by which (1) the valueof the company (determined in accordance with the provisions of our charter)plus the total distributions paid through the date of the termination orexpiration of the advisory management agreement on the then outstanding sharesof our common stock exceeds (2) the sum of the aggregate issue price ofthose outstanding shares plus a 7% cumulative, non-compounded, annual return onthe issue price of those outstanding shares, divided by (B) the value ofthe company as of the date of the termination or expiration of the advisorymanagement agreement divided by the number of outstanding shares of commonstock as of such date. Thereafter, the convertible stock will automatically convertinto the applicable number of shares of common stock upon the earlier to occurof (1) the date we have made total distributions on the then outstandingshares of our common stock equal to the issue price of those shares plus a 7%cumulative, non-compounded, annual return on the issue price of thoseoutstanding shares or (2) the listing of the common stock for trading on anational securities exchange; provided that the value of the company plus totaldistributions paid to holders of our then outstanding common stock through thedate of listing exceeds the issue price of those shares plus a 7% cumulative,non-compounded, annual return on the issue price of those outstanding shares.

 

Priorto the commencement of our Public Offering, we intend to repurchase theoutstanding convertible stock described above from our advisor and reissue suchconvertible stock with new terms. The new terms will change how we calculatethe conversion of our convertible stock if our advisory management agreementwith Behringer Harvard Multifamily Advisors I expires without renewal or isterminated (other than because of a material breach by our advisor). Currently,the number of shares of common stock into which the convertible stock convertsis calculated at the time the advisory management agreement terminates. If, atthat time, our company value plus prior distributions are not sufficient tomeet the above-described 7% return threshold, then the convertible stock wouldbe of no value. Although the conversion ratio is set at the time the advisorymanagement agreement terminates, the actual conversion will not occur until aTriggering Event occurs.

 

Asamended, following the termination of the advisory management agreement, thenumber of shares of common stock into which the convertible stock would convertwould be determined on a Triggering Event instead of at the time the advisorymanagement agreement terminates. If it is determined that the convertible stockis convertible into shares of common stock, the actual number of shares ofcommon stock to be received upon conversion would be reduced from that providedin our current charter so that the holder of the convertible stock would onlybe entitled to a prorated portion of common stock based on the percentage oftime that we were advised by Behringer Harvard Multifamily Advisors I.

 

***Distributions***

 

We didnot declare or pay any distributions prior to June 6, 2007.

 

On June 6, 2007, theBoard of Directors authorized the payment of cash dividends (each a “DailyDistribution”) to stockholders of record as of the close of business on eachday of the period commencing on July 1, 2007 and ending on August 31,2007 (each a “Record Date”), with each Daily Distribution payable as of eachRecord Date to 

 

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be $0.000986301 per share of common stock, which isequivalent to an annual distribution rate of four percent (4%) on a share ofcommon stock purchased for nine dollars ($9.00). The Daily Distribution foreach day of each month shall be paid by the Company on or before the sixteenthday of the following month.

 

On August 28, 2007,the Board of Directors also authorized the payment of cash dividends (each a “DailyDistribution”) to stockholders of record as of the close of business on eachday of the period commencing on September 1, 2007 and ending on November 30,2007 (each a “Record Date”), with each Daily Distribution payable as of eachRecord Date to be $0.000986301 per share of common stock, which is equivalentto an annual distribution rate of four percent (4%) on a share of common stockpurchased for nine dollars ($9.00). The Daily Distribution for each day of eachmonth shall be paid by the Company on or before the sixteenth day of thefollowing month.

 

On November 28,2007 the Board of Directors also authorized the payment of cash dividends (eacha “Daily Distribution”) to stockholders of record as of the close of businesson each day of the period commencing on December 1, 2007 and ending on February 29,2008 (each a “Record Date”), with each Daily Distribution payable as of eachRecord Date to be $0.001013699 per share of common stock, which is equivalentto an annual distribution rate of four percent (4%) on a share of common stockpurchased for nine dollars ($9.25). The Daily Distribution for each day of eachmonth shall be paid by the Company on or before the sixteenth day of thefollowing month.

 

On February 11,2008 the Board of Directors also authorized the payment of cash dividends (eacha “Daily Distribution”) to stockholders of record as of the close of businesson each day of the period commencing on March 1, 2008 and ending on March 31,2008 (each a “Record Date”), with each Daily Distribution payable as of eachRecord Date to be $0.001013699 per share of common stock, which is equivalentto an annual distribution rate of four percent (4%) on a share of common stockpurchased for nine dollars ($9.25). The Daily Distribution for each day of eachmonth shall be paid by the Company on or before the sixteenth day of thefollowing month.

 

On March 14,2008 the Board of Directors also authorized the payment of cash dividends (eacha “Daily Distribution”) to stockholders of record as of the close of businesson each day of the period commencing on April 1, 2008 and ending on May 31,2008 (each a “Record Date”), with each Daily Distribution payable as of eachRecord Date to be $0.001013699 per share of common stock, which is equivalentto an annual distribution rate of four percent (4%) on a share of common stockpurchased for nine dollars ($9.25). The Daily Distribution for each day of eachmonth shall be paid by the Company on or before the sixteenth day of thefollowing month.

 

On May 14,2008 the Board of Directors also authorized the payment of cash dividends (eacha “Daily Distribution”) to stockholders of record as of the close of businesson each day of the period commencing on June 1, 2008 and ending on June 30,2008 (each a “Record Date”), with each Daily Distribution payable as of eachRecord Date to be $0.001013699 per share of common stock, which is equivalentto an annual distribution rate of four percent (4%) on a share of common stockpurchased for nine dollars ($9.25). The Daily Distribution for each day of eachmonth shall be paid by the Company on or before the sixteenth day of thefollowing month.

 

On June 25,2008 the Board of Directors also authorized the payment of cash dividends (eacha “Daily Distribution”) to stockholders of record as of the close of businesson each day of the period commencing on July 1, 2008 and ending on August 31,2008 (each a “Record Date”), with each Daily Distribution payable as of eachRecord Date to be $0.001013699 per share of common stock, which is equivalentto an annual distribution rate of four percent (4%) on a share of common stockpurchased for nine dollars ($9.25). The Daily Distribution for each day of eachmonth shall be paid by the Company on or before the sixteenth day of thefollowing month.

 

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| ** **     | ** ** | **Distributions** | ** ** |
|----------------|------------|-------------------|------------|
| **2008**       | ** ** | **Declared**      | ** ** | **Paid** | ** ** |
| Second Quarter |       | $                 | 1,330,847  |   | $ | 1,330,802 |   |
| First Quarter  |       | 1,301,225         |       | 1,279,428 |   |
|           |       | $                 | 2,632,072  |   | $ | 2,610,230 |   |
|           |       |              |       |   |   |
| **2007**       | ** ** | ** **        | ** ** | ** ** | ** ** |
| Fourth Quarter |       | $                 | 730,682    |   | $ | 396,450 |   |
| Third Quarter  |       | 196,590           |       | 118,764 |   |
| Second Quarter |       | —            |       | — |   |
| First Quarter  |       | —            |       | — |   |
|           |       | $                 | 927,272    |   | $ | 515,214 |   |

 

**8.    Commitments and Contingencies**

 

At June 30,2008, the Ventures held contracts for equity investments and/or mortgage loanswith a total commitment value of approximately $158.2 million and the Ventureshave currently funded approximately $134.6 million. The Ventures will require additionalcapital from us and Behringer Harvard Master Partnership I in order to fund theremaining $23.6 million equity investment and/or mortgage loan commitments. TheVentures have also issued contingent sell options to the Project Entities. Inaddition, we hold The Lovers Lane Townhomes Junior Mezzanine Loan with a totalcommitment value of approximately $2.2 million and have currently fundedapproximately $1,000; the total commitment value was reduced in April 2008.

 

Theremaining commitments on the real estate investment development by the Ventureswill be funded as actual construction progresses. Estimated future payments areas follows, as of June 30, 2008:

 
| ** ** | ** ** | **The Ventures’  total unfunded  commitments** | ** ** | **The Ventures’  other contingent  obligations under  sell options** | ** ** | **Our estimated  portion of the  Ventures’ unfunded  commitments and  contingent options** | ** ** | **Our unfunded  commitment on  our mortgage  loan** | ** ** | **Our estimated  total** | ** ** |
|------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------|------------|
| 2008       |       | $                                                             | 11,794,800 |                                                                                          | $          | —                                                                                                                        |       | $                                                                  | 6,487,140  |                          | $          | 1,091,466 |   | $ | 7,578,606 |   |
| 2009       |       | 11,794,800                                                    |       | 11,800,000                                                                                    |       | 12,977,140                                                                                                                    |       | 1,091,466                                                          |       | 14,068,606                    |       |
| 2010       |       | —                                                        |       | 43,976,450                                                                                    |       | 24,187,048                                                                                                                    |       | —                                                             |       | 24,187,048                    |       |
|       |       |                                                          |       |                                                                                          |       |                                                                                                                          |       |                                                               |       |                          |       |
| Total      |       | $                                                             | 23,589,600 |                                                                                          | $          | 55,776,450                                                                                                                    |       | $                                                                  | 43,651,328 |                          | $          | 2,182,932 |   | $ | 45,834,260 |   |

 

At December 31,2007, the Ventures held contracts for equity investments and/or mortgage loanswith a total commitment value of approximately $126.5 million and the Ventureshave currently funded approximately $102.3 million. The Ventures will requireadditional capital from us and Behringer Harvard Master Partnership I in orderto fund the remaining $24.2 million equity investment and/or mortgage loancommitments. The Ventures have also issued contingent sell options to theProject Entities. In addition, we hold The Lovers Lane Townhomes JuniorMezzanine Loan with a total commitment value of approximately $3.2 million andhave currently funded approximately $1,000.

 

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The remaining commitments on the real estateinvestment development by the Ventures will be funded as actual constructionprogresses. Estimated future payments are as follows, as of December 31,2007:

 

 
| ** ** | ** ** | **The Ventures’  total unfunded  commitments** | ** ** | **The Ventures’  other contingent  obligations under  sell options** | ** ** | **Our estimated  portion of the  Ventures’ unfunded  commitments and  contingent options** | ** ** | **Our unfunded  commitment on  our mortgage  loan** | ** ** | **Our estimated  total** | ** ** |
|------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------|------------|
| 2008       |       | $                                                             | 24,229,508 |                                                                                          | $          | —                                                                                                                        |       | $                                                                  | 13,326,229 |                          | $          | 1,610,102 |   | $ | 14,936,331 |   |
| 2009       |       | —                                                        |       | 61,545,395                                                                                    |       | 33,849,967                                                                                                                    |       | 1,610,102                                                          |       | 35,460,069                    |       |
|       |       |                                                          |       |                                                                                          |       |                                                                                                                          |       |                                                               |       |                          |       |
| Total      |       | $                                                             | 24,229,508 |                                                                                          | $          | 61,545,395                                                                                                                    |       | $                                                                  | 47,176,196 |                          | $          | 3,220,204 |   | $ | 50,396,400 |   |

 

*The Ventures’ other contingent obligations under sell options issued*

 

The Venture which owns investments in the Fairfieldat Baileys Crossing Project Entity has issued a contingent sell option to anunaffiliated equity investor in the Project Entity. This option is currentlynot exercisable and cannot be exercised until development is complete and theproperty has been certified for occupancy. If the sell option becomesexercisable, it will expire after three years. If exercised, the Venture willbe required to purchase their interest, after it is free of all liens, claims,and encumbrances, for cash at a price to be negotiated in the future usingmarket values at the time of exercise. This investor’s equity balance wasapproximately $11.8 million at both June 30, 2008 and December 31,2007, and has been included in the above tables as the estimated exercise pricedue. Option exercise is dependent upon construction and may become exercisablein 2009 or 2010.

 

The Venture which owns investments in the Fairfieldat Cameron House Project Entity has issued a contingent sell option to anunaffiliated equity investor in the Project Entity. This option is currentlynot exercisable and cannot be exercised until development is complete and the propertyhas been certified for occupancy. If the sell option becomes exercisable, itwill expire after three years. If exercised, the Venture will be required topurchase their interest, after it is free of all liens, claims, andencumbrances, for cash at a price to be negotiated in the future using marketvalues at the time of exercise. This investor’s equity balance is approximately$10.3 million at June 30, 2008 and December 31, 2007, and has beenincluded in the above tables as the estimated exercise price due. Optionexercise is dependent upon construction and may become exercisable in 2009 or2010.

 

The Venture which owns investments in the LoversLane Townhomes Project Entity has issued a contingent sell option to theProject Entity. This option is currently not exercisable and cannot beexercised until development is complete and the property has been certified foroccupancy. If this sell option becomes exercisable, it will expire after 30days. If exercised, the Venture will be required to purchase The Lovers LaneTownhomes, after it is free of all liens, claims, and encumbrances, for cash inan amount equal to the lower of (a) actual project costs plus interestcharges, or (b) the maximum budgeted cost amount plus interest charges.The estimated exercise price of approximately $33.7 million has been includedin the above tables as the estimated amount due. Option exercise is dependentupon construction and may become exercisable in 2009 or 2010. If the Venturewere to purchase the property, we estimate the Venture’s total cash outlay willapproximate $6.5 million after considering the application of estimatedproceeds received from an expected senior property mortgage and any unpaidprincipal and interest on the Lovers Lane Townhome mezzanine loans issued by usand the Venture.

 

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

 

We have no employees and are supported by relatedparty arrangements. Our advisor and certain of its affiliates earn fees andcompensation in connection with our offering and in connection with the acquisition,management, and sale of our assets.

 

Behringer Securities LP (“Behringer Securities”),our dealer manager for the Offering, receives a commission of up to 7% of grossoffering proceeds before reallowance of commissions earned by participating broker-dealers.In addition, up to 2.5% of gross offering proceeds before reallowance toparticipating broker-dealers are paid to 

 

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BehringerSecurities as a dealer manager fee. Behringer Securities will reallow all ofits commissions to participating broker-dealers. Behringer Securities may,pursuant to separately negotiated agreements, reallow a portion of its dealermanager fee in an aggregate amount up to 1.5% of gross offering proceeds toparticipating broker-dealers for marketing fees, including the cost of bonafide training and educational meetings, and due diligence expensereimbursements and no more than 0.5% of gross offering proceeds for bona fide,separately invoiced due diligence expenses incurred as fees, costs or otherexpenses from third parties. We began receiving proceeds from our privateoffering in April 2007 and terminated the private offering on December 28,2007. For the three and six months ended June 30, 2007, we sold 1.6million shares and therefore Behringer Harvard Multifamily Advisors I earned,commissions and dealer manager fees of $868,000 and $361,000, respectively. Forthe period from April 1, 2007 through December 31, 2007, BehringerHarvard Multifamily Advisors I earned commissions and dealer manager fees of$7.9 million and $3.2 million, respectively. We have sold no additional sharesin 2008.

 

All organization and offering expenses (excludingselling commissions and the dealer manager fee) are incurred and paid byBehringer Harvard Multifamily Advisors I or its affiliates. As related to thePrivate Offering, we paid Behringer Harvard Multifamily Advisors I a fixed rateof 1.5% of gross offering proceeds, regardless of whether the actual amount oforganization and offering expenses is greater or less than 1.5% of grossoffering proceeds. We began receiving proceeds from our private offering in April 2007and terminated the private offering on December 28, 2007. For the threeand six months ended June 30, 2007, Behringer Harvard Multifamily AdvisorsI earned $216,000 for organization and offering expenses. For the period from April 1,2007 through December 31, 2007, Behringer Harvard Multifamily Advisors Iearned organization and offering expenses of $1.9 million. We have sold noadditional shares in 2008.

 

Included in general and administrative expense forthe three and six months ended June 30, 2008, are $88,000 and $44,000,respectively, for such expenses incurred on our behalf under an agreement withBehringer Harvard Multifamily Advisors I. None were incurred for the three andsix months ended June 30, 2007. These obligations are typically settled incash within ninety days.

 

Behringer Harvard Multifamily Advisors I or itsaffiliates will receive acquisition and advisory fees of 2.5% of (1) thecontract purchase price paid or allocated in respect of the development,construction or improvement of each asset acquired directly by us, includingany debt attributable to these assets, or (2) when we make an investmentindirectly through another entity, our pro rata share of the gross asset valueof real estate investments held by that entity. Behringer Harvard MultifamilyAdvisors I or its affiliates will also receive 2.5% of the funds advanced inrespect of a loan or other investment. Behringer Harvard Multifamily Advisors Ior its affiliates will be reimbursed for all expenses related to the selectionand acquisition of assets, whether or not acquired by us. We began acquiringreal estate investments in April 2007. For the three months ended June 30,2008 and 2007, Behringer Harvard Multifamily Advisors I earned acquisition andadvisory fees of approximately $929,000 and $285,000, respectively. For the sixmonths ended June 30, 2008 and 2007, Behringer Harvard MultifamilyAdvisors I earned acquisition and advisory fees of approximately $943,000 and$285,000, respectively. For the year ended December 31, 2007, BehringerHarvard Multifamily Advisors I earned acquisition and advisory fees ofapproximately $2.6 million.

 

Behringer Harvard Multifamily Advisors I or itsaffiliates will receive debt financing fees of 1% of the amount available to usunder debt financing originated or refinanced by or for us. It is anticipatedthat our advisor will pay some or all of these fees to third parties with whomit subcontracts to coordinate financing for us. We began acquiring real estateinvestments in April 2007. For the three and six months ended June 30,2008 and 2007, Behringer Harvard Multifamily Advisors I earned no debtfinancing fees. For the year ended December 31, 2007, Behringer HarvardMultifamily Advisors I earned debt financing fees of $0.2 million from TheReserve at Johns Creek Walk property.

 

We expect to pay HPT Management Services LP (“HPTManagement”), our affiliated property manager, fees for the management of ourproperties, which may be subcontracted to unaffiliated third parties. On March 17,2008, HPT Management assigned its property management agreement with us toBehringer Harvard Multifamily Management Services, LLC (“BHM Management”). Suchfees are equal to 3.75% of gross revenues. In the event that we contractdirectly with a non-affiliated third party property manager in respect of aproperty, we will pay BHM Management an oversight fee equal to 1% of grossrevenues of the property managed. In no event will we pay both a propertymanagement fee and an oversight fee to HPT Management with respect to aparticular property. We will reimburse the costs and expenses incurred by BHMManagement on our behalf, including fees and expenses of apartment locators andthird-party accountants, the wages and salaries and other employee-related 

 

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expensesof all on-site employees of BHM Management who are engaged in the operation,management, maintenance or access control of our properties, including taxes,insurance and benefits relating to such employees, and legal, travel and otherout-of-pocket expenses that are directly related to the management of specificproperties. Neither HPT Management Services nor BHM Management has earnedproperty management fees since our inception.

 

Behringer Harvard Multifamily Advisors I willreceive a monthly asset management fee for each asset. This amount will becalculated based upon one-twelfth of 1% of aggregate asset value, as defined,as of the last day of the preceding month. We began acquiring real estateinvestments in April 2007. For the three months ended June 30, 2008and 2007, Behringer Harvard Multifamily Advisors I earned asset management feesof approximately $230,000 and $7,000 respectively. For the six months ended June 30,2008 and 2007, Behringer Harvard Multifamily Advisors I earned asset managementfees of approximately $405,000 and $7,000 respectively.

 

We will pay a development fee in an amount that isusual and customary for comparable services rendered to similar projects in thegeographic market of the project; provided, however, we will not pay adevelopment fee to an affiliate of our advisor if our advisor or any of itsaffiliates elects to receive an acquisition and advisory fee based on the costof such development. Behringer Harvard Multifamily Advisors I has earned nodevelopment fees since our inception.

 

We are dependent on Behringer Harvard MultifamilyAdvisors I, Behringer Securities and BHM Management for certain services thatare essential to us, including the sale of shares of our common stock, assetacquisition and disposition decisions, property management and leasing servicesand other general administrative responsibilities. In the event that thesecompanies were unable to provide us with the respective services, we would berequired to obtain such services from other sources.

 

Thefollowing amounts are included in receivables from and payables to affiliates:

 
| ** **                                | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                      |       |                    |       |                        |       |
| Advance to Ventures                       |       | $                       | —     |                        | $          | 226,443 |   |
| Commissions and dealer manager fees       |       | 4,750                   |       | —                      |       |
| Organization and offering costs           |       | 750                     |       | —                      |       |
| Reimbursements of pursuit and other costs |       | 164,356                 |       | 74,484                      |       |
| Total Receivables from affiliates         |       | $                       | 169,856    |                        | $          | 300,927 |   |
|                                      |       |                    |       |                        |       |
| Asset management fees                     |       | $                       | 229,665    |                        | $          | 217,837 |   |
| Acquisition and advisory fees             |       | 39,716                  |       | 908,345                     |       |
| Commissions and dealer manager fees       |       | —                  |       | 231,976                     |       |
| Organization and offering costs           |       | —                  |       | 50,238                      |       |
| General and administrative                |       | 89,561                  |       | —                      |       |
| Due to Ventures                           |       | 8,750                   |       | 4,810                       |       |
| Total Payables to affiliates              |       | $                       | 367,692    |                        | $          | 1,413,206 |   |

 

**10.**** ****Supplemental disclosures of cash flow information**

 

Supplemental cash flow information is summarizedbelow:

 
| ** **                                                                                            | ** ** | **For the Six  Months Ended  June 30, 2008** | ** ** | **For the Six  Months Ended  June 30, 2007** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| Supplemental disclosure of cash flow  information:                                                    |       |                                                                  |       |                                                                  |       |
| Interest paid, net of amounts capitalized                                                             |       | $                                                                     | —     |                                                                  | $          | 68,246 |   |
|                                                                                                  |       |                                                                  |       |                                                                  |       |
| Non-cash investing activities:                                                                        |       |                                                                  |       |                                                                  |       |
| Escrow and prepaid acquisition costs                                                                  |       | $                                                                     | 1,533,835  |                                                                  | $          | — |   |
| Accrued acquisition fees                                                                              |       | $                                                                     | 39,717     |                                                                  | $          | 170,918 |   |
| Accrued other assets                                                                                  |       | $                                                                     | 22,361     |                                                                  | $          | — |   |
| Conversion of mortgage note receivable into  investments in unconsolidated real estate joint ventures |       | $                                                                     | —     |                                                                  | $          | 2,782,923 |   |
|                                                                                                  |       |                                                                  |       |                                                                  |       |
| Non-cash financing activities:                                                                        |       |                                                                  |       |                                                                  |       |
| Dividends payable                                                                                     |       | $                                                                     | 21,842     |                                                                  | $          | — |   |
| Credit facility – financing costs                                                                |       | $                                                                     | —     |                                                                  | $          | 24,008 |   |
| Offering costs                                                                                        |       | $                                                                     | —     |                                                                  | $          | 20,300 |   |

 

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**11. Subsequent Events**

 

On August 13, 2008, the Board of Directors alsoauthorized the payment of cash dividends (each a “Daily Distribution”) tostockholders of record as of the close of business on each day of the periodcommencing on September 1, 2008 and ending on September 30, 2008(each a “Record Date”), with each Daily Distribution payable as of each RecordDate to be $0.001013699  per share ofcommon stock, which is equivalent to an annual distribution rate of fourpercent (4%) on a share of common stock purchased for nine dollars andtwenty-five cents ($9.25). The Daily Distribution for each day of each monthshall be paid by the Company on or before the sixteenth day of the followingmonth.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion and analysis should be readin conjunction with the accompanying consolidated financial statements and thenotes thereto:

 

**Forward-Looking Statements**

 

This section contains forward-looking statements,including discussion and analysis of the financial condition of us, oursubsidiaries, and our Co-investment Ventures: including entities consolidatedunder FIN 46R, anticipated capital expenditures required to complete projects,amounts of anticipated cash distributions to our stockholders in the future andother matters. These forward-looking statements are not historical facts butare the intent, belief or current expectations of our management based on theirknowledge and understanding of our 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 toidentify forward-looking statements. These statements are not guarantees offuture performance and are subject to risks, uncertainties and other factors,some of which are beyond our control, are difficult to predict and could causeactual results to differ materially from those expressed or forecasted in theforward-looking statements.

 

Forward-looking statements that were true at thetime made may ultimately prove to be incorrect or false. We caution investorsnot to place undue reliance on forward-looking statements, which reflect ourmanagement’s view only as of the date of this report on Form 10-Q. Weundertake no obligation to update or revise forward-looking statements toreflect changed assumptions, the occurrence of unanticipated events or changesto future operating results. Factors that could cause actual results to differmaterially 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. Theforward-looking statements should be read in light of the risk factorsidentified in the “Risk Factors” section of our Amendment No. 1 to Form 10as filed with the SEC on June 9, 2008.

 

**Cautionary Note**

 

The representations, warranties, and covenants madeby us in any agreement filed as an exhibit to this report on Form 10-Q aremade solely for the benefit of the parties to the agreement, including, in somecases, for the purpose of allocating risk among the parties to the agreement,and should not be deemed to be representations, warranties or covenants to orwith any other parties. Moreover, these representations, warranties orcovenants should not be relied upon as accurately describing or reflecting thecurrent state of our affairs.

 

**Overview**

 

We were incorporated on August 4, 2006 as aMaryland corporation and operate as a REIT for federal and state income taxpurposes. We make investments in and operate institutional quality real estate.In particular, we were organized to invest in and operate institutional qualityapartment communities that we believe have desirable locations, personalizedamenities, and high quality construction. We began acquiring interests inmultifamily real estate properties in April 2007. To date, all of ourinvestments have been in institutional quality development and operatingapartment communities located in metropolitan cities and suburban markets inthe United States. We have since made investments in one operating property andnine properties that are currently under development or redevelopment. As of June 30,2008, we owned a portfolio of ten investments located in Texas, Virginia,Florida, Colorado, Nevada, Maryland, and Georgia.

 

Our investment strategy is designed to provide ourstockholders with a diversified portfolio and our management and board haveextensive experience in investing in numerous types of real estate, loan andother investments. We intend to primarily invest in, acquire and operateapartment communities, with a particular focus on using multiple strategies toacquire investments in high quality apartment communities that producestabilized rental income. We will invest in and acquire a blended portfolioconsisting of core, stabilized income generating assets, 

 

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assetsthat may benefit from enhancement or repositioning and development assets forstabilization to retain as core assets generating income with potential capitalappreciation. Further, we may invest in commercial real estate, includingoffice buildings, shopping centers, business and industrial parks,manufacturing facilities, warehouses and distribution facilities and motel andhotel properties. We may invest in real estate-related securities, includingsecurities issued by other real estate companies, either for investment or inchange of control transactions completed on a negotiated basis or otherwise. Wealso may originate or invest in commercial mortgage-backed securities,mortgage, bridge, mezzanine or other loans and Section 1031tenant-in-common interests (including those issued by programs sponsored byBehringer Harvard Holdings, LLC), or in entities that make investments similarto the foregoing. Although we intend to primarily invest in real estate assetslocated in the United States, in the future, we may make investments in realestate assets located outside the United States. We have not made anyinternational investments. We will not make international investments until allof our non-independent directors and one of our independent directors have atleast three years of relevant experience acquiring and managing suchinternational investments.

 

We believe that economic conditions in the majormetropolitan markets of the United States will continue to provide adequatedemand for properly positioned multifamily properties; such conditions includean assessment of job and salary growth, lifestyle trends, as well assingle-family home pricing and availability of credit. Our multifamily assetacquisition strategy concentrates on multifamily properties located in the 50largest metropolitan statistical areas (“MSAs”) across the United States. The****U.S. Census population estimates are used to determine thelargest MSAs. Our top-50 MSA strategy will focus on acquiring properties andother real estate assets that provide us with broad geographic diversity.Investments in multifamily properties have benefited from the changingdemographic trends of the last ten years. These trends include continued growthin non-traditional households, the echo-boomer generation coming of age andentering the housing market, low rates of inflation, and increased immigration.Changes in domestic financial markets (discussed below) can affect thestability and direction of these historical trends and can adversely affect ourstrategy. Based on projected economic and credit market conditions for theUnited States in 2008, as published by prominent real estate and economicadvisory firms, we expect the national pace of real estate acquisitions to beslower in 2008 than in recent years.

 

Recently, domestic financial markets haveexperienced unusual volatility and uncertainty. Although this condition hasoccurred most visibly within the “subprime” single-family mortgage lendingsector of the credit market, liquidity has tightened in overall domesticfinancial markets, including the investment grade debt and equity capitalmarkets. Consequently, there is greater uncertainty regarding our ability toaccess the credit market in order to attract financing on reasonable terms.Investment returns on our assets and our ability to make acquisitions could beadversely affected by our inability to secure financing on reasonable terms, ifat all. On the other hand, we may be able to take advantage of the currentdislocation in the credit markets to identify challenged developments or redevelopmentsor other unique investment opportunities created by the change in liquidity andrepricing of risk. In addition, we may be able to identify acquisitions as theybecome more attractive due to declines in commercial real estate prices. Asdiscussed further below, we expect to meet our short-term liquidityrequirements through the net cash raised from our prior private offering, thisoffering and cash flow from the operations of our current investments. Forpurposes of our long-term liquidity requirements, we expect that the net cashfrom this offering and from our current and future investments will generatesufficient cash flow to cover operating expenses and our monthly distribution.Multifamily community demand is also affected by changes in credit marketliquidity and repricing of risk affects the cost and availability of financingfor purchase of single family homes.

 

We actively search for real estate opportunities androutinely evaluate making investments in potential projects and operating properties.We expect to use the proceeds from our public offering to substantiallyincrease the number and amount of our investments in potential projects andoperating properties.

 

**Property**Portfolio

 

We commenced a private offering to accreditedinvestors on November 22, 2006 and terminated that offering on December 28,2007. We sold a total of approximately 14.2 million shares of common stock andraised a total of approximately $127.3 million in gross offering proceeds inthe private offering. As of June 30, 2008, we have used the proceeds fromthe private offering, as well as borrowings under our prior credit facilitywith Behringer Harvard Operating Partnership I LP, to acquire equity interestsin ten joint ventures which we account for under the equity method ofaccounting. Each of the ten joint ventures own equity interests in and/or havemade interest-bearing mezzanine loans to nine entities that own real estateproperties currently under development and one entity that owns an operatingproperty. Under arrangements managed by Behringer Harvard Institutional GP LP,a Texas limited partnership, which is an affiliate of our advisor and isindirectly wholly owned by Behringer Harvard Holdings, we have entered into,and it is intended that we will continue to enter into, a series ofco-investment 

 

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agreementswith Behringer Harvard Master Partnership I LP, a Delaware limited partnershipfor the purposes of forming and operating entities****(“Co-Investment Ventures”)****that will own interests in subsidiaries that elect to qualify as real estateinvestment trusts and invest in to-be-developed multifamily communities ornewly constructed multifamily communities that have not yet reachedstabilization, other than residential properties for assisted living, studenthousing or senior housing.

 

In the ordinary course of our business, we and/orour Co-Investment Ventures contract with unaffiliated commercial propertydevelopment companies to provide equity and/or mezzanine loans for a particularproject (our “Project Commitments”). We fund an initial amount under ourProject Commitments at contract inception and make additional payments asconstruction progresses, typically spanning one to three years. Estimatedremaining payments on our Project Commitments for 2008 are approximately $7.6million and are expected to be funded from current cash balances. See “Item 3.Properties” for more discussion of our investments.

 

The following is a description and carrying value ofour portfolio of investments, made through our Co-Investment Ventures as of June 30,2008:

 

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| **Project Name**               | ** ** | **Multifamily  Project Type** | ** ** | **Investment Type**   | ** ** | **Location**                                   | ** ** | **Date  Investment  Acquired** | ** ** | **Our Carrying  Amount  (in  thousands)** | ** ** |
|--------------------------------|------------|------------------------------------|------------|----------------------------|------------|------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| Lovers Lane  Townhomes         |       | Development                        |       | Mezzanine  Loan            |       | Dallas,  Texas                                 |       | Apr-07                         |       | $                                         | 2,723      |   |
|                           |       |                               |       |                       |       |                                           |       |                           |       |                                      |       |
| The Eclipse                    |       | Development                        |       | Equity and  Mezzanine Loan |       | Houston,  Texas                                |       | Apr-07                         |       | 7,136                                     |       |
|                           |       |                               |       |                       |       |                                           |       |                           |       |                                      |       |
| Fairfield at  Baileys Crossing |       | Development                        |       | Mezzanine  Loan            |       | Fairfax  County and Arlington County, Virginia |       | Jul-07                         |       | 12,493                                    |       |
|                           |       |                               |       |                       |       |                                           |       |                           |       |                                      |       |
| Alexan St. Rose                |       | Development                        |       | Mezzanine  Loan            |       | Clark  County, Nevada                          |       | Jul-07                         |       | 2,870                                     |       |
|                           |       |                               |       |                       |       |                                           |       |                           |       |                                      |       |
| Johns Creek  Walk              |       | Operating                          |       | Equity                     |       | Fulton  County, Georgia                        |       | Aug-07                         |       | 5,300                                     |       |
|                           |       |                               |       |                       |       |                                           |       |                           |       |                                      |       |
| Satori                         |       | Development                        |       | Equity and  Mezzanine Loan |       | Broward  County, Florida                       |       | Oct-07                         |       | 13,025                                    |       |
|                           |       |                               |       |                       |       |                                           |       |                           |       |                                      |       |
| Tower 55  Hundred              |       | Development                        |       | Equity and  Mezzanine Loan |       | Arlington  County, Virginia                    |       | Oct-07                         |       | 13,642                                    |       |
|                           |       |                               |       |                       |       |                                           |       |                           |       |                                      |       |
| Fairfield at  Cameron House    |       | Development                        |       | Mezzanine  Loan            |       | Silver  Spring, Maryland                       |       | Dec-07                         |       | 9,982                                     |       |
|                           |       |                               |       |                       |       |                                           |       |                           |       |                                      |       |
| Alexan  Prospect               |       | Development                        |       | Equity and  Mezzanine Loan |       | Denver,  Colorado                              |       | Apr -08                        |       | 7,141                                     |       |
|                           |       |                               |       |                       |       |                                           |       |                           |       |                                      |       |
| Alexan Russell Lofts           |       | Development                        |       | Equity and  Mezzanine Loan |       | Clark  County, Nevada                          |       | Jun-08                         |       | 3,861                                     |       |
|                           |       |                               |       |                       |       |                                           |       |                           |       | $                                         | 78,173     |   |
|                                |            |                                    |            |                            |            |                                                |            |                                |            |                                           |            |  |  |

 

The following is additional information aboutthe ten multifamily properties we have invested in through our Co-InvestmentVentures as of June 30, 2008 and December 31, 2007:

 
| ** **                       | ** ** | **Number of Units** | ** ** |
|----------------------------------|------------|-------------------------------|------------|
| **Property Type**           | ** ** | **June 30, 2008**   | ** ** | **December 31, 2007** | ** ** |
|                             |       |                          |       |   |   |
| Stabilized operating properties: |       |                          |       |   |   |
| Atlanta, Georgia                 |       | 210                           |       | 210 |   |
|                             |       |                          |       |   |   |
| Properties under development:    |       |                          |       |   |   |
| Dallas, Texas                    |       | 149                           |       | 149 |   |
| Houston, Texas                   |       | 330                           |       | 330 |   |
| Fairfax County, Virginia         |       | 414                           |       | 414 |   |
| Arlington County, Virginia       |       | 234                           |       | 234 |   |
| Henderson, Nevada                |       | 430                           |       | 430 |   |
| Ft. Lauderdale, Florida          |       | 279                           |       | 279 |   |
| Silver Spring, Maryland          |       | 325                           |       | 325 |   |
| Denver, Colorado                 |       | 400                           |       | — |   |
| Clark County, Nevada             |       | 168                           |       | — |   |
| Total:                           |       | 2,939                         |       | 2,371 |   |

 

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**CriticalAccounting Policies and Estimates**

 

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

 

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

 

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

 

Our consolidated financial statements will includeour accounts, the accounts of variable interest entities (“VIEs”) in which weare the primary beneficiary and the accounts of other subsidiaries over whichwe will have control. All inter-company transactions, balances and profits willbe eliminated in consolidation. Interests in entities acquired will beevaluated for consolidation based on Financial Accounting Standards BoardInterpretation (“FIN”) 46R, which requires the consolidation of VIEs in whichwe are deemed to be the primary beneficiary. If the interest in the entity isdetermined to not be a VIE under FIN 46R, then the entity will be evaluated forconsolidation under the American Institute of Certified Public Accountants’ (“AICPA”)Statement of Position (“SOP”) 78-9, “Accounting for Investments in Real EstateVentures,” and by Emerging Issues Task Force (“EITF”) 04-5, “DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights.”

 

There are judgments and estimates involved indetermining if an entity in which we will make an investment will be a VIE andif so, if we will be the primary beneficiary. The entity will be 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. FIN 46Rprovides some guidelines as to what the minimum equity at risk should be, butthe percentage can vary depending upon the industry or the type of operationsof the entity and it will be up to our advisor to determine that minimumpercentage as it relates to our business and the facts surrounding each of ouracquisitions. In addition, even if the entity’s equity at risk is a very lowpercentage, our advisor will be required by FIN 46R to evaluate the equity atrisk compared to the entity’s expected future losses to determine if therecould still in fact be sufficient equity at the entity. Determining expectedfuture losses involves assumptions of various possibilities of the results offuture operations of the entity, assigning a probability to each possibilityand using a discount rate to determine the net present value of those futurelosses. A change in the judgments, assumptions and estimates outlined abovecould result in consolidating an entity that should not be consolidated oraccounting for an investment on the equity method that should in fact beconsolidated, the effects of which could be material to our results of operationsand financial condition.

 

***Mortgage Notes Receivable***

 

Mortgage notes receivable are reported at theiroutstanding principal balances net of any unearned income and unamortizeddeferred fees and costs. Loan origination fees and certain direct originationcosts are generally deferred and recognized as adjustments to interest incomeover the lives of the related loans.

 

The project borrower remains obligated to payprincipal and interest due on the loans issued by our Co-Investment Ventures aswell as our loan, regardless of the project borrowers’ intent or ability tosell or refinance the property. In addition, these loans do not contain a rightto participate in expected residual profit from the sale or refinancing of theproperty as defined within Exhibit I of AICPA Practice Bulletin 1, “Accountingof Real Estate Acquisition, Development, or Construction Arrangements” and EITF86-21, “Application of the AICPA Notice to Practitioners Regarding Acquisition,Development, and Construction Arrangements to Acquisition of an OperatingProperty”. As a result, we account for our Lovers Lane Townhomes JuniorMezzanine loan, and our Co-Investment 

 

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Venturesaccount for all of their loans, as a loan, and not as investments in realestate pursuant to Exhibit I of AICPA Practice Bulletin 1 and EITF 86-21.

 

***Investments in******Real******EstateJoint Ventures***

 

Each investment we have made has been made through aCo-Investment Venture managed by us or a subsidiary of ours. We are the managerof the Co-Investment Venture’s affairs, but the operation of Co-InvestmentVentures are conducted in accordance with operating plans prepared by us and approvedby us and the Co-Investment Partner. In addition, without the consent of allmembers of the Co-Investment Venture, the manager may not approve or disapproveon behalf of the Co-Investment Venture certain major decisions affecting theCo-Investment Venture, such as (i) selling or otherwise disposing of theinvestment or any other property having a value in excess of $100,000, (ii) sellingany additional interests in the Co-Investment Venture or its subsidiary REIT(with limited exceptions relating to the subsidiary REIT maintaining its statusas a real estate investment trust or the sale of an interest to the developerof the project) or (iii) incurring or materially modifying anyindebtedness of the Co-Investment Venture or the subsidiary REIT. As of June 30,2008, each Venture has two partners, and each Venture partner possesses equalsubstantive participating rights to make decisions which constitute routineoccurrences in each Venture’s ordinary course of business. These decisionsinclude the requirement to approve initial and annual operating plans, initialand annual capital expenditures, any sales or dispositions of investments, and,any method of refinancing or raising additional debt or equity capital.

 

Each Co-Investment Venture is evaluated under FIN46R. If the Co-Investment Venture is determined to not be a variable interestentity under FIN 46R, then the ventures are evaluated for consolidation underthe American Institute of Certified Public Accountants’ (“AICPA”) Statement ofPosition (“SOP”) 78-9, “Accounting for Investments in Real Estate Ventures,”and by Emerging Issues Task Force (“EITF”) 04-5, “Determining Whether a GeneralPartner, or the General Partners as a Group, Controls a Limited Partnership orSimilar Entity When the Limited Partners Have Certain Rights.” As a result ofthe equal substantive participating rights possessed by each partner, no singleparty controls each venture; accordingly, we account for each Co-InvestmentVenture using the equity method of accounting pursuant to SOP 78-9. The equitymethod of accounting requires these investments to be initially recorded atcost and subsequently increased (decreased) for our share of net income (loss),including eliminations for our share of inter-company transactions and reducedwhen distributions are received.

 

***InvestmentImpairments***

 

For real estate we may wholly own, our managementwill monitor events and changes in circumstances indicating that the carryingamounts of the real estate assets may not be recoverable. When such events orchanges in circumstances are present, we will assess potential impairment bycomparing estimated future undiscounted operating cash flows expected to begenerated over the life of the asset and from its eventual disposition, to thecarrying amount of the asset. In the event that the carrying amount exceeds theestimated future undiscounted operating cash flows, we will recognize animpairment loss to adjust the carrying amount of the asset to estimated fairvalue.

 

For real estate we may own through an investment ina joint venture, TIC interest or other similar investment structure, at eachreporting date we will compare the estimated fair value of our investment tothe carrying value. An impairment charge will be recorded to the extent thefair value of our investment is less than the carrying amount and the declinein value is determined to be other than a temporary decline.

 

In evaluating our investments for impairment,our advisor will make several judgments, assumptions and estimates, including,but not limited to, the projected date of disposition of our investments inreal estate, the estimated future cash flows from our investments in realestate and the projected sales price of each of our investments in real estate.A change in these judgments, assumptions and estimates could result inunderstating or overstating the book value of our investments which could bematerial to our financial statements.

 

Recently, domestic financial markets have experienced unusualvolatility and uncertainty. Although this condition has occurred most visiblywithin the “subprime” single-family mortgage lending sector of the creditmarket, liquidity has tightened in overall domestic financial markets,including the investment grade debt and equity capital markets. Consequently,there is greater uncertainty regarding our ability to access the credit marketin order to attract financing on reasonable terms. Investment returns on ourassets and our ability to make acquisitions could be adversely affected by ourinability to secure financing on reasonable terms, if at all.

 

***Real Estate***

 

Upon the acquisition of real estate properties, wewill allocate the purchase price of those properties to the tangible assetsacquired, consisting of land and buildings, any assumed debt, identifiedintangible assets and asset retirement obligations based on their relative fairvalues in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,“Business Combinations” and No. 142, “Goodwill and Other Intangible Assets.”  Identified intangible assets consist of thefair value of above-market and below-market leases, in-place leases, 

 

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in-placetenant improvements and tenant relationships. Initial valuations are subject tochange until our information is finalized, which will be no later than twelvemonths from the acquisition date.

 

We will determine the fair value of assumed debt bycalculating the net present value of the scheduled mortgage payments usinginterest rates for debt with similar terms and remaining maturities that ouradvisor believes we could obtain. Any difference between the fair value andstated value of the assumed debt will be recorded as a discount or premium andamortized over the remaining life of the loan.

 

The fair value of the tangible assets acquired,consisting of land and buildings, will be determined by valuing the property asif it were vacant, and the “as-if-vacant” value will then be allocated to landand buildings. Land values will be derived from appraisals, and building valueswill be calculated as replacement cost less depreciation or our advisor’sestimates of the relative fair value of these assets using discounted cash flowanalyses or similar methods. The value of the building will be depreciated overthe estimated useful life of twenty-five years to thirty-five years, using thestraight-line method.

 

We will determine the value of above-marketand below-market in-place leases for acquired properties based on the presentvalue (using an interest rate that reflects the risks associated with theleases acquired) of the difference between (1) the contractual amounts tobe paid pursuant to the in-place leases and (2) management’sestimate of current market lease rates for the corresponding in-place leases,measured over a period equal to (a) the remaining non-cancelable leaseterm for above-market leases, or (b) the remaining non-cancelable leaseterm plus any fixed rate renewal options for below market leases. We record thefair value 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.

 

The total value of identified real estate intangibleassets acquired will be further allocated to in-place lease values, in-placetenant improvements, in-place leasing commissions and tenant relationshipsbased on our evaluation of the specific characteristics of each tenant’s leaseand our overall relationship with that respective tenant. The aggregate valuefor tenant improvements and leasing commissions will be based on estimates ofthese costs incurred at inception of the acquired leases, amortized through thedate of acquisition. The aggregate value of in-place leases acquired and tenantrelationships will be determined by applying a fair value model. The estimatesof fair value of in-place leases will include an estimate of carrying costsduring the expected lease-up periods for the respective spaces considering thencurrent market conditions. In estimating the carrying costs that would haveotherwise been incurred had the leases not been in place, we will include suchitems as real estate taxes, insurance and other operating expenses as well aslost rental revenue during the expected lease-up period based on then currentmarket conditions. The estimates of the fair value of tenant relationships willalso include costs to execute similar leases including leasing commissions,legal and tenant improvements as well as an estimate of the likelihood ofrenewal as determined by our advisor on a tenant-by-tenant basis.

 

We will amortize the value of in-place leases andin-place tenant improvements over the initial term of the respective leases. Thevalue of tenant relationship intangibles will be amortized over the initialterm and any anticipated renewal periods, but in no event exceeding theremaining depreciable life of the building. If a tenant terminates its leaseprior to expiration of the initial terms, the unamortized portion of thein-place lease value and tenant relationship intangibles will be charged toexpense.

 

In allocating the purchase price of each of ourproperties, our advisor will make assumptions and use various estimates,including, but not limited to, the estimated useful lives of the assets, thecost of replacing certain assets, discount rates used to determine presentvalues, market rental rates per square foot and the period required to leasethe property up to its occupancy at acquisition if it were vacant. Many ofthese estimates will be obtained from independent third party appraisals. However,our advisor will be responsible for the source and use of these estimates. Achange in these estimates and assumptions could result in the variouscategories of our real estate assets or related intangibles being overstated orunderstated which could result in an overstatement or understatement ofdepreciation or amortization expense. These variances could be material to ourresults of operations and financial condition.

 

**Results ofOperations**

 

As of June 30, 2008, we and/or ourCo-Investment Ventures had acquired joint venture interests in nine propertiesunder development and acquired one joint venture interest in an operatingapartment community. As of June 30, 2007, we and/or our Co-InvestmentVentures had acquired joint venture interests in two properties under 

 

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development.We began acquiring interests in real estate in April 2007. Accordingly,our results of operations for each period presented reflect significant increasesin all categories.

 

In connection with our investment in Co-InvestmentVentures in June 2007, our Co-Investment Partner purchased 45% of theequity in two of our wholly-owned subsidiaries; one owning the Lovers LaneTownhomes Senior Mezzanine Loan commitment and the other owning The Eclipsecommitments. We entered into these commitments in April 2007 and hadpartially funded them as of June 2007.

 

*The three months ended June 30, 2008 ascompared to the three months ended June 30, 2007*

 

*Asset Management Fees.*Assetmanagement fees for the three months ended June 30, 2008 and 2007 wereapproximately $230,000 and $7,000, respectively. The increase is due toacquiring joint venture interests in eight properties subsequent to June 30,2007.  We expect increases in these fees as a result of owning andacquiring additional joint venture interests and real estate.

 

*Interest Expense.*Interest expense for the three months ended June 30, 2008 and 2007was approximately $0 and $171,000, respectively, and was comprised of interestcosts due for borrowings under the credit facility with Behringer HarvardOperation Partnership I LP. We entered into this credit facility in April 2007and borrowed a total of $8 million during the three months ending June 30,2007. We paid all outstanding amounts as of May 31, 2007. In the ordinarycourse of our business, we may enter into borrowing arrangements in the future,which will create additional expenses.

 

*General and Administrative Expense*. General and administrative expense for thethree months ended June 30, 2008 and 2007 were approximately $245,000 and$154,000 respectively, and included corporate general and administrativeexpenses including compensation of our board of directors, auditing and taxfees, and legal fees. We expect increases as a result of owning andacquiring additional joint venture interests and real estate.

 

*Organization Expense*. There were no organization expense for the three months ended June 30,2008. Organization expenses for the three months ended June 30, 2007 wasapproximately $48,000. We had an obligation to pay a fixed fee of 1.5% of ourgross private offering proceeds to our advisor which covered organization andoffering expenses incurred on our behalf. We have recorded the pro-rated shareof organization expenses embedded in the fee as an expense. The privateoffering was terminated on December 28, 2007.

 

*Depreciation and Amortization Expense.*Depreciation and amortization expenses forthe three months ended June 30, 2008 was approximately $8,000 and includedamortization of deferred costs related to joint venture investments. There wereno depreciation and amortization expense for the three months ended June 30,2007. We expect increases as a result of owning and acquiring additionaljoint venture interests and real estate.

 

*Interest Income.*Interest income for the three months ended June 30, 2008 and 2007was approximately $225,000 and $71,000, respectively, and primarily includedinterest earned on our funds on deposit with banks that resulted from thereceipt of proceeds from our private offering which terminated on December 28,2007. We expect increases in the future as we maintain our current bankdeposits and from proceeds received from our public offering.

 

*Equity in Earnings of Joint Venture Investments.*Equity in earnings of joint ventureinvestments for the three months ended June 30, 2008 and 2007 wasapproximately $1.1 million and $30,000, respectively, and included our share inearnings from our unconsolidated joint venture investments. These net earningsincreased due to the acquisition of eight joint venture investments subsequentto June 30, 2007. Equity in earnings generated from the joint ventureinvestments were due primarily from interest and fees accrued on loans made toproject development borrowers. Equity in earnings was reduced, in part, from ajoint venture investment in an operating property that incurred a net lossafter deducting depreciation and amortization. For our existing joint ventures,we expect this trend to continue for the duration of 2008 and expect net equityin earnings to decrease after 2008 due to the development propertiestransitioning into operating properties and due to potential restrictions oncash flows available for interest recognition on outstanding loans. Based onour current and potential future joint venture investments, we expect to haveaggregate positive equity in earnings from joint venture investments that haveissued loans to project developments borrowers. However, this positive equityin earnings may be partially offset or exceeded by losses from joint ventureinvestments in operating properties after deducting depreciation andamortization.

 

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*The six months ended June 30,2008 as compared to the six months ended June 30, 2007*

 

*Asset Management Fees.*Asset management fees for the six months ended June 30, 2008 and 2007 wereapproximately $405,000 and $7,000, respectively. The increase is due toacquiring joint venture interests in eight properties subsequent to June 30,2007.  We expect increases in these feesas a result of owning and acquiring additional joint venture interests and realestate.

 

*Interest Expense.*Interestexpense for the six months ended June 30, 2008 and 2007 was approximately$0 and $171,000, respectively, and was comprised of interest costs due forborrowings under the credit facility with Behringer Harvard OperatingPartnership I LP.  We entered into thiscredit facility in April 2007 and borrowed a total of $8 million duringthe three months ending June 30, 2007. We paid all outstanding amounts as of May 31, 2007.  In the ordinary course of our business, wemay enter into borrowing arrangements in the future, which will createadditional expenses.  This creditfacility was terminated on December 20, 2007; all amounts were paid infull.

 

*General and Administrative Expenses.*General and administrative expenses for the six months ended June 30, 2008and 2007 were approximately $541,000 and $168,000, respectively, and includedcorporate general and administrative expenses including compensation of ourboard of directors, auditing and tax fees, and legal fees.  We expect increases as a result of owning andacquiring additional joint venture interests and real estate.

 

*Organization Expenses.*There was no organization expense for the sixmonths ended June 30, 2008. Organization expenses forthe six months ended June 30, 2007 was approximately $48,000.  We had an obligation to pay a fixed fee of1.5% of our gross private offering proceeds to our advisor which coveredorganization and offering expenses incurred on our behalf.  We have recorded the pro-rated share oforganization expenses embedded in the fee as an expense. The private offeringwas terminated on December 28, 2007.

 

*Depreciation and Amortization Expense. *Depreciationand amortization expenses for the six months ended June 30, 2008 wasapproximately $30,000 and included amortization of deferred costs related tojoint venture investments.  There were nodepreciation and amortization expense for the six months ended June 30,2007.  We expect increases as a result ofowning and acquiring additional joint venture interests and real estate.

 

*Interest Income. *Interest income for thesix months ended June 30, 2008 and 2007 was approximately $650,000 and$76,000, respectively, and primarily included interest earned on our funds ondeposit with banks that resulted from the receipt of proceeds from our privateoffering which terminated on December 28, 2007 as well as interest earnedon the Lovers Lane Townhomes loans during the period they were accounted for asa loan.  We expect increases in thefuture as we maintain our current bank deposits and from proceeds received fromour public offering.

 

*Equity in Earnings of Joint VentureInvestments. *Equityin earnings of joint venture investments for the six months ended June 30,2008 and 2007 was approximately $1.9 million and $30,000, respectively, andincluded our share in earnings from our unconsolidated joint ventureinvestments.  These net earningsincreased due to the acquisition of eight joint venture investments subsequentto June 30, 2007.  Equity inearnings generated from the joint venture investments were due primarily frominterest and fees accrued on loans made to project development borrowers.  Equity in earnings was reduced, in part, froma joint venture investment in an operating property that incurred a net lossafter deducting depreciation and amortization. For our existing joint ventures, we expect this trend to continue forthe duration of 2008 and expect net equity in earnings to decrease after 2008due to the development properties transitioning into operating properties anddue to potential restrictions on cash flows available for interest recognitionon outstanding loans.  Based on ourcurrent and potential future joint venture investments, we expect to haveaggregate positive equity in earnings from joint venture investments that haveissued loans to project developments borrowers. However, this positive equity in earnings may be partially offset orexceeded by losses from joint venture investments in operating properties afterdeducting depreciation and amortization.

 

**CashFlow Analysis**

 

*The six months ended June 30, 2008 as compared to thesix months ended June 30, 2007*

 

Asof June 30, 2008, we have acquired joint venture interests in nineproperties under development and one joint venture interest in an operatingapartment community. We began acquiring interests in real estate in April 2007. As a result, our cash flows for the six months ended June 30, 2008 reflectsignificant differences from

 

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the cash flows for thesix months ended June 30, 2007.  Webegan to receive proceeds from our private offering of our common stock in April 2007which terminated on December 28, 2007.

 

Cashflows provided by operating activities for the six months ended June 30,2008 were $1.5 million and included our net income of $1.5 million;amortization of $42,000; equity in earnings of $1.9 million which is includedin our net income offset by distributions of $1.9 million from ourunconsolidated real estate joint venture investments; and other net changesused in working capital accounts of $26,000. During the six months ended June 30, 2007, cash flows used inoperating activities were $180,000 and included our net loss of $288,000;amortization of $91,000; equity in earnings of $30,000 which is included in ournet income; and other net changes in working capital of $47,000. Operating cashflows were significantly lower in the six months ended June 30, 2007 dueto having recent investments in only two projects and less corporate activity.

 

Cashflows used in investing activities for the six months ended June 30, 2008were $17.4 million. During the period we invested $18.2 million to acquireinterests in real estate ventures; cash distributions from our real estateventures exceeded GAAP earnings, resulting in $831,000 being accounted for as areturn of investment; and we had net short-term advances to and from affiliatesof $45,000. During the six months ended June 30, 2007, cash flows used ininvesting activities were $6.3 million including $3.0 million in issunces ofmortgage notes receivable, $2.0 million to acquire interests in real estateventures, $1.3 million in accounts receivables from affiliates and $1.9 millionin prepaid acquisition expense and escrow deposits offset by $2.0 million inproceeds from sales of interests in real estate ventures.

 

Cashflows used in financing activities for the six months ended June 30, 2008were $2.9 million. During the period, we redeemed common stock in the amount of$50,000.  We paid dividends of $2.6 million and paid cash of $221,000 toaffiliates for offering costs.  During the six months ended June 30,2007, cash flows provided by financing activities were $12.8 million and werecomprised primarily of funds received from the issuance of stock, net ofoffering costs, of $13.0 million.  Wereceived $8.0 million in proceeds from our credit facility loan and repaid the$8.0 million in the same quarter.  Wepaid credit facility financing fees in the amount of $287,000.

 

**Liquidityand Capital Resources**

 

Ourprincipal demands for funds will continue to be for making investments, on ourown or through joint ventures, in existing core multifamily properties,multifamily properties in various stages of development, mortgage, bridge ormezzanine loans and other investments, for the payment of operating expensesand distributions, and for the payment of interest on our outstandingindebtedness.  Generally, cash needs foritems other than our investments are expected to be met from operations, andcash needs for our investments are expected to be met from the net proceeds ofthis offering and other offerings of our securities as well as mortgagessecured by our real estate investments. However, there may be a delay between the sale of our shares, makinginvestments in real estate and loans and the receipt of income from suchinvestments, which could result in a delay in the benefits to our stockholdersof returns generated from our operations. Assuming we commence our initial public offering and no shares arereallocated from our distribution reinvestment plan, or DRIP offering, to ourprimary offering and the maximum offering amount of $2,475,000,000 is raised,we expect to use approximately 91.6% of the gross proceeds raised in thisoffering (89.6% with respect to gross proceeds from our primary offering and100% with respect to gross proceeds from our distribution reinvestment plan) tomake investments in real estate, loans and other investments, payingacquisition fees and expenses incurred in making such investments and for anycapital reserves we may establish.  Weexpect to use approximately 91.6% of the gross proceeds if no shares arereallocated from our distribution reinvestment plan to this offering and themaximum offering is raised (89.6% with respect to gross proceeds from ourprimary offering and 100.0% with respect to gross proceeds from ourdistribution reinvestment plan) to make investments in real estate, loans andother investments and to use approximately 2.1% of the gross proceeds forestablishment of capital reserves and payment of acquisition fees and expensesrelated to the selection and acquisition of our investments, assuming no debtfinancing fee (2.1% with respect to gross proceeds from our primary offeringand 2.3% with respect to gross proceeds from our distribution reinvestmentplan).

 

Ouradvisor evaluates our potential investments and engages in negotiations withsellers and borrowers on our behalf. After a contract for the purchase of an investment is executed, theinvestment will not be purchased until the substantial completion of duediligence.  During this period, we may decide to temporarily invest anyunused proceeds from this offering in investments that could yield lowerreturns than the properties. These lower returns may affect our ability tomake distributions.

 

The amount ofdistributions to be distributed to our stockholders will be determined by ourboard of directors and is dependent on a number of factors, including fundsavailable for payment of distributions, financial condition,

 

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capital expenditure requirements and annual distribution requirementsneeded to maintain our status as a REIT under the Code.  Until proceedsfrom our offerings are fully invested and generating operating cash flowsufficient to fund distributions made to stockholders, we have and may continueto pay all or a substantial portion of our distributions from the proceeds ofsuch offerings or from borrowings in anticipation of future cash flow.  Asof June 30, 2008, we made distributions in the amount of $3,125,000 to ourstockholders since our inception. Any distributions made by us in the futuremay be in the form of a return of capital and/or from the taxable earnings ofreal estate operations.   Sources of distributable cash other thanfrom operating cash flow may include offering proceeds, cash advanced to us byor reimbursements for expenses from, our advisor and proceeds from loansincluding those secured by our assets.

 

We had the ability toborrow funds and use guarantees and letters of credit under a credit agreementwith Behringer Harvard Operating Partnership I LP (the “Credit Facility”), andused borrowings under the Credit Facility to fund certain of ourinvestments.  We pledged substantiallyall of the assets of Behringer Harvard Multifamily OP I and subsidiaries ascollateral for the Credit Facility.  TheCredit Facility provided us with an optional source of funds, guarantees, andletters of credit issued on our behalf. The Credit Facility had an aggregatecommitment of $100 million, which could have been increased to a maximum of$400 million. Principal and interest could be prepaid without penalty and weredue at the end of the one-year term, April 2, 2008. The term of the loancould have been extended until April 1, 2009 upon the agreements of bothparties; this Credit Facility was terminated on December 20, 2007. Thefollowing table lists interest and fees under the Credit Facility:

 

·   Interest at rates between 7.5% and 13%,depending on our leverage-to-tangible assets ratio as of the prior calendarquarter end.

 

·   Commitment Fee of 0.25% on the MaximumCommitment Amount, paid at inception and upon each $100 million Credit Facilityincrease. Total commitment fees paid were $250,000.

 

·   Facility Fee of 0.1% for the averageunused portion of the maximum commitment amount (including loans, commitmentletters and guarantees); paid annually. Total facility fees paid were $68,000.

 

·   Letter of credit fees of 1.5% ofaggregate face amount; paid quarterly in advance. We paid no letter of creditfees.

 

·   Guaranty fees of 1.5% of the totalindebtedness guaranteed; paid quarterly in advance. We paid no guaranty fees.

 

During 2007, we used borrowings of approximately $1.6million under the Credit Facility to fund our senior mezzanine loan and ourjunior mezzanine loan for the Lovers Lane Townhomes investment and have fullyrepaid all outstanding principal and interest as of June 30, 2007. As of June 30, 2008, we have investments in a joint venture (seniormezzanine loan) and a direct investment (junior mezzanine loan) with anapproximate total carrying value of $2.7 million for the Lovers Lane Townhomesinvestment.

 

During 2007, we used borrowings of approximately $1 millionunder the Credit Facility to fund our equity and mezzanine loan for The Eclipseinvestments and have fully repaid all outstanding principal and interest as of June 30,2007.  As of June 30, 2008, we have an investment in a joint venturewith an approximate total carrying value of $7.1 million for The Eclipseinvestments.

 

During 2007, we used borrowings of approximately $8 millionunder the Credit Facility to fund our mezzanine loan for the Fairfield atBaileys Crossing investment and have fully repaid all outstanding principal andinterest as of December 31, 2007. As of June 30, 2008, we have an investment in a joint venture withan approximate total carrying value of $12.5 million for Fairfield at BaileysCrossing investment.

 

During 2007, we used borrowings of approximately $3 millionunder the Credit Facility to fund our mezzanine loan for the Alexan St. Roseinvestment and have fully repaid all outstanding principal and interest as of December 31,2007.  As of June 30, 2008, we have an investment in a joint venturewith an approximate total carrying value of $2.9 million for the Alexan St.Rose investment.

 

During 2007, we used borrowings of approximately $4 millionunder the Credit Facility to pay a portion of our 80% equity ownership in TheReserve at Johns Creek Walk investment and fully repaid all outstandingprincipal and interest as

 

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of December 31,2007.  As of June 30, 2008, we havean investment in a joint venture with an approximate total carrying value of$5.3 million for The Reserve at Johns Creek Walk investment.

 

Our joint venture with PGGM for The Reserve at Johns CreekWalk has a wholly owned subsidiary.  Thissubsidiary owns the 80% equity ownership in The Reserve at Johns Creek Walkproperty and also borrowed approximately $23 million under a loan agreementwith Bear Sterns Commercial Mortgage, Inc. to finance the total purchaseprice (“The Reserve at Johns Creek Walk Senior Loan”).  The interest rateunder The Reserve at Johns Creek Walk Senior Loan is a fixed annual rate of6.461%. The Reserve at Johns Creek Walk Senior Loan is non-recourse andrequires that the property be held by a special purpose entity; only permitsinterest payments during its 5.5 year term; does not permit prepayment ofprincipal prior to the earlier to occur of (i) two (2) years fromsecuritization of the entire loan, or (ii) the fourth (4th) anniversary ofthe first monthly payment date made under the loan; requires certain operatingreserves for maintenance, taxes, insurance, and operations. For the six monthsended June 30, 2008, this property paid interest of $751,000, and theoutstanding principal balance owed by the property was approximately $23million. As of June 30, 2008, the occupancy rate at The Reserve at JohnsCreek Walk was 90%.

 

During 2007, we used borrowings of approximately $6.7million under the Credit Facility to fund our equity investment and mezzanineloan for the Tower 55 Hundred investments, and have fully repaid alloutstanding principal and interest under the Tower 55 Hundred investments as ofDecember 31, 2007.  As of June 30,2008, we have an investment in a joint venture with an approximate totalcarrying value of $13.6 million for the Tower 55 Hundred investments.

 

During 2007, we used borrowings of approximately $6 millionunder the Credit Facility to fund our equity investment and mezzanine loan forthe Satori investments, and have fully repaid all outstanding principal andinterest as of December 31, 2007. As of June 30, 2008, we have aninvestment in a joint venture with an approximate total carrying value of $13million for the Satori investments.

 

During the year ended December 31, 2007 total amountsborrowed and repaid under the Credit Facility, for use in the aboveinvestments, were approximately $36 million; all amounts have been repaid,including interest and other fees of approximately $925,000.  We had no borrowings for the six months endedJune 30, 2008 and 2007.

 

As of June 30, 2008 and December 31, 2007, we werein compliance with all material financial covenants and restrictions.

 

OnDecember 28, 2007, we ceased offering shares of common stock under ourprivate offering. We sold a total of approximately 14.2 million shares ofcommon stock and raised a total of approximately $127.3 million in grossprivate offering proceeds in the private offering.

 

Weexpect to meet our short-term liquidity requirements through the net cashraised from our prior private offering, this offering and cash flow from theoperations of our current investments.  Currently, a portion of thedistributions are paid from cash provided by operations and sources other thanoperating cash flow, such as offering proceeds and cash advanced to us by our sponsor. Operating cash flows are expected to increase as additional investments areadded to the portfolio.  For both our short-term and long-term liquidityrequirements, other potential future sources of capital may include proceedsfrom secured or  unsecured financings from banks or other lenders,proceeds from the sale of our investments, if and when any are sold, andundistributed funds from operations.  If necessary, we may use financingsor other sources of capital in the event of unforeseen significant capitalexpenditures.

 

Recently,domestic financial markets have experienced unusual volatility and uncertainty.Although this condition has occurred most visibly within the “subprime”single-family mortgage lending sector of the credit market, liquidity hastightened in overall domestic financial markets, including the investment gradedebt and equity capital markets. Consequently, there is greater uncertaintyregarding our ability to access the credit market in order to attract financingon reasonable terms. Investment returns on our assets and our ability to makeacquisitions could be adversely affected by our inability to secure financingon reasonable terms, if at all. However, for purposes of our long-termliquidity requirements, we expect that the net cash from this offering and fromour current and future investments will generate sufficient cash flow to coveroperating expenses and our monthly distribution.

 

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**Distributions**

 

Distributions as of June 30,2008 and December 31, 2007 were as follows:

** **

| ** **     | ** ** | **Distributions** | ** ** |
|----------------|------------|-------------------|------------|
| **2008**       | ** ** | **Declared**      | ** ** | **Paid** | ** ** |
|           | ** ** | ** **        | ** ** | ** ** | ** ** |
| Second Quarter | ** ** | $                 | 1,330,847  |   | $ | 1,330,802 | ** ** |
| First Quarter  |       | 1,301,225         |       | 1,279,428 |   |
|           |       | $                 | 2,632,072  |   | $ | 2,610,230 |   |

 

| **2007**       | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------|------------|------------|------------|------------|------------|
|           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fourth Quarter |       | $          | 730,682    |       | $          | 396,450 |   |
| Third Quarter  |       | 196,590    |       | 118,764    |       |
| Second Quarter |       | —     |       | —     |       |
| First Quarter  |       | —     |       | —     |       |
|           |       | $          | 927,272    |       | $          | 515,214 |   |

 

The Daily Distribution was declared and paid in excess ofFFO and we expect to continue to do so in the near-term.  Some or all of our distributions have beenpaid from sources other than operating cash flow, such as offering proceeds,cash advanced to us by or reimbursements from our advisor and proceeds fromloans including those secured by our and/or our Co-Investment Venture assets.

 

Over the long-term, we expect that a greater percentage ofour distributions will be from FFO (except to the extent of distributions fromthe sale of our assets).  However, ultimate FFO performance cannot bepredicted given the uncertainty arising from numerous factors, including boththe raising and placing of capital at favorable yields and the financialperformance of our investments in the current real estate environment and thetypes and mix of investments in our and/or our Co-Investment Ventures’portfolio, which include but are not limited to equity and mezzanine, mortgageand bridge loans investments in existing operating properties and properties invarious stages of development, and the accounting treatment of our investmentsin accordance with our accounting policies.  As a result, futuredistributions declared and paid may continue to exceed FFO.

 

**Off-BalanceSheet Arrangements**

 

UntilDecember 20, 2007, we had the ability to borrow funds and use guaranteesand letters of credit under a credit agreement with Behringer Harvard OperatingPartnership I LP (the “Credit Facility”).  We used borrowings under theCredit Facility to fund our investments but did not use any guarantees orletters of credit.  We pledged substantially all of the assets ofBehringer Harvard Multifamily OP I and subsidiaries as collateral for theCredit Facility.  The Credit Facility provided us with an optional sourceof funds, guarantees, and letters of credit issued on our behalf. The CreditFacility had an aggregate commitment of $100 million, which could have beenincreased to a maximum of $400 million. Principal and interest could be prepaidwithout penalty and were due at the end of the one-year term, April 2,2008. The term of the loan could have been extended until April 1, 2009upon the agreements of both parties; this Credit Facility was terminated on December 20,2007. The following table lists interest and fees under the Credit Facility:

 

·                  Interestat rates between 7.5% and 13%, depending on our leverage-to-tangible assetsratio as of the prior calendar quarter end.

 

·                  CommitmentFee of 0.25% on the Maximum Commitment Amount, paid at inception and upon each$100 million Credit Facility increase. Total commitment fees paid were$250,000.

 

·                  FacilityFee of 0.1% for the average unused portion of the maximum commitment amount(including loans, commitment letters and guarantees); paid annually. Totalfacility fees paid were $68,000.

 

·                  Letterof credit fees of 1.5% of aggregate face amount; paid quarterly in advance. Wepaid no letter of credit fees.

 

·                  Guarantyfees of 1.5% of the total indebtedness guaranteed; paid quarterly in advance.We paid no guaranty fees.

 

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OnMay 7, 2007, affiliates of our advisor agreed to an investment arrangement(the “Master Co-Investment Arrangement”) with Stichting Pensioenfonds Zorg enWelijn, a Dutch foundation (“PGGM”). PGGM is a Dutch pension fund serving 1.9 million families of healthcareand social workers, managing more than $95 billion in pension assets andinvesting in the Netherlands and abroad in equities, fixed-interest securities,real estate, private equity and commodities.

 

Underarrangements managed by Behringer Harvard Institutional GP LP, a Texas limitedpartnership, which is an affiliate of our advisor and is indirectly whollyowned by Behringer Harvard Holdings, we have entered into, and it is intendedthat we will continue to enter into, a series of co-investment agreements forthe purposes of forming and operating entities that will be managed by us or asubsidiary of ours and will invest in to-be-developed multifamily communitiesor newly constructed multifamily communities that have not yet reachedstabilization.  Behringer Harvard Master Partnership I LP, a Delawarelimited partnership (the “Co-Investment Partner”), is our co-investment partnerfor these co-investment projects.  Our Co-Investment Partner is owned (i) 99%by PGGM, which serves as the limited partner of the Co-Investment Partner, and (ii) 1%by Behringer Harvard Institutional GP, which serves as the general partner ofthe Co-Investment Partner.  PGGM has committed to invest up to $200million in co-investment ventures through the Co-Investment Partner, but mayincrease its commitment to $300 million at any time prior to November 9,2011.  Behringer Harvard Institutional GP will provide the remaining 1% ofcapital for the Co-Investment Partner’s investments in co-investmentventures.  Generally, the Co-Investment Partner will own 45% of eachco-investment venture, although the Co-Investment Partner may own less than 45%of a co-investment venture if such venture will own a co-investment projectwith expected development costs in excess of $75 million or if the parties soagree.  We have committed to invest up to $247 million in co-investmentventures approved by our board of directors and to own 55% of each theseco-investment ventures.  In addition, we have agreed to increase thiscommitment to $370 million if PGGM were to increase its capital commitment tothe Co-Investment Partner to $300 million.  As manager, we will have controlover the affairs of the co-investment ventures, but the operation ofco-investment ventures must generally be conducted in accordance with operatingplans approved by the Co-Investment Partner.

 

Ourjoint venture with PGGM for The Reserve at Johns Creek Walk has a wholly-ownedsubsidiary.  This subsidiary owns the 80%equity ownership in The Reserve at Johns Creek Walk property and also borrowedapproximately $23 million under a loan agreement with Bear Sterns CommercialMortgage, Inc. to finance the total purchase price (“The Reserve at JohnsCreek Walk Senior Loan”).  The interest rate under The Reserve atJohns Creek Walk Senior Loan is a fixed annual rate at 6.461%. The Reserve atJohns Creek Walk Senior Loan is non-recourse and requires that the property beheld by a special purpose entity; only permits interest payments during its 5.5year term; does not permit prepayment of principal prior to the earlier tooccur of (i) two (2) years from securitization of the entire loan, or(ii) the fourth (4th) anniversary of the first monthly payment date madeunder the loan; requires certain operating reserves for maintenance, taxes,insurance, and operations. As of June 30, 2008, the outstanding principalbalance owed by the joint venture under The Reserve at Johns Creek Walk SeniorLoan was approximately $23 million.

 

The investments in real estate and loans owned by us andour Co-Investment Ventures were entered into with unaffiliated developers whoown interests in the underlying real estate and development projects.  These unaffiliated parties and theiraffiliates have provided us with collateral interests in the properties,development projects, improvements, project owning entities and/or financialand performance guarantees of the developer and certain of its affiliates.  These entities have also obtained additionalnecessary financing that is senior in priority to our investments, by providinga collateral interest in the property and improvements senior in priority toours; using the credit of the unaffiliated developer and certain of itsaffiliates; and by the issuance of performance and financial guarantees fromthe unaffiliated developer and certain of its affiliates.  We have nocontractual obligation on these senior level financings obtained by theunaffiliated developer, which includes land loans, construction loans, andground leases.

 

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

 

**ContractualObligations**

 

In the ordinary course ofbusiness, we and/or Co-Investment Ventures contract with unaffiliatedcommercial property development companies to provide them with a total equityand/or mezzanine loan amount on a particular project (our “Project Commitments”). We fund an initial amount under our Project Commitments at contract inceptionand make additional payments as construction progresses, typically spanning oneto three years.

 

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As of June 30, 2008,the Co-Investment Ventures held contracts for equity investments and/ormortgage loans with a total commitment value of approximately $158.2 millionand the Ventures have funded approximately $134.6 million.  The Co-Investment Ventures will requireadditional capital from us and Behringer Harvard Master Partnership I in orderto fund the remaining $23.6 million equity investment and/or mortgage loancommitments.  The Ventures have alsoissued contingent sell options to the Project Entities.  In addition, as of June 30, 2008, wehold The Lovers Lane Townhomes Junior Mezzanine Loan with a total commitmentvalue of approximately $2.2 million and have funded approximately $1,000, thetotal commitment value was reduced in April 2008.

 

The remaining commitmentson the real estate investment development by the Co-Investment Ventures will befunded as actual construction progresses. Estimated future payments are as follows, as of June 30, 2008:

 
| ** ** | ** ** | **The Co-  Investment  Ventures’ total  unfunded  commitments** | ** ** | **The Co-  Investment  Ventures’ other  contingent  obligations  under sell  options** | ** ** | **Our estimated  portion of the  Co-Investment  Ventures’  unfunded  commitments  and contingent  options** | ** ** | **Our  estimated  unfunded  commitment  on our  mortgage  loan** | ** ** | **Our estimated  total** | ** ** |
|------------|------------|--------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------|------------|
|       |       |                                                                           |       |                                                                                                       |       |                                                                                                                                 |       |                                                                  |       |                          |       |
| 2008       |       | $                                                                              | 11,794,800 |                                                                                                       | $          | —                                                                                                                               |       | $                                                                     | 6,487,140  |                          | $          | 1,091,466 |   | $ | 7,578,606 |   |
| 2009       |       | 11,794,800                                                                     |       | 11,800,000                                                                                                 |       | 12,977,140                                                                                                                           |       | 1,091,466                                                             |       | 14,068,606                    |       |
| 2010       |       | —                                                                         |       | 43,976,450                                                                                                 |       | 24,187,048                                                                                                                           |       | —                                                                |       | 24,187,048                    |       |
| Total      |       | $                                                                              | 23,589,600 |                                                                                                       | $          | 55,776,450                                                                                                                           |       | $                                                                     | 43,651,328 |                          | $          | 2,182,932 |   | $ | 45,834,260 |   |

 

At December 31, 2007, the Co-Investment Ventures heldcontracts for equity investments and/or mortgage loans with a total commitmentvalue of approximately $126.5 million, and the Co-Investment Ventures havefunded approximately $102.3 million. The Ventures will require additionalcapital from us and Behringer Harvard Master Partnership I in order to fund theremaining $24.2 million equity investment and/or mortgage loancommitments.  The Co-Investment Ventureshave also issued contingent sell options to the Project Entities. In addition,as of December 31, 2007, we held The Lovers Lane Townhomes JuniorMezzanine Loan with a total commitment value of approximately $3.2 million andhave funded approximately $1,000.

 

The remaining commitments on the real estate investmentdevelopment by the Co-Investment Ventures will be funded as actual constructionprogresses. Estimated future payments are as follows, as of December 31,2007:

 
| ** ** | ** ** | **The Co-  Investment  Ventures’ total  unfunded  commitments** | ** ** | **The Co-  Investment  Ventures’ other  contingent  obligations  under sell  options** | ** ** | **Our estimated  portion of the  Co-Investment  Ventures’  unfunded  commitments  and contingent  options** | ** ** | **Our  estimated  unfunded  commitment  on our  mortgage  loan** | ** ** | **Our estimated  total** | ** ** |
|------------|------------|--------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------|------------|
|       |       |                                                                           |       |                                                                                                       |       |                                                                                                                                 |       |                                                                  |       |                          |       |
| 2008       |       | $                                                                              | 24,229,508 |                                                                                                       | $          | —                                                                                                                               |       | $                                                                     | 13,326,229 |                          | $          | 1,610,102 |   | $ | 14,936,331 |   |
| 2009       |       | —                                                                         |       | 61,545,395                                                                                                 |       | 33,849,967                                                                                                                           |       | 1,610,102                                                             |       | 35,460,069                    |       |
| Total      |       | $                                                                              | 24,229,508 |                                                                                                       | $          | 61,545,395                                                                                                                           |       | $                                                                     | 47,176,196 |                          | $          | 3,220,204 |   | $ | 50,396,400 |   |

 

*The Co-Investment Ventures’ other contingent obligationsunder sell options*

 

The Co-InvestmentVenture, which has made a mezzanine loan to the Fairfield at Baileys CrossingProject Entity, has also issued a contingent sell option to an unaffiliatedequity investor in the Project Entity. This option is not currently exercisable and cannot be exercised untildevelopment is complete and the property has been certified 

 

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for occupancy.  If the selloption becomes exercisable, it will expire after three years. If exercised, theVenture will be required to purchase their interest after it is free of allliens, claims, and encumbrances, for cash at a price to be negotiated in thefuture using market values at the time of exercise.  This investor’s equity balance wasapproximately $11.8 million at both June 30, 2008 and December 31,2007, and has been included in the above tables as the estimated exercise pricedue.  Option exercise is dependent uponconstruction and may become exercisable in 2009 or 2010.

 

The Co-InvestmentVenture, which made a mezzanine loan to an affiliate of the Fairfield atCameron House Project Entity, has also issued a contingent sell option to an unaffiliatedequity investor in the Project Entity. This option is not currently exercisableand cannot be exercised until development is complete and the property has beencertified for occupancy.  If the selloption becomes exercisable, it will expire after three years.  If exercised, the Venture will be required topurchase their interest after it is free of all liens, claims, andencumbrances, for cash at a price to be negotiated in the future using marketvalues at the time of exercise.  Thisinvestor’s equity balance is approximately $10.3 million at June 30, 2008and December 31, 2007, and has been included in the above tables as theestimated exercise price due.  Optionexercise is dependent upon construction and may become exercisable in 2009 or2010.

 

The Co-InvestmentVenture, which made a mezzanine loan to the Lovers Lane Townhomes ProjectEntity has issued a contingent sell option to the Project Entity. This optionis not currently exercisable and cannot be exercised until development iscomplete and the property has been certified for occupancy.  If this contingent sell option becomesexercisable, it will expire after 30 days. If exercised, the Venture will be required to purchase The Lovers LaneTownhomes after it is free of all liens, claims, and encumbrances, for cash inan amount equal to the lower of (a) actual project costs plus interestcharges, or (b) the maximum budgeted cost amount plus interest paid on theLovers Mezzanine loans, plus $8,750 per apartment unit in the Lovers LaneProject, plus $1,161,000.  The estimatedexercise price of approximately $33.7 million has been included in the abovetables as the estimated amount due. Option exercise is dependent upon construction and may becomeexercisable in 2009 or 2010. If the Venture were to purchase the property, weestimate the Venture’s total cash outlay will approximate $6.5 million afterconsidering the application of estimated proceeds received from an expectedsenior property mortgage and any unpaid principal and interest on the LoversLane Townhome mezzanine loans issued by us and the Venture.

 

**Fundsfrom Operations**

 

Fundsfrom operations (“FFO”) is a non-GAAP financial measure that is widelyrecognized as a measure of REIT operating performance.  We use FFO as defined by the NationalAssociation of Real Estate Investment Trusts to be net income (loss), computedin accordance with GAAP excluding extraordinary items, as defined by GAAP, andgains (or losses) from sales of property, plus depreciation and amortization onreal estate assets, and after adjustments for unconsolidated partnerships,joint ventures and subsidiaries.  Webelieve that FFO is helpful to our investors and our management as a measure ofoperating performance because it excludes depreciation and amortization, gainsand losses from property dispositions, and extraordinary items, and as aresult, when compared year to year, reflects the impact on operations fromtrends in occupancy rates, rental rates, operating costs, developmentactivities, general and administrative expenses, and interest costs, which isnot immediately apparent from net income. Historical cost accounting for real estate assets in accordance withGAAP implicitly assumes that the value of real estate diminishes predictablyover time.  Since real estate values havehistorically risen or fallen with market conditions, many industry investorsand analysts have considered the presentation of operating results for realestate companies that use historical cost accounting alone to be insufficient.  As a result, our management believes that theuse of FFO, together with the required GAAP presentations, provide a morecomplete understanding of our performance. Factors that impact FFO include start-up costs, fixed costs, delay inbuying assets, lower yields on cash held in accounts pending investment, incomefrom portfolio properties and other portfolio assets, interest rates onacquisition financing and operating expenses. In addition, FFO will be affected by the types of investments in ourand/or our Co-Investment Ventures’ portfolio, which include but are not limitedto equity and mezzanine, mortgage and bridge loan investments in existingoperating properties and properties in various stages of development,mezzanine, mortgage and bridge loans and the accounting treatment of theinvestments in accordance with our Accounting policies.  FFO should not be considered as analternative to net income (loss), as an indication of our liquidity, nor is itindicative of funds available to fund our cash needs, including our ability tomake distributions.

 

Our calculations of FFOare presented below:

 

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| ** **                    | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                                          | ** ** | **2007**                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                          |       |                                                              |       |                                                            |       |   |   |   |   |
| Net income (loss)             |       | $                                                                 | 834,710    |                                                            | $          | (279,217 | ) | $ | 1,531,780 |   | $ | (288,508 | ) |
|                          |       |                                                              |       |                                                            |       |   |   |   |   |
| Real Estate Depreciation  (1) |       | 277,989                                                           |       | —                                                          |       | 558,988 |   | — |   |
|                          |       |                                                              |       |                                                            |       |   |   |   |   |
| Funds from Operations  (FFO)  |       | $                                                                 | 1,112,699  |                                                            | $          | (279,217 | ) | $ | 2,090,768 |   | $ | (288,508 | ) |
|                          |       |                                                              |       |                                                            |       |   |   |   |   |
| GAAP weighted average  shares |       | 14,267,364                                                        |       | 878,939                                                         |       | 14,268,951 |   | 444,010 |   |

 

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(1) This alsoincluded the depreciation and amortization expense of our Co-Investment Ventureshare which we account for under the equity method of accounting which isreflected in our equity in earnings of our joint venture investments.

 

*Non-cash Items Included in Net Income (Loss)*

 

Our Co-InvestmentVentures recognize certain non-cash items as income or expense. Provided belowis additional information related to those items that are included in our netincome (loss) above, which may be helpful in assessing our operating results.

 

·                  Accrued interest income on loans with deferredinterest payment terms was approximately $135,000 and $55,000 for the threemonths ended June 30, 2008 and 2007, respectively; $258,000 and $55,000was recognized for the six months ended June 30, 2008 and 2007,respectively.

 

·                  Amortization of intangible lease assets was approximately$94,000 and $0 for the three months ended June 30, 2008 and 2007,respectively; $194,000 and $0 was recognized for the six months ended June 30,2008 and 2007, respectively.

 

·                  Amortized loan fee income was approximately $61,000and $1,000 for the three months ended June 30, 2008 and 2007,respectively; $112,000 and $1,000 was recognized for the six months ended June 30,2008 and 2007, respectively.

 

·                  Amortization of deferred financing costs wasapproximately $11,000 and $0 for the three months ended June 30, 2008 and2007, respectively; $21,000 and $0 was recognized for the six months ended June 30,2008 and 2007, respectively.

 

Inaddition, FFO may be used to fund all or a portion of certain capitalizableitems that are excluded from FFO, such as capital expenditures and payments ofprincipal on debt, each of which may impact the amount of cash available fordistribution to our stockholders.

 

**Recently Announced Accounting Pronouncements**

 

InSeptember 2006, the FASB issued Statement No. 157, “Fair ValueMeasurements” (“SFAS 157”). SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  We adopted the provisions of SFAS 157 effectiveJanuary 1, 2008, and did not have a material effect on our consolidated resultsof operations or financial position.

 

InFebruary 2008, the FASB staff issued Staff Position No. 157-2 “EffectiveDate of FASB Statement No. 157” (“FSP SFAS 157-2”).  FSP SFAS 157-2 delayed the effective date ofSFAS 157 for nonfinancial assets and nonfinancial liabilities, except for itemsthat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually).  Theprovisions of FSP SFAS 157-2 are effective for the Company’s fiscal yearbeginning January 1, 2009.  We arecurrently assessing the effect FSP SFAS 157-2 may have on our financialstatement disclosure.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - Including an Amendment of FASBStatement No. 115.”  The fair valueoption established by SFAS No. 159 permits all entities to choose tomeasure eligible items at fair value at specified election dates.  A business entity will report unrealizedgains and losses on items for which the fair value option has been elected in 

 

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earnings (or another performance indicator ifthe business entity does not report earnings) at each subsequent reportingdate.  SFAS No. 159 is effective forfiscal years beginning after November 15, 2007.  We have not elected the fair value measurementoption for any financial assets or liabilities at the present time.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations.”  This Statement replacesSFAS No. 141 “Business Combinations” but retains the fundamentalrequirement that the acquisition method of accounting, or purchase method, beused for all business combinations and for an acquirer to be identified foreach business combination.  ThisStatement is broader in scope than that of Statement 141, which applied only tobusiness combinations in which control was obtained by transferringconsiderations.  SFAS No. 141(R)applies the same method of accounting (the acquisition method) to alltransactions and other events in which one entity obtains control over one ormore other businesses.  This Statementalso makes certain other modifications to Statement 141, including a broaderdefinition of a business and the requirement that acquisition related costs areexpensed as incurred.  This statementapplies to business combinations occurring on or after the beginning of thefirst annual reporting period beginning on or after December 15,2008.  Early adoption is notallowed.  We expect SFAS No. 141(R) willhave a material effect on our accounting for future acquisitions of propertiesif they fall under the definition of a business combination.

 

InDecember 2007, the FASB issued SFAS No. 160, Non-controllingInterests in Consolidated Financial Statements- An amendment of ARB No. 51.  This Statement amends ARB No. 51 toestablish accounting and reporting standards for the non-controlling interestin a subsidiary and for the deconsolidation of a subsidiary. It clarifies thata non-controlling interest in a subsidiary, which is sometimes referred to asminority interest, is an ownership interest in the consolidated entity thatshould be reported as equity in the consolidated financial statements.  Among other requirements, this statementrequires consolidated net income to be reported at amounts that include theamounts attributable to both the parent and the non-controlling interest. Italso requires disclosure, on the face of the consolidated income statement, ofthe amounts of consolidated net income attributable to the parent and to thenon-controlling interest.  This Statementis effective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008 (that is, January 1, 2009,for entities with calendar year-ends). Earlier adoption is prohibited. We are currently assessingthe effect SFAS No. 160 may have on our consolidated results of operationsand financial position.

 

In March 2008, theFASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities, an amendment of FASB Statement No. 133”.  SFASNo. 161 requires entities to provide greater transparency about how andwhy the entity uses derivative instruments, how the instruments and relatedhedged items are accounted for under SFAS No. 133, and how the instrumentsand related hedged items affect the financial position, results of operations,and cash flows of the entity.  SFAS No. 161 is effective forfiscal years beginning after November 15, 2008.  The principalimpact to us will be to expand our disclosures regarding derivativeinstruments.  We had no derivativeinstruments during the six-month period ended June 30, 2008 or the year endedDecember 31, 2007.

 

**Inflation**

 

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

 

**REITTax Election**

 

We intend to make anelection to be taxed as a real estate investment trust (“REIT”) under Sections856 through 860 of the Internal Revenue Code commencing with our taxable yearended December 31, 2007.  If wequalify for taxation as a REIT, we generally will not be subject to federalcorporate income tax to the extent we distribute our REIT taxable income to ourstockholders.  REITs are subject to anumber of other organizational and operational requirements.  Even if we qualify for taxation as a REIT, wemay be subject to certain state and local taxes on our income and property, andfederal income and excise taxes on our undistributed income.

 

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

 

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

 

Our joint venture with PGGM for The Reserve at Johns CreekWalk has a wholly-owned subsidiary.  Thissubsidiary owns the 80% equity ownership in The Reserve at Johns Creek Walkproperty and also borrowed approximately $23 million under a loan agreementwith Bear Sterns Commercial Mortgage, Inc. to finance the total purchaseprice (“The Reserve at Johns Creek Walk Senior Loan”).  The interest rate under The Reserve at JohnsCreek Walk Senior Loan is a fixed annual rate of 6.461%. The Reserve at JohnsCreek Walk Senior Loan is non-recourse and requires that the property be heldby a special purpose entity; only permits interest payments during its 5.5 yearterm; does not permit prepayment of principal prior to the earlier to occur of (i) two(2) years from securitization of the entire loan, or (ii) the fourth(4th) anniversary of the first monthly payment date made under the loan;requires certain operating reserves for maintenance, taxes, insurance, andoperations. As of June 30, 2008, the outstanding principal balance owed bythe joint venture under The Reserve at Johns Creek Walk Senior Loan wasapproximately $23 million.

 

We do not have any foreign operations and thus we are notexposed to foreign currency fluctuations.

 

**Item 4T.   Controlsand Procedures.**

 

*Evaluation of Disclosure Controls and Procedures*

 

As required by Rule 13a-15(b) and Rule 15d-15(b) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”), ourmanagement, including our Chief Executive Officer and Chief Financial Officer,evaluated, as of June 30, 2008, the effectiveness of our disclosurecontrols and procedures as defined in Exchange Act Rule 13a-15(e) andRule 15d-15(e).  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures, as of June 30, 2008, were effective for the purpose ofensuring that information required to be disclosed by us in this report isrecorded, processed, summarized and reported within the time periods specifiedby the rules and forms of the Exchange Act and is accumulated andcommunicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosures.

 

We believe, however, that a controls system, no matter howwell designed and operated, cannot provide absolute assurance that theobjectives of the controls system are met, and no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud orerror, if any, within a company have been detected.

 

*Changes in Internal Control over Financial Reporting*

 

There has been no change in internal control over financialreporting that occurred during the quarter ended June 30, 2008 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II**

**OTHER INFORMATION**

 

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

 

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

 

**Item 1A.                 Risk Factors.**

 

There have been no material changes from the risk factorsset forth in our Amendment No. 1 to Form 10, filed with theSecurities and Exchange Commission on June 9, 2008.

 

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

 

During the period covered by this Form 10-Q,we did not sell any equity securities and we did not redeem any of oursecurities.

 

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

 

None.

 

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

 

None.

 

**Item 5.                    Other Information.**

 

None.

 

**Item 6.                    Exhibits.**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                   | ** ** |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                |       |                                                                                                                                                                                                                              |       |
| 3.1                 |       | Form of  Articles of Restatement (Incorporated  by reference to Exhibit 3.1 to Amendment No. 1 to the Registration  Statement on Form 10 filed on June 9, 2008)                                          |       |
|                |       |                                                                                                                                                                                                                              |       |
| 3.2                 |       | Form of  Third Amended and Restated Bylaws (Incorporated  by reference to Exhibit 3.2 to Amendment No. 1 to the Registration  Statement on Form 10 filed on June 9, 2008)                                |       |
|                |       |                                                                                                                                                                                                                              |       |
| 4.1                 |       | Statement  regarding Restrictions on Transferability of Shares of Common Stock (Incorporated by reference to Exhibit 4.1 to Amendment  No. 1 to the Registration Statement on Form 10 filed on  June 9, 2008) |       |
|                |       |                                                                                                                                                                                                                              |       |
| 31.1                |       | Certification of Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                         |       |
|                |       |                                                                                                                                                                                                                              |       |
| 31.2                |       | Certification of Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                         |       |

 

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| 32.1 |   | Certifications of Chief Executive Officer and  Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by  Section 906 of the Sarbanes-Oxley Act of 2002* |   |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 

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* Filed herewith

 

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** **

**SIGNATURE**

 

 

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

 

 

 
| ** **                   | ** ** | **BEHRINGER HARVARD MULTIFAMILY REIT I, INC.** |
|------------------------------|------------|------------------------------------------------|
|                         |       |                                           |
|                         |       |                                           |
| Dated:  August 14, 2008 |       | /s/ Gary S. Bresky                             |
|                         |       | Gary  S. Bresky                                |
|                         |       | Chief  Financial Officer                       |

 

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