Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**Forthe quarterly period ended September 30, 2008**

 

**OR**

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

 

**Forthe transition period from                        to                     **

 

**CommissionFile Number: 000-53195**

 

**BehringerHarvard Multifamily REIT I, Inc.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

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

 

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

(Address ofPrincipal Executive Offices) (ZIP Code)

 

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

 

**None**

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

 

Indicateby check mark whether the Registrant:  (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.  Yes  x   Noo

 

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

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

 

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

 

As of November 7, 2008,the Registrant had 14,351,839 shares of common stock outstanding.

 

 

 

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**BEHRINGERHARVARD MULTIFAMILY REIT I, INC.**

**Form 10-Q**

**QuarterEnded September 30, 2008**

 
| ** **    | ** **                                                                                                                                             | **Page**   |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **    | **PART 1**                                                                                                                                        |       |
| ** **    | **FINANCIAL  INFORMATION**                                                                                                                             |       |
|          |                                                                                                                                                   |       |
| **Item 1.**   | **Financial Statements (unaudited)**                                                                                                                   |       |
| ** **    | ** **                                                                                                                                             | ** ** |
|          | Consolidated Balance Sheets as of September 30,  2008 and December 31, 2007                                                                  | 3          |
|          |                                                                                                                                                   |       |
|          | Consolidated Statements of Operations for the three  and nine months ended September 30, 2008 and 2007                                            | 4          |
|          |                                                                                                                                                   |       |
|          | Consolidated Statements of Stockholders’ Equity for  the year ended December 31, 2007 and for the nine months ended  September 30, 2008 | 5          |
|          |                                                                                                                                                   |       |
|          | Consolidated Statements of Cash Flows for the nine  months ended September 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**                                                        | 31         |
|          |                                                                                                                                                   |       |
| **Item 3.**   | **Quantitative  and Qualitative Disclosures About Market Risk**                                                                                        | 51         |
|          |                                                                                                                                                   |       |
| **Item 4T.**  | **Controls and  Procedures**                                                                                                                           | 51         |
|          |                                                                                                                                                   |       |
|          | **PART II**                                                                                                                                       |       |
|          | **OTHER  INFORMATION**                                                                                                                                 |       |
|          |                                                                                                                                                   |       |
| **Item 1.**   | **Legal Proceedings**                                                                                                                                  | 52         |
|          |                                                                                                                                                   |       |
| **Item 1A.**  | **Risk Factors**                                                                                                                                       | 52         |
|          |                                                                                                                                                   |       |
| **Item 2.**   | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                                                       | 52         |
|          |                                                                                                                                                   |       |
| **Item 3.**   | **Defaults  Upon Senior Securities**                                                                                                                   | 52         |
|          |                                                                                                                                                   |       |
| **Item 4.**   | **Submission  of Matters to a Vote of Security Holders**                                                                                               | 52         |
|          |                                                                                                                                                   |       |
| **Item 5.**   | **Other Information**                                                                                                                                  | 52         |
|          |                                                                                                                                                   |       |
| **Item 6.**   | **Exhibits**                                                                                                                                           | 53         |
|          |                                                                                                                                                   |       |
| **Signature** |                                                                                                                                                   | 54         |

 

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**PART I**

**FINANCIAL INFORMATION**

 

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

 

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

**Consolidated Balance Sheets**

(Unaudited)

 
| ** **                                                                                                                                                                                             | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                             | ** ** | **2008**               | ** **  | **2007**              | ** ** |
|                                                                                                                                                                                                   |       |                   |        |                  |       |
| **Assets**                                                                                                                                                                                             |       |                   |        |                  |       |
| Cash and cash equivalents                                                                                                                                                                              |       | $                      | 30,290,271  |                  | $          | 53,377,585 |   |
| Investments in unconsolidated real estate joint ventures                                                                                                                                               |       | 81,626,105             |        | 60,068,633            |       |
| Restricted cash                                                                                                                                                                                        |       | —                 |        | 53,300                |       |
| Receivables from affiliates                                                                                                                                                                            |       | 228,352                |        | 300,927               |       |
| Mortgage note receivable                                                                                                                                                                               |       | 1,149                  |        | 70,986                |       |
| Escrow deposits                                                                                                                                                                                        |       | —                 |        | 888,525               |       |
| Other assets                                                                                                                                                                                           |       | 401,529                |        | 681,917               |       |
| **Total assets**                                                                                                                                                                                       |       | $                      | 112,547,406 |                  | $          | 115,441,873 |   |
|                                                                                                                                                                                                   |       |                   |        |                  |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                          |       |                   |        |                  |       |
|                                                                                                                                                                                                   |       |                   |        |                  |       |
| **Liabilities**                                                                                                                                                                                        |       |                   |        |                  |       |
| Payables to affiliates                                                                                                                                                                                 |       | $                      | 319,893     |                  | $          | 1,130,992 |   |
| Subscriptions for common stock                                                                                                                                                                         |       | —                 |        | 53,300                |       |
| Dividends payable                                                                                                                                                                                      |       | 433,856                |        | 412,058               |       |
| Accrued offering costs                                                                                                                                                                                 |       | 6,058,748              |        | 282,214               |       |
| Accounts payable and accrued liabilities                                                                                                                                                               |       | 84,179                 |        | 143,812               |       |
| **Total liabilities**                                                                                                                                                                                  |       | 6,896,676              |        | 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  September 30, 2008 and December 31, 2007, respectively |       | 1,426                  |        | 1,427                 |       |
| Additional paid-in capital                                                                                                                                                                             |       | 108,462,988            |        | 114,566,504           |       |
| Cumulative distributions and net loss                                                                                                                                                                  |       | (2,813,684             | )           | (1,148,434            | )          |
| **Total stockholders’ equity**                                                                                                                                                                    |       | 105,650,730            |        | 113,419,497           |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                    |       | $                      | 112,547,406 |                  | $          | 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 Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                  | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                                                                  | ** ** | **2008**                                           | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                        |       |                                               |       |                                              |       |   |   |   |   |
| **Rental revenue**                                                          |       | $                                                  | —     |                                              | $          | — |   | $ | — |   | $ | — |   |
|                                                                        |       |                                               |       |                                              |       |   |   |   |   |
| **Expenses**                                                                |       |                                               |       |                                              |       |   |   |   |   |
| Asset management fees                                                       |       | 243,754                                            |       | 66,475                                            |       | 648,665 |   | 73,922 |   |
| Property management fees                                                    |       | 10,882                                             |       | —                                            |       | 10,882 |   | — |   |
| Organization expenses                                                       |       | 9,458                                              |       | 2,014                                             |       | 9,458 |   | 49,709 |   |
| Interest expense                                                            |       | —                                             |       | 354,426                                           |       | — |   | 525,785 |   |
| General and administrative                                                  |       | 425,964                                            |       | 176,257                                           |       | 967,285 |   | 344,539 |   |
| Depreciation and amortization                                               |       | 8,367                                              |       | —                                            |       | 38,338 |   | — |   |
| **Total expenses**                                                          |       | 698,425                                            |       | 599,172                                           |       | 1,674,628 |   | 993,955 |   |
|                                                                        |       |                                               |       |                                              |       |   |   |   |   |
| Interest income                                                             |       | 162,352                                            |       | 10,596                                            |       | 812,764 |   | 86,486 |   |
| Equity in earnings of unconsolidated real estate joint venture  investments |       | 1,301,610                                          |       | 254,205                                           |       | 3,159,181 |   | 284,590 |   |
| **Net income (loss)**                                                       |       | $                                                  | 765,537    |                                              | $          | (334,371 | ) | $ | 2,297,317 |   | $ | (622,879 | ) |
|                                                                        |       |                                               |       |                                              |       |   |   |   |   |
| Weighted average number of common shares                                    |       | 14,267,364                                         |       | 2,152,919                                         |       | 14,268,418 |   | 1,019,906 |   |
|                                                                        |       |                                               |       |                                              |       |   |   |   |   |
| Basic and diluted income (loss) per share                                   |       | $                                                  | 0.05       |                                              | $          | (0.16 | ) | $ | 0.16 |   | $ | (0.61 | ) |

 

*SeeNotes 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 Income (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          |       | 116,438,616    |       | —                          |       | 116,440,043 |   |
| Incentive award plan                   |       | —                |       | —         |       | 24,435         |       | —                          |       | 24,435 |   |
| Offering costs                         |       | —                |       | —         |       | (1,909,606     | )          | —                          |       | (1,909,606 | ) |
| 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                             |       |                  |       |           |       | —         |       | 2,297,317                       |       | 2,297,317 |   |
| Issuances of common stock under:       |       |                  |       |           |       |           |       |                            |       |   |   |
| Incentive award plan                   |       | —                |       | —         |       | 18,327         |       | —                          |       | 18,327 |   |
| Shares returned                        |       | (5,555                | )          | (1             | )          | (50,000        | )          | —                          |       | (50,001 | ) |
| Offering costs                         |       | —                |       | —         |       | (6,071,843     | )          | —                          |       | (6,071,843 | ) |
| Distributions declared on common stock |       | —                |       | —         |       | —         |       | (3,962,567                      | )          | (3,962,567 | ) |
|                                   |       |                  |       |           |       |           |       |                            |       |   |   |
| Balance at September 30, 2008     |       | 14,267,364            |       | $              | 1,426      |           | $          | 108,462,988                     |       | $ | (2,813,684 | ) | $ | 105,650,730 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**BehringerHarvard Multifamily REIT I, Inc.**

**ConsolidatedStatements of Cash Flows**

(Unaudited)

 
| ** **                                                                                          | ** ** | **For the Nine**       | ** ** | **For the Nine**       | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                          | ** ** | **Months Ended**            | ** ** | **Months Ended**            | ** ** |
| ** **                                                                                          | ** ** | **September 30, 2008** | ** ** | **September 30, 2007** | ** ** |
| **Cash flows from operating activities**                                                            |       |                             |       |                             |       |
| Net income (loss)                                                                                   |       | $                                | 2,297,317  |                             | $          | (622,879 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  (used in) operating activities: |       |                             |       |                             |       |
| Amortization of deferred financing costs                                                            |       | —                           |       | 156,658                          |       |
| Depreciation and amortization                                                                       |       | 38,338                           |       | —                           |       |
| Stock-based compensation                                                                            |       | 18,326                           |       | 18,326                           |       |
| Equity in earnings of unconsolidated real estate joint venture  investments                         |       | (3,159,181                       | )          | (284,590                         | )          |
| Distributions received from unconsolidated real estate joint ventures                               |       | 3,159,181                        |       | —                           |       |
| Changes in operating assets and liabilities:                                                        |       |                             |       |                             |       |
| Accrued interest on mortgage note receivable                                                        |       | (76                              | )          | (41,641                          | )          |
| Accounts receivable                                                                                 |       | 28,320                           |       | —                           |       |
| Other assets                                                                                        |       | (319,804                         | )          | (94,188                          | )          |
| Credit Facility – Interest payable                                                             |       | —                           |       | 337,527                          |       |
| Payables to affiliates                                                                              |       | 61,117                           |       | 152,449                          |       |
| Accounts payable and other liabilities                                                              |       | (81,707                          | )          | 71,203                           |       |
| **Cash provided by (used in) operating activities**                                                 |       | 2,041,831                        |       | (307,135                         | )          |
|                                                                                                |       |                             |       |                             |       |
| **Cash flows from investing activities**                                                            |       |                             |       |                             |       |
| Investments in unconsolidated real estate joint ventures                                            |       | (21,955,674                      | )          | (24,431,629                      | )          |
| Issuances of mortgage notes receivable                                                              |       | —                           |       | (2,995,719                       | )          |
| Advances to unconsolidated real estate joint venture                                                |       | —                           |       | (754,991                         | )          |
| Repayments of advances to unconsolidated real estate joint ventures                                 |       | 39,970                           |       | 599,199                          |       |
| Prepaid acquisition costs                                                                           |       | —                           |       | (694,431                         | )          |
| Proceeds from sales of interests in real estate ventures                                            |       | —                           |       | 1,968,150                        |       |
| Distributions received from unconsolidated real estate joint ventures                               |       | 1,022,076                        |       | —                           |       |
| Escrow deposits                                                                                     |       | —                           |       | (1,237,500                       | )          |
| **Cash used in investing activities**                                                               |       | (20,893,628                      | )          | (27,546,921                      | )          |
|                                                                                                |       |                             |       |                             |       |
| **Cash flows from financing activities**                                                            |       |                             |       |                             |       |
| Shares Returned                                                                                     |       | (50,001                          | )          | —                           |       |
| Proceeds from sales of common stock                                                                 |       | —                           |       | 28,108,008                       |       |
| Offering costs                                                                                      |       | (17,803                          | )          | (2,511,567                       | )          |
| Change in subscriptions for common stock                                                            |       | (53,300                          | )          | 800,000                          |       |
| Change in subscription cash received                                                                |       | 53,300                           |       | (800,000                         | )          |
| Dividends paid                                                                                      |       | (3,940,769                       | )          | (118,762                         | )          |
| Credit Facility:                                                                                    |       |                             |       |                             |       |
| Proceeds                                                                                            |       | —                           |       | 23,000,000                       |       |
| Repayments                                                                                          |       | —                           |       | (14,000,000                      | )          |
| Financing fees                                                                                      |       | —                           |       | (317,577                         | )          |
| Change in payables to affiliates                                                                    |       | (226,944                         | )          | —                           |       |
| **Cash provided by (used in) financing activities**                                                 |       | (4,235,517                       | )          | 34,160,102                       |       |
|                                                                                                |       |                             |       |                             |       |
| Net change in cash and cash equivalents                                                             |       | (23,087,314                      | )          | 6,306,046                        |       |
| Cash and cash equivalents at beginning of period                                                    |       | 53,377,585                       |       | 20,004                           |       |
| Cash and cash equivalents at end of period                                                          |       | $                                | 30,290,271 |                             | $          | 6,326,050 |   |

* *

*SeeNotes to Consolidated Financial Statements.*

 

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

**Notes to Consolidated FinancialStatements**

**(unaudited)**

** **

**1.**     Organization and Business

** **

***Organization***

*** ***

Behringer Harvard MultifamilyREIT I, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”)was organized in Maryland on August 4, 2006 and has elected to be taxed,and currently qualifies, as a real estate investment trust (“REIT”) for federalincome tax purposes. We invest in and operate multifamily communities. Theseoperating and development properties are expected to include conventionalmultifamily assets, such as mid-rise, high-rise, and garden style properties,and also to include student housing and age-restricted properties, typicallyrequiring residents to be age 55 or older. Targeted communities includeexisting “core” properties that are already well positioned and producingrental income, as well as more opportunistic properties in various stages ofdevelopment, redevelopment or in need of repositioning.  Further, we may invest in commercial realestate, real estate related securities, collateralized mortgage-backedsecurities, mortgage, bridge, mezzanine or other loans and Section 1031tenant-in-common interests, or in entities that make similar investments.

 

Substantially all ourbusiness is conducted through our operating partnership Behringer HarvardMultifamily OP I LP, a Delaware limited partnership (“Behringer HarvardMultifamily OP I”). Our wholly-owned subsidiary, BHMF, Inc., a Delawarecorporation (“BHMF Inc.”) owns less than 0.1% of Behringer Harvard MultifamilyOP I as its sole general partner. The remaining ownership interest in BehringerHarvard Multifamily OP I is held as a limited partner’s interest by BHMFBusiness Trust, a Maryland business trust.

 

We have no employees andare supported by related party arrangements. We are externally managed byBehringer Harvard Multifamily Advisors I LP (“Behringer Harvard MultifamilyAdvisors I”), a Texas limited partnership organized in 2006. Behringer HarvardMultifamily Advisors I is responsible for managing our affairs on a day-to-daybasis and for identifying and making real estate investments on our behalf.

 

***Offeringsof our Common Stock***

*** ***

We are authorized toissue 875,000,000 shares of common stock, 1,000 shares of convertible stock and124,999,000 shares of preferred stock. All shares of common stock have a parvalue of $.0001 per share. On August 4, 2006 (date of inception), we sold1,249 shares of our common stock to Behringer Harvard Holdings, LLC (“BehringerHarvard”) for cash of $10,004. On November 28, 2007, we sold an additional23,720 shares of our common stock to Behringer Harvard for cash of $189,997.

 

On November 22,2006, we commenced a private offering to sell a maximum of approximately $400million of common stock to accredited investors (the “Private Offering”). Weheld all Private Offering proceeds in escrow until after we had sold ourinitial $1.5 million of shares of common stock. In April 2007, the Companyreleased the proceeds from escrow and began issuing shares of our common stock.We terminated the Private Offering on December 28, 2007. We sold a totalof approximately 14.2 million shares of common stock and raised a total ofapproximately $127.3 million in gross offering proceeds in the PrivateOffering. Commissions, dealer manager fees, and other offering costs wereapproximately $13 million.

 

On September 2,2008, we commenced a public offering (the “Initial Public Offering”) of up to200,000,000 shares of common stock offered at a price of $10.00 per sharepursuant to a registration statement filed under the Securities Act of 1933, asamended (the “Securities Act”).  TheInitial Public Offering also covers the registration of up to an additional50,000,000 shares of common stock at a price of $9.50 per share pursuant to ourdistribution reinvestment plan (“DRIP”). We reserve the right to reallocate shares of our common stock betweenthe primary offering and our DRIP.

 

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We intend to use theproceeds from our offerings of our common stock, after deducting offeringexpenses, primarily to make investments in apartment communities, with aparticular focus on using multiple strategies to acquire high quality apartmentcommunities that will produce rental income. We will acquire a blendedportfolio consisting of core, stabilized income generating assets, assets thatmay benefit from enhancement or repositioning and development assets forstabilization to retain as core assets generating income with potential capitalappreciation.

 

# **While conducting an offering, weadmit new stockholders at least monthly. All subscription proceeds are held ina separate account until the subscribing investors are admitted asstockholders. Upon admission of new stockholders, subscription proceeds aretransferred to operating cash and may be utilized as consideration forinvestments and the payment or reimbursement of dealer manager fees, sellingcommissions, offering expenses and operating expenses. Until required for suchpurposes, net offering proceeds are held in short-term, liquid investments.**

# ** **

# **Our common stock is not currentlylisted on a national securities exchange. However, management anticipateswithin four to six years after the termination of our public offering to beginthe process of either listing the common stock on a national securities exchangeor liquidating our assets, depending on then-prevailing market conditions.**

# ** **

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

** **

The accompanyingconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in our Amendment No. 1to Form 10 filed pursuant to Section 12(g) of the Security andExchange Act of 1934, as amended for the year ended December 31, 2007,which was filed with the Securities and Exchange Commission (“SEC”) on June 9,2008. 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.

 

The results for theinterim periods shown in this report are not necessarily indicative of futurefinancial results. The accompanying consolidated balance sheet and consolidatedstatement of stockholders’ equity as of September 30, 2008 andconsolidated statements of operations and cash flows for the periods ended September 30,2008 and 2007 have not been audited by our independent registered publicaccounting firm. In the opinion of management, the accompanying unauditedconsolidated financial statements include all adjustments necessary to presentfairly our consolidated financial position as of September 30, 2008 and December 31,2007 and our consolidated results of operations and cash flows for the periodsended September 30, 2008 and 2007. Such adjustments are of a normalrecurring nature.

 

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

** **

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

*** ***

The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Theseestimates include such items as the purchase price allocation for real estateacquisitions, impairment of long-lived assets and equity-method real estateinvestments, depreciation and amortization and allowance for doubtfulaccounts.  Actual results could differfrom those estimates.

 

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

*** ***

Our consolidatedfinancial statements include our accounts, the accounts of variable interestentities in which we are the primary beneficiary and the accounts of othersubsidiaries over which we have control. All inter-company transactions, balances and profits have beeneliminated in consolidation.  Interestsin entities acquired are evaluated based on Financial Accounting StandardsBoard Interpretation (“FIN”) 46R “Consolidation of Variable Interest Entities,”which requires the consolidation of variable interest entities

 

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in which we are deemed tobe the primary beneficiary.  If theinterest in the entity is determined to not be a variable interest entity underFIN 46R, then the entities are evaluated for consolidation under the AmericanInstitute of Certified Public Accountants’ (“AICPA”) Statement of Position (“SOP”)78-9, “Accounting for Investments in Real Estate Ventures,” and by EmergingIssues Task Force (“EITF”) 04-5, “Determining Whether a General Partner, or theGeneral Partners as a Group, Controls a Limited Partnership or Similar EntityWhen the Limited Partners Have Certain Rights.”

 

***RealEstate and Other Related Intangibles***

*** ***

If, in the future, weacquire real estate properties, we will allocate the purchase price of thoseproperties to the tangible assets acquired, consisting of land, inclusive ofassociated rights, and buildings, any assumed debt, identified intangibleassets and asset retirement obligations based on their relative fair values inaccordance with SFAS No. 141, “Business Combinations” and No. 142, “Goodwilland Other Intangible Assets.”  Identifiedintangible assets consist of the fair value of above-market and below-marketleases, in-place leases, in-place tenant improvements, in-place leasingcommissions and tenant relationships.

 

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

 

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

 

The fair value of anytangible assets that will be acquired, expected to consist of land andbuildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant”value is then allocated to land and buildings. Land values are derived from appraisals, and building values arecalculated as replacement cost less depreciation or management’s estimates ofthe relative fair value of these assets using discounted cash flow analyses orsimilar methods.  The values of buildingsare depreciated over the estimated useful lives ranging from 25-35 years usingthe straight-line method.

 

We will determine thevalue of above-market and below-market in-place leases for acquired propertiesbased on the present value (using an interest rate that reflects the risksassociated with the leases acquired) of the difference between (1) thecontractual amounts to be paid pursuant to the in-place leases and (2) 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 andbelow-market leases as intangible assets or intangible liabilities,respectively, and amortize them as an adjustment to rental income over theabove determined lease term.

 

The total value ofidentified real estate intangible assets that we may acquire in the future isfurther allocated to in-place lease values and tenant relationships based onour evaluation of the specific characteristics of each tenant’s lease and ouroverall relationship with that respective tenant.  The aggregate value of in-place 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 an estimateof the likelihood of renewal as determined by management on a tenant-by-tenantbasis.

 

We will amortize thevalue of in-place leases acquired in the future to expense over the term of therespective leases. The value of tenant relationship intangibles is amortized toexpense over the initial term and any anticipated renewal periods, but in noevent does the amortization period for intangible assets exceed the remainingdepreciable life of the building. Should a tenant terminate their lease, the unamortizedportion of the in-place lease value and tenant relationship intangibles wouldbe charged to expense.

 

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***Impairmentof Long Lived Assets and Mortgage Notes Receivable***

*** ***

Upon the acquisition ofany 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.

 

For real estate we ownthrough an investment in a real estate joint venture other similar real estateinvestment structure, at each reporting date we compare the estimated fairvalue 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.

 

We assess impairment atthe individual project basis. In evaluating our investments in real estateventures and mortgage notes for impairment, management makes several estimatesand assumptions about the financial condition of the borrower and theguarantor. In addition, management makes several estimates and assumptionsabout the property and the additional collateral provided by the guarantor,including but not limited to, the projected disposition dates, estimated futurecash flows, and the projected sales prices. A change in these estimates and assumptions could result in understatingor overstating the book value of the mortgage note which could be material toour financial statements.

 

We review the terms and conditions underlying theoutstanding balances of mortgage notes receivable on an individual basis. If wedetermine that it is probable that all amounts due under the terms of a loanwill not be collected, an impairment charge is recorded to the extent that theinvestment in the note exceeds our estimate of the fair value of the collateralsecuring such note.

 

Recently, domesticfinancial markets have experienced unusual volatility and uncertainty. Althoughthis condition has occurred most visibly within the “subprime” single-familymortgage lending sector of the credit market, liquidity has tightened inoverall 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 make acquisitionscould be adversely affected by our inability to secure financing on reasonableterms, if at all.

 

No impairment chargeshave been recorded as of September 30, 2008 and December 31, 2007.

 

***Cashand Cash Equivalents***

*** ***

We consider investmentsin highly-liquid money market funds with original maturities of three months orless to be cash equivalents. The carrying amount of cash and cash equivalentsreported on the balance sheet approximates fair value due to their short-termmaturities.

 

***RestrictedCash***

*** ***

Restricted cash includedsubscription proceeds from our private offering that were held in a separateaccount until the subscribing investors were admitted as stockholders.  During our private offering, we admitted newstockholders at least monthly.  Uponacceptance of stockholders, shares of stock were issued, and we received thesubscription proceeds which may have been utilized as consideration forinvestments and the payment or reimbursement of dealer manager fees, sellingcommissions, organization and offering expenses, and operating expenses.

 

***MortgageNote Receivable***

*** ***

Mortgage note receivableis reported at the outstanding principal balances net of any unearned incomeand unamortized deferred fees and costs. Loan origination fees and certain directorigination costs are generally deferred and recognized as adjustments tointerest income over the lives of the related loan.

 

We and our joint ventureshave issued mortgage notes and/or mezzanine loans with respect to certaindevelopment projects. Each borrower remains obligated to pay principal andinterest due on the loans regardless of its intent or ability to sell orrefinance the property. In addition, these loans do not contain a right toparticipate 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,

 

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“Application of the AICPANotice to 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.

 

***EscrowDeposits***

*** ***

We have refundableamounts deposited in escrow for contracts to potentially acquire interests inproperties and entities that own real estate and development projects.  As of December 31, 2007, we had $888,000in escrow deposits related to the Russell Road development in Nevada.  As of September 30, 2008, we had noescrow deposits.

 

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

** **

We account for certaininvestments in unconsolidated real estate joint ventures using the equitymethod of accounting because we exercise significant influence over, but do notcontrol these entities.  Theseinvestments are initially recorded at cost and are adjusted for our share ofequity in earnings and distributions.  Wereport our share of income and losses based on our ownership interests in theentities.

 

In connection with theacquisition of investments in unconsolidated real estate joint ventures, weincur certain acquisition and advisory fees that are paid to Behringer HarvardMultifamily Advisors I or an affiliate.  These fees are capitalized aspart of our basis in the investments in joint ventures.  We amortize anyexcess of the carrying value of our investments in joint ventures over the bookvalue of the underlying equity over the estimated useful lives of theunderlying operating property, which represents the assets to which the excessis most clearly related.

 

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

*** ***

Behringer HarvardMultifamily Advisors I or its affiliates are obligated to pay all of our PublicOffering and Private Offering organization and offering costs.  Offering costs include items such as legaland accounting fees, marketing, promotional and printing costs.  On November 22, 2006, we entered into anagreement with Behringer Harvard Multifamily Advisors I, where BehringerHarvard Multifamily Advisors I or its affiliates will earn fees andcompensation in connection with their obligation to pay all of our organizationand offering costs, and in connection with the acquisition, management, andsale of our assets (the “Advisory Management Agreement”).  In connection with the effectiveness of ourInitial Public Offering on September 2, 2008, the fees and compensationunder the Advisory Management Agreement were amended.

 

*InitialPublic Offering*

* *

Under the amendedAdvisory Management Agreement, we will reimburse Behringer Harvard MultifamilyAdvisors I for all Initial Public Offering organization and offering costsincurred by them in an amount not to exceed 1.5% of our gross Public Offering,(the O&O Reimbursement”).  TotalPublic Offering organization and offering costs incurred by Behringer HarvardMultifamily Advisors I are approximately $6.1 million and $0.5 million as of September 30,2008 and December 31, 2007, respectively. At the end of each reporting period, we estimate the total gross InitialPublic Offering proceeds expected to be received over the entire offeringperiod and recognize the amount of estimated total O&O Reimbursement asdetermined under Statement of Financial Accounting Standards (“SFAS”) No. 5,“Accounting for Contingencies”.  We haverecognized the O&O Reimbursement at the lower amount of (a) 1.5% ofthe estimated total gross Public Offering proceeds expected to be received overthe entire offering period, or (b) the actual Public Offering costs incurred byBehringer Harvard Multifamily Advisors I or its affiliates.  The O&O Reimbursement obligation isrecorded as an offset to additional paid-in capital in accordance with StaffAccounting Bulletin (“SAB”) Topic 5.A, Miscellaneous Accounting — Expenses ofOffering.  Total unpaid O&OReimbursement recorded as a liability and as an offset to additional paid-incapital was approximately $6.1 million as of September 30, 2008.  As of December 31, 2007 we had noobligation for such costs and none was recognized.  We expect to use only proceeds from our PublicOffering to pay our O&O Reimbursement obligation and as a result we havebeen paid no amounts as of September 30, 2008.

 

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*PrivateOffering*

* *

Behringer HarvardMultifamily Advisors I or its affiliates were obligated to pay all of ourPrivate Offering organization and offering costs.  Our only obligation for those costs was topay a fee to Behringer Harvard Multifamily Advisors I under our AdvisorManagement Agreement.  We incurred thisfee obligation at the rate of 1.5% of the actual gross Private Offeringproceeds (the “O&O Fee”), regardless of whether the actual amount ofPrivate Offering costs incurred by Behringer Harvard Multifamily Advisors I orits affiliates was higher or lower than the O&O Fee. Total Private Offeringorganization and offering costs incurred by Behringer Harvard MultifamilyAdvisors I were approximately $3.5 million and $3.0 million as of September 30,2008 and December 31, 2007, respectively. We had no obligation for PrivateOffering costs incurred by Behringer Harvard Multifamily Advisors I and itsaffiliates in excess of total amounts due under the O&O Fee. The amount ofO&O Fees recorded was determined as 1.5% of the actual Private Offeringproceeds received to date; no other amounts were considered by management to beprobable of reimbursement. At the end of each reporting period, we recorded thepro-rated share of offering costs embedded in the O&O Fee as an offset toadditional paid-in capital in accordance with Staff Accounting Bulletin (“SAB”)Topic 5.A, Miscellaneous Accounting — Expenses of Offering.  Total unpaid O&O Fees recognized as aliability and as an offset to additional paid-in capital were approximately$50,000 as of December 31, 2007; no amounts remained unpaid as of September 30,2008. Total O&O Fees paid and recognized as an offset to additional paid-incapital were approximately $1.9 million as of September 30, 2008 and December 31,2007, respectively.

 

Behringer HarvardMultifamily Advisors I or its affiliates were obligated to pay all of ourPrivate Offering organizational expenses. Our only obligation for these costswas to pay the O&O Fee as discussed above; we have no other obligations forthese costs. Our organization costs are recorded as an expense in accordancewith Statement of Position 98-5, Reporting on the Costs of Start-up Activitiesand we recorded the pro-rated share of organization expenses embedded in the O&OFee as an expense. We had no obligation for organization costs incurred byBehringer Harvard Multifamily Advisors I and its affiliates in excess of totalamounts due under the O&O Fee, which are approximately $9,500.

 

The AdvisoryManagement Agreement was amended on September 2, 2008 and the O&OReimbursement obligation now includes Private Offering costs incurred byBehringer Harvard Multifamily Advisors I or its affiliates in excess of totalamounts due under the O&O Fee.  As a result,approximately $1.6 million of such costs are included in our estimated totalO&O Reimbursement obligation as of September 30, 2008.  In addition, during September 2008 werecognized as an expense, organization costs incurred by Behringer HarvardMultifamily Advisors I and its affiliates in excess of total amounts due underthe O&O Fee, which were approximately $9,500.

 

As of September 30,2008 and December 31, 2007, the amount of our accrued obligation under theO&O Fee for the private offering costs and O&O Reimbursement for thepublic offering costs has been recognized in our consolidated statements inaccordance with SFAS No. 5.

 

***IncomeTaxes***

*** ***

Wehave elected to be taxed as a REIT under Sections 856 through 860 of theInternal Revenue Code of 1986, as amended (the “Code”), and have qualified as aREIT since the year ended December 31, 2007.  To qualify as a REIT,we must meet a number of organizational and operational requirements, includinga requirement that we distribute at least 90% of our REIT taxable income to ourstockholders.  As a REIT, we generally will not be subject to federalincome tax at the corporate level.  We are organized and operate in such amanner as to qualify for taxation as a REIT under the Code, and we intend tocontinue to operate in such a manner, but no assurance can be given that wewill operate in a manner so as to qualify or remain qualified as a REIT.

 

We have evaluated the current anddeferred income tax related to the Texas margin tax and we have no significanttax liability or benefit as of September 30, 2008 and December 31,2007. In addition, we recognized no current tax expense for the nine monthsended September 30, 2008 and 2007 related to the Texas margin tax.

 

On January 1,2007 we adopted the provisions of FASB Interpretation No. 48 Accountingfor uncertainty in income taxes – an interpretation of FASB statement No 109 (“FIN48”). Under FIN 48, we recognize the financial statement benefit of anuncertain tax position only after determining that the relevant tax authoritywould more likely then not sustain the position following an audit. To date, weare unaware of any uncertain tax positions.

 

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***StockBased Compensation***

*** ***

We have a stock-basedincentive award plan for our directors and consultants and for employees,directors and consultants of our affiliates, and our advisor and itsaffiliates.  We account for this planunder the modified prospective method of 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 the ConsolidatedStatements of Cash Flows, rather than as operating cash flows as required underprevious regulations.

 

On November 14,2006, we issued a total of 3,000 shares of restricted stock to our independentdirectors.  On November 28, 2007 weissued 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 basisover the required service period. For the nine months ended September 30,2008 and 2007, we recognized stock-based compensation expense of approximately$18,000, during both periods.

 

No other stock-basedcompensation has been issued.

 

***Concentrationof Credit Risk***

 

At September 30,2008 and December 31, 2007 we had cash and cash equivalents and restrictedcash deposited in certain financial institutions in excess of federally insuredlevels.  We regularly monitor thefinancial stability of these financial institutions and believe that we arenot exposed to any significant credit risk in cash and cash equivalents orrestricted cash.

 

We have diversified ourcash and cash equivalents between several banking institutions in an attempt tominimize exposure to any one of these entities.  However, the FederalDeposit Insurance Corporation, or “FDIC,” generally only insures limitedamounts per depositor per insured bank.  Beginning October 3, 2008through December 31, 2009, the FDIC will insure up to $250,000 perdepositor per insured bank; on January 1, 2010, the standard coveragelimit will return to $100,000 for most deposit categories.  (Unlimited deposit insurance coverage will beavailable to our non-interest bearing transaction accounts held at thoseinstitutions participating in FDIC’s Temporary Liquidity Guarantee Program throughDecember 31, 2009.)  At September 30,2008 and December 31, 2007, we had cash and cash equivalents deposited ininterest bearing transaction accounts at certain financial institutions inexcess of federally insured levels.

 

***Earnings per Share***

 

We calculate earnings pershare in accordance with FAS No. 128, Earnings Per Share. Basic earningsper share is calculated by dividing net earnings available to common shares bythe weighted-average common shares outstanding during the period. Dilutedearnings per share is calculated similarly, except that it includes thedilutive effect of the assumed exercise of securities, including the effect ofshares issuable under our stock-based incentive plans. Upon our adoption of ashare redemption plan, the weighted-average common shares redeemable during theperiod will be excluded from basic earnings per share, and included in dilutedearnings per share.

 

On November 14,2006, we issued a total of 3,000 shares of restricted stock to our independentdirectors, which require a 12 month service and vesting period.  On November 28, 2007 we issued anadditional total of 3,000 shares of restricted stock to our independentdirectors. The restricted shares have no exercise price and are presented asissued shares on our balance sheet. However, as a result of the outstandingperformance requirements the number of shares are excluded from our basicearnings per share calculation until performance is achieved. At the time suchshares have a dilutive effect, they will be included in the dilutive earningsper share calculation.

 

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The BehringerHarvard Multifamily REIT I, Inc. 2006 Incentive Award Plan (“IncentiveAward Plan”) was approved by the board of directors on November 14, 2006and 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 of10,000,000 shares have been authorized and reserved for issuance under theIncentive Award Plan.

 

As of September 30,2008 and December 31, 2007 we had 1,000 shares of convertible stock issuedand outstanding, no shares of preferred stock issued and outstanding, and hadno options to purchase shares of common stock outstanding.

 

***Reportable Segments***

 

SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” establishes standardfor reporting and financial and descriptive information about an enterprise’sreportable segments. Our current business consists of owning, managing,operating, leasing, acquiring, developing, investing in and disposing of realestate assets. Substantially all of our consolidated income is from real estateproperties that we own through a joint-venture, and we account for each jointventure under the equity method of accounting. Management evaluates operatingperformance on an individual joint venture level. However, as each of our jointventures has similar economic characteristics in our financial statements, ourjoint ventures have been aggregate into one reportable segment.

 

**4.****    ****Recently Announced Accounting Pronouncements**

** **

In September 2006,the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”).SFAS 157 defines fair value, establishes a framework for measuring fair valuein generally accepted accounting principles, and expands disclosures about fairvalue measurements.  We adopted theprovisions of SFAS 157 effective January 1, 2008, and did not have amaterial effect on our consolidated results of operations or financialposition.

 

In February 2008,the FASB staff issued Staff Position No. 157-2 “Effective Date of FASBStatement No. 157” (“FSP SFAS 157-2”). FSP SFAS 157-2 delayed the effective date of SFAS 157 for nonfinancialassets and nonfinancial liabilities, except for items that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually).  The provisions of FSPSFAS 157-2 will expire for the Company’s fiscal year beginning January 1,2009.  We are currently assessing theeffect FSP SFAS 157-2 may have on our financial statement disclosure.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities - Including an Amendment of FASB Statement No. 115.”  The fair value option established bySFAS No. 159 permit all entities to choose to measure eligible itemsat fair value at specified election dates. A business entity will report unrealized gains and losses on items forwhich the fair value option has been elected in earnings (or anotherperformance indicator if the business entity does not report earnings) at eachsubsequent reporting date.  SFAS No. 159is effective for fiscal years beginning after November 15, 2007.  We have not elected the fair valuemeasurement option for any financial assets or liabilities at the present time.

 

In December 2007,the FASB issued SFAS No. 141(R), “Business Combinations.”  This Statement replaces SFAS No. 141 “BusinessCombinations” but retains the fundamental requirement that the acquisitionmethod of accounting, or purchase method, be used for all business combinationsand for an acquirer to be identified for each business combination.  This Statement is broader in scope than thatof Statement 141, which applied only to business combinations in which controlwas obtained by transferring consideration. SFAS No. 141(R) applies the same method of accounting (theacquisition method) to all transactions and other events in which one entityobtains control over one or more other businesses.  This Statement also makes certain other modificationsto Statement 141, including a broader definition of a business and therequirement that acquisition related costs are expensed as incurred.  This statement applies to businesscombinations occurring on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008.  Early adoption is not allowed. Theacquisition of a real estate property has been determined to meet thedefinition of a business combination as defined in SFAS No. 141(R).  Therefore, SFAS No. 141(R) will have amaterial effect on our accounting for future acquisitions of properties asacquisition costs will no longer be capitalized, but will be expensed beginningJanuary 1, 2009.

 

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In December 2007,the FASB issued SFAS No. 160, Non-controlling Interests in ConsolidatedFinancial Statements- An amendment of ARB No. 51.  This Statement amends Accounting ResearchBulletin No. 51 to establish accounting and reporting standards for thenon-controlling interest in a subsidiary and for the deconsolidation of asubsidiary. It clarifies that a non-controlling interest in a subsidiary, whichis sometimes referred to as minority interest, is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements.  Among otherrequirements, this Statement requires consolidated net income to be reported,on the face of the consolidated income statement, at amounts that include theamounts attributable to both the parent and the non-controlling interest. ThisStatement is effective for fiscal years, and interim periods within thosefiscal years, beginning on or after December 15, 2008. Earlier adoption isnot permitted. This Statement shall be applied prospectively as of thebeginning of the fiscal year in which this Statement is initially adopted,except for the presentation and disclosure requirements.  The presentation and disclosure requirementsshall be applied retrospectively for all periods presented.

 

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 would be to expand our disclosures regarding derivative instruments.   We had no derivative instruments during thenine-month period ended September 30, 2008 or the year ended December 31,2007.

 

**5.**     Unconsolidated Real EstateJoint Ventures

** **

***PGGMJoint Venture***

 

We have entered intojoint ventures with Behringer Harvard Master Partnership I LP (“BehringerHarvard Master Partnership I”) in which we are the manager. The 1% generalpartner 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.

 

During April 2007 weentered into commitments for and partially funded equity investments in unconsolidatedreal estate joint ventures and interest-bearing loans to real estate jointventures with two separate commercial real estate developers, the Lovers LaneTownhomes and the Eclipse, in our real estate development business (the “TwoDevelopment Contracts”). These Two Development Contracts were held by twoseparate subsidiaries that we fully consolidated in our financial statements(the “Two Subsidiaries”).

 

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. Webelieve the carrying values of the joint 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 a joint venture structurewith the PGGM Joint Venture (the “Ventures”). The maximum funding commitmentfrom the PGGM Joint Venture may be increased to $300 million.

 

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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 and EITF04-5. 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. As aresult of these equal substantive participating rights, no single partycontrols each Venture; accordingly, we account for each Venture using theequity method of accounting.

 

*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 ofaccounting. As of December 31, 2007, the mortgage note receivable wasapproximately $70,000.  For the 2008consolidated financial statement presentation, this balance has beenreclassified from mortgage note receivable to investments in unconsolidatedreal estate joint ventures.

 

*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 the particularreal estate project (the “Project Entities”). Prior to our equity investments,the Project Entities were owned by the commercial developers and were organizedto own, construct, and finance only one particular real estate project. TheProject Entities are not consolidated in our financial statements.

 

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Ourinterests in the Ventures are recorded as investments in unconsolidated realestate joint ventures and use the equity method of accounting.  The following presents the Ventures’ combinedbalance sheet data:

 
| ** **                                               | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|----------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| **Balance sheet data:**                        | ** ** | **2008**               | ** **  | **2007**              | ** ** |
|                                                     |       |                   |        |                  |       |
| Cash and restricted cash                                 |       | $                      | 1,915,061   |                  | $          | 1,796,624 |   |
| Accounts receivable                                      |       | 18,814                 |        | 385,004               |       |
| Accrued interest receivable                              |       | 2,111,772              |        | 686,807               |       |
| Mortgage notes receivable                                |       | 104,374,638            |        | 76,378,734            |       |
| Investments in unconsolidated real estate joint ventures |       | 25,133,653             |        | 14,981,406            |       |
| Deferred financing costs and other assets, net           |       | 504,775                |        | 472,415               |       |
| Land and buildings, net                                  |       | 31,374,349             |        | 32,813,280            |       |
| Total assets                                             |       | $                      | 165,433,062 |                  | $          | 127,514,270 |   |
|                                                     |       |                   |        |                  |       |
| Accrued liabilities                                      |       | $                      | 485,569     |                  | $          | 312,881 |   |
| Mortgage note payable                                    |       | 23,000,000             |        | 23,000,000            |       |
| Other liabilities                                        |       | 102,568                |        | 103,511               |       |
| Minority shareholder interest                            |       | 1,839,519              |        | 2,085,194             |       |
| Members’ equity:                                    |       |                   |        |                  |       |
| Behringer Harvard Multifamily REIT I, Inc.          |       | 77,645,728             |        | 57,005,889            |       |
| Behringer Harvard Master Partnership I                   |       | 62,359,678             |        | 45,006,795            |       |
| Total liabilities and members’ equity               |       | $                      | 165,433,062 |                  | $          | 127,514,270 |   |

 

The Reserve at JohnsCreek Walk is an operating apartment community wholly-owned by a single-purposelimited liability company (the “The Reserve at Johns Creek Walk Property Entity”).The Reserve at Johns Creek Walk Property Entity, including its operatingreceipts lock-box account, serves as collateral for an interest-only bank loanwith a principal balance of $23 million from an unaffiliated lender (the “BankLoan”). The Bank Loan was entered into during August 2007, matures in March 2013,and bears interest at a rate of 6.461%. The lender has no recourse to theVenture or us, only to The Reserve at Johns Creek Walk Property Entity.Breaching the Bank Loan’s agreement’s restrictions on encumbrances, sale,transfer, or refinancing of the property could constitute an event of defaultand increase the interest rate by 5%; uncured events of default can acceleratethe loan’s maturity date.  Managementbelieves no events of default have occurred. One of our Ventures owns an 80percent equity interest in The Reserve at Johns Creek Walk Property Entity,with an unaffiliated entity owning the remaining 20 percent.  As a result of the Venture consolidating TheReserve at Johns Creek Walk Property Entity, the Bank Loan and the unaffiliatedentity’s 20 percent equity interest are presented in the Ventures’ combinedbalance sheet data above as mortgage note payable and minority shareholderinterest, respectively.  The operatingresults of The Reserve at Johns Creek Walk Property Entity are included belowin the Ventures’ combined income statement data.

 

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Thefollowing presents the Ventures’ combined income statement data:

 
| ** **                        | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                        | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                        | ** ** | **2008**                                           | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                              |       |                                               |       |                                              |       |   |   |   |   |
| **Revenues:**                     |       |                                               |       |                                              |       |   |   |   |   |
| Rent                              |       | $                                                  | 765,423    |                                              | $          | 442,517 |   | $ | 2,239,432 |   | $ | 442,517 |   |
| Interest                          |       | 2,735,132                                          |       | 694,811                                           |       | 7,225,870 |   | 721,264 |   |
|                              |       | 3,500,555                                          |       | 1,137,328                                         |       | 9,465,302 |   | 1,163,781 |   |
|                              |       |                                               |       |                                              |       |   |   |   |   |
| **Operating costs and expenses:** |       |                                               |       |                                              |       |   |   |   |   |
| General and operating             |       | 229,217                                            |       | 225,302                                           |       | 884,480 |   | 225,988 |   |
| Real estate taxes                 |       | 100,000                                            |       | 42,044                                            |       | 300,000 |   | 42,044 |   |
| Interest expense                  |       | 379,763                                            |       | 243,544                                           |       | 1,131,034 |   | 243,543 |   |
| Depreciation and amortization     |       | 448,340                                            |       | 163,625                                           |       | 1,481,552 |   | 163,625 |   |
|                              |       | 1,157,320                                          |       | 674,515                                           |       | 3,797,065 |   | 675,200 |   |
|                              |       |                                               |       |                                              |       |   |   |   |   |
| Minority shareholder interest     |       | (71,425                                            | )          | (32,870                                           | )          | (245,674 | ) | (32,870 | ) |
| **Net income**                    |       | $                                                  | 2,414,660  |                                              | $          | 495,683 |   | $ | 5,913,910 |   | $ | 521,451 |   |

 

Includedin our equity in earnings of unconsolidated real estate joint ventureinvestments for the three months ended September 30, 2008 and 2007 is our shareof the above Ventures’ net income in the amount of $1,301,610 and $254,205,respectively. Included in our equity in earnings of unconsolidated real estatejoint venture investments for the nine months ended September 30, 2008 and2007 is our share of the above Ventures’ net income in the amount of $3,159,181and $284,590, respectively.

 

Netoperating losses attributable to the minority shareholders’ interest in TheReserve at Johns Creek Walk Property Entity for the three months ended September 30,2008 and 2007 was $71,425 and $32,870, respectively.  Net operating losses attributable to theminority shareholders’ interest in The Reserve at Johns Creek Walk PropertyEntity for the nine months ended September 30, 2008 and 2007 was $245,674and $32,870, respectively.

 

Thefollowing presents the reconciliation between our members’ equity interest inthe Ventures and our total investments in unconsolidated real estate jointventures:

 
| ** **                                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| Balance of our Member’s equity in the Ventures      |       | $                      | 77,645,728 |                  | $          | 57,005,889 |   |
| Our capitalized costs, net of amortization               |       | 4,083,086              |       | 3,062,744             |       |
| Other                                                    |       | (102,709               | )          | —                |       |
| Investments in unconsolidated real estate joint ventures |       | $                      | 81,626,105 |                  | $          | 60,068,633 |   |

 

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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 and one operating property. Below are the Ventures’uncollected loan principal balance and equity investments in the ProjectEntities, exclusive of loan commitment fees received, and the Ventures’ equityinvestment in an operating property, as of September 30, 2008 and December 31,2007:

 
| **Name of development and related investments**                                   | ** ** | **Location**         | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                                                                       |       |                 |       |                         |       |                        |       |
| Lovers Lane Townhomes                                                                                      |       | Dallas, TX           |       |                         |       |                        |       |
| Interest-bearing Senior  Mezzanine Loan; 10% annual interest;

principal and interest  due April 2012 |       |                 |       | $                            | 5,514,012  |                        | $          | 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;

principal  due July 2012                               |       |                 |       | 22,138,172                   |       | 22,138,172                  |       |
|                                                                                                       |       |                 |       |                         |       |                        |       |
| 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                           |       |                 |       | 19,337,568                   |       | 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                               |       |                 |       | 6,252,061                    |       | —                      |       |
|                                                                                                       |       |                 |       |                         |       |                        |       |
| Alexan Russell Lofts                                                                                       |       | Clark County, NV     |       |                         |       |                        |       |
| Interest-bearing  loan; 10% annual interest;

principal  due June 2013                                |       |                 |       | 5,811,767                    |       | —                      |       |
|                                                                                                       |       |                 |       |                         |       |                        |       |
| The  Ventures’ total loans to unconsolidated real estate joint ventures                               |       |                 |       | 106,622,124                  |       | 78,114,358                  |       |
|                                                                                                            |            |                      |            |                              |            |                             |            |  |  |

 

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| **Name of development and related investments**                   | ** ** | **Location**         | ** ** | **September 30,  2008** | ** **  | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------|------------|------------------------------|-------------|-----------------------------|------------|
|                                                                                       |       |                 |       |                         |        |                        |       |
| 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                   |       |
|                                                                                       |       |                 |       |                         |        |                        |       |
| 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 Reserve at Johns  Creek Walk                                                           |       | Fulton County, GA    |       |                         |        |                        |       |
| Equity interest of 80%  in an operating property                                           |       |                 |       | 9,196,417                    |        | 9,196,417                   |       |
|                                                                                       |       |                 |       |                         |        |                        |       |
| The Ventures’ total  loans and equity investments                                     |       |                 |       | $                            | 140,952,194 |                        | $          | 102,237,430 |   |
|                                                                                            |            |                      |            |                              |             |                             |            |  |  |

 

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Our involvement with eachof the Project Entities began at the time we committed to making ourinvestments, and our maximum potential loss exposure is limited to the fundedportion of our commitments. The Project Entities also owe amounts under othermortgage loans, bank loans, and other liabilities balances—these areobligations of the Project Entities. Neither we nor the Ventures have a primaryor secondary obligation on those obligations of the Project Entities. Thefollowing table includes estimated information about the nature and size of theactivities of the Project Entities:

 
| **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*

 

Certain Ventures have anequity investment in Project Entities. The Project Entities own development projects and****typicallyhave no operational income or loss. The following presents the unauditedsummarized financial information of those Project Entities:

 
| ** **                          | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Cash                                |       | $                            | 356,577    |                        | $          | 537,526 |   |
| Prepaid taxes and other assets      |       | 249,371                      |       | 8,864                       |       |
| Land and construction in progress   |       | 179,022,242                  |       | 85,522,204                  |       |
| Accounts payable and other          |       | 5,427,009                    |       | 5,923,569                   |       |
| Mortgage loans and interest payable |       | 138,729,120                  |       | 62,308,162                  |       |
| Payable to affiliates               |       | —                       |       | 410,208                     |       |
|                                     |            |                              |            |                             |            |  |  |

 

**6.****     Credit Facility withBehringer Harvard Operating Partnership I LP**

 

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 September 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 September 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 September 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.

 

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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 Behringer Harvard Multifamily Advisors Ihas been terminated or not renewed on account of a material breach by ouradvisor (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 automaticallyconvert into the applicable number of shares of common stock upon the earlierto occur of (1) the date we have made total distributions on the thenoutstanding shares of our common stock equal to the issue price of those sharesplus 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.

 

In September 2008,we repurchased the outstanding convertible stock described above from ouradvisor and issued convertible stock with new terms. The new terms will changehow we calculate the conversion of our convertible stock if our advisorymanagement agreement with Behringer Harvard Multifamily Advisors I expires withoutrenewal or is terminated (other than because of a material breach by ouradvisor). Currently, the number of shares of common stock into which theconvertible stock converts is calculated at the time the advisory managementagreement terminates. If, at that time, our company value plus priordistributions are not sufficient to meet the above-described 7% returnthreshold, then the convertible stock would be of no value. Although theconversion ratio is set at the time the advisory management agreementterminates, the actual conversion will not occur until a Triggering Eventoccurs.  Management has reviewed theterms of the underlying shares and determined the fair value under GAAPapproximated the nominal value paid for the shares.

 

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.

 

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***Share RedemptionProgram***

 

On September 2, 2008, our board of directors has authorized ashare redemption program for investors who hold their shares for more than oneyear.  The purchase price for redeemed shares is set forth in theprospectus for our Initial Public Offering of common stock, as supplementedfrom time to time.  Our board of directors reserves the right in its solediscretion at any time, and from time to time, to (1) waive the one-yearholding period in the event of the death, disability, need for long-term care,or other exigent circumstances such as bankruptcy, a mandatory distributionrequirement under a stockholder’s IRA or with respect to shares purchased underor through our DRIP or automatic purchase plan, (2) reject any request forredemption, (3) change the purchase price for redemptions, or (4) terminate,suspend or amend the share redemption program.  Under the terms of theplan, during any calendar year, we will not redeem in excess of 5% of theweighted average number of shares outstanding during the twelve-month periodimmediately prior to the date of redemption.  In addition, our board ofdirectors will determine whether we have sufficient cash from operations torepurchase shares, and such purchases will generally be limited to proceeds ofour DRIP plus 1% of operating cash flow for the previous fiscal year.  Forthe nine months ended September 30, 2008, we have redeemed nostockholders.

 

***Distributions***

 

We did not declare or pay any distributions prior toJune 6, 2007.

 

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

 
| ** **     | ** ** | **Distributions** | ** ** |
|----------------|------------|-------------------|------------|
| **2008**       | ** ** | **Declared**      | ** ** | **Paid** | ** ** |
| Third Quarter  |       | $                 | 1,330,495  |   | $ | 1,330,539 |   |
| Second Quarter |       | 1,330,847         |       | 1,330,802 |   |
| First Quarter  |       | 1,301,225         |       | 1,279,428 |   |
|           |       | $                 | 3,962,567  |   | $ | 3,940,769 |   |

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

 

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

 

At September 30, 2008, the Ventures heldcontracts for equity investments and/or mortgage loans with a total commitmentvalue of approximately $158.2 million and the Ventures have currently fundedapproximately $141.0 million. The Ventures will require additional capital fromus and Behringer Harvard Master Partnership I in order to fund the remainingcommitments of $17.2 million.  TheVentures have also issued contingent sell options to three 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.

 

The remaining commitments of the Ventures will befunded as actual real estate project construction progresses. Estimated futurepayments are as follows, as of September 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       |       | $                                                                   | 8,608,050  |                                                                                          | $          | —                                                                                                                        |       | $                                                                  | 4,734,428  |                          | $          | 1,091,466 |   | $ | 5,825,894 |   |
| 2009       |       | 8,608,050                                                           |       | 11,800,000                                                                                    |       | 11,224,428                                                                                                                    |       | 1,091,466                                                          |       | 12,315,894                    |       |
| 2010       |       | —                                                              |       | 43,976,450                                                                                    |       | 24,187,048                                                                                                                    |       | —                                                             |       | 24,187,048                    |       |
|       |       |                                                                |       |                                                                                          |       |                                                                                                                          |       |                                                               |       |                          |       |
| Total      |       | $                                                                   | 17,216,100 |                                                                                          | $          | 55,776,450                                                                                                                    |       | $                                                                  | 40,145,904 |                          | $          | 2,182,932 |   | $ | 42,328,836 |   |

 

At December 31, 2007, the Ventures heldcontracts for equity investments and/or mortgage loans with a total commitmentvalue of approximately $126.5 million and the Ventures had funded approximately$102.3 million. The Ventures required additional capital from us and BehringerHarvard Master Partnership I in order to fund the remaining commitment of $24.2million at December 31, 2007. The Ventures have also issued contingentsell options to three Project Entities. In addition, we held The Lovers LaneTownhomes Junior Mezzanine Loan with a total commitment value of approximately$3.2 million and had funded approximately $1,000.

 

The remaining commitments of the Ventures will befunded as actual real estate project construction progresses. Estimated futurepayments 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 |   |

 

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*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 theProject Entity. This option is currently not exercisable and cannot beexercised until development is complete and the property has been certified foroccupancy. If the sell option becomes exercisable, it will expire after threeyears. If exercised, the Venture will be required to purchase the interest ofan unaffiliated equity investor in the Project Entity, 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 equitybalance was approximately $11.8 million at both September 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 theProject Entity. This option is currently not exercisable and cannot beexercised until development is complete and the property has been certified foroccupancy. If the sell option becomes exercisable, it will expire after threeyears. If exercised, the Venture will be required to purchase the interest ofan unaffiliated equity investor in the Project Entity, 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 equitybalance is approximately $10.3 million at both September 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 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 $9.3 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 andcertain of its affiliates earn fees and compensation in connection with theacquisition, management and sale of our assets.

 

Behringer Securities LP (“Behringer Securities”),our dealer manager for the Initial Public Offering, receives a commission of upto 7% of gross offering proceeds before reallowance of commissions earned byparticipating broker-dealers. In addition, up to 2.5% of gross offeringproceeds before reallowance to participating broker-dealers are paid toBehringer Securities as a dealer manager fee. Behringer Securities LP (“BehringerSecurities”), an affiliate of our advisor, serves as the dealer manager for theInitial Public Offering and receives commissions of up to 7% of gross offeringproceeds (1% for sales under our DRIP) before reallowance of commissions earnedby participating broker-dealers.  In connection with the Initial PublicOffering, up to 2.5% of gross proceeds before reallowance to participatingbroker-dealers are paid to Behringer Securities as a dealer manager fee; exceptthat no dealer manager fee is paid on purchases made pursuant to ourDRIP.  In the Initial Public Offering, Behringer Securities reallows allof its commissions to participating broker-dealers and reallows a portion ofits dealer manager fee of up to 2.0% of the gross offering proceeds to be paidto such participating broker-dealers; provided, however, that BehringerSecurities may reallow, in the aggregate, no more than 1.5% of gross offeringproceeds for marketing fees and expenses, bona fide training and educationalmeetings and non-itemized, non-invoiced due diligence efforts, and no more than0.5% of gross offering proceeds for bona fide, separately invoiced duediligence expenses incurred as fees, costs and other expenses from thirdparties. For the threemonths ended September 30, 2007, we sold 1.5 million shares and thereforeBehringer Harvard Multifamily Advisors I earned commissions and dealer managerfees of $869,000 and $342,000, respectively. For the nine months ended September 30,2007, we sold 3.2 million shares and therefore Behringer Harvard Multifamily AdvisorsI earned commissions and dealer manager fees of $1.7 million and $703,000,respectively. For the period from April 1, 2007 through December 31,2007, Behringer Harvard Multifamily Advisors I earned commissions and dealermanager fees of $7.9 million and $3.2 million, respectively. We have sold noadditional shares in 2008.

 

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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 nine months ended September 30, 2007, Behringer Harvard MultifamilyAdvisors I earned $205,000 and $422,000, respectively, for organization andoffering expenses. For the period from April 1, 2007 through December 31,2007, Behringer Harvard Multifamily Advisors I earned organization and offeringexpenses of $1.9 million. We have sold no additional shares in 2008.  Under the terms of the amended AdvisoryManagement Agreement, we will reimburse Behringer Harvard Multifamily AdvisorsI for all organization and offering costs they have incurred not to exceed 1.5%of our gross Public Offering proceeds, including costs from prior offerings inexcess of the O&O Fee.  As of September 30,2008, we estimated our obligation to reimburse offering expenses in an amountof approximately $6.1 million and recorded it as a reduction of additionalpaid-in capital.

 

Included in general and administrative expense forthe three and nine months ended September 30, 2008, are $106,000 and$194,000, respectively, for accounting and legal personnel costs incurred onour behalf by our advisor under the Advisory Management Agreement. None wereincurred for the three and nine months ended September 30, 2007. Theseobligations are typically settled in cash within ninety days.

 

Behringer Harvard Multifamily Advisors I or itsaffiliates received 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. Under the amended AdvisoryManagement Agreement dated September 2, 2008, this fee was reduced to1.75%. For the three months ended September 30, 2008 and 2007, BehringerHarvard Multifamily Advisors I earned acquisition and advisory fees ofapproximately $84,000 and $799,000, respectively. For the nine months ended September 30,2008 and 2007, Behringer Harvard Multifamily Advisors I earned acquisition andadvisory fees of approximately $1.0 million and $1.1 million, respectively. Forthe year ended December 31, 2007, Behringer Harvard Multifamily Advisors Iearned acquisition and advisory fees of approximately $2.6 million.

 

Our advisor or its affiliates will also receive anon-accountable acquisition expense reimbursement in the amount of 0.25% of thefunds paid for purchasing an asset, including any debt attributable to theasset, plus 0.25% of the funds budgeted for development, construction orimprovement in the case of assets that we acquire and intend to develop,construct or improve.  Our advisor or itsaffiliates will also receive a non-accountable acquisition expensereimbursement in the amount of 0.25% of the funds advanced in respect of a loanor other investment.  We will also paythird parties, or reimburse the advisor or its affiliates, for anyinvestment-related expenses due to third parties in the case of a completedinvestment, including, but not limited to, legal fees and expenses, travel andcommunication expenses, costs of appraisals, accounting fees and expenses,third-party brokerage or finder’s fees, title insurance, premium expenses andother closing costs.  Our advisor will beresponsible for paying all of the expenses it incurs associated with personsemployed by the advisor to the extent dedicated to making investments for us,such as wages and benefits of the investment personnel.  Our advisor will also be responsible forpaying all of the investment-related expenses that we or our advisor incursthat are due to third parties with respect to investments we do not make.

 

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 nine months ended September 30,2008 and 2007, Behringer Harvard Multifamily Advisors I earned debt financingfees of $0 and $0.2 million, respectively. For the year ended December 31,2007, Behringer Harvard Multifamily Advisors I earned debt financing fees of$0.2 million from The Reserve at Johns Creek Walk property.

 

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We pay Behringer Harvard Multifamily Securities, LLC(“BHM Management”) an affiliate of our advisor, fees for the management of ourproperties, which may be subcontracted to unaffiliated third parties. Such feesare equal to 3.75% of gross revenues. In the event that we contract directlywith a non-affiliated third party property manager in respect of a property, wewill pay BHM Management an oversight fee equal to 1% of gross revenues of theproperty managed. On September 2, 2008, we entered into an amended andrestated property management agreement with BHM Management.  Under the terms of the amended and restatedproperty management agreement, the oversight fee was reduced to 0.5%. In noevent will we pay both a property management fee and an oversight fee to BHMManagement with respect to a particular property. We will reimburse the costsand expenses incurred by BHM Management on our behalf, including fees andexpenses of apartment locators and third-party accountants, the wages andsalaries and other employee-related expenses of all on-site employees of BHMManagement who are engaged in the operation, management, maintenance or accesscontrol of our properties, including taxes, insurance and benefits relating tosuch employees, and legal, travel and other out-of-pocket expenses that aredirectly related to the management of specific properties. For the three andnine months ended September 30, 2008, BHM Management earned $11,000.  No fees were earned in 2007.

 

Behringer Harvard Multifamily Advisors I received amonthly asset management fee for each asset. This amount will be calculatedbased upon one-twelfth of 1% of aggregate asset value, as defined, as of thelast day of the preceding month. We began acquiring real estate investments in April 2007.Under the amended Advisory Management Agreement, this fee is 0.75% of thehigher of the cost of investment or value of the investment. For the threemonths ended September 30, 2008 and 2007, Behringer Harvard MultifamilyAdvisors I earned asset management fees of approximately $244,000 and $66,000,respectively. For the nine months ended September 30, 2008 and 2007,Behringer Harvard Multifamily Advisors I earned asset management fees ofapproximately $649,000 and $74,000, respectively.

 

Behringer Harvard Multifamily Advisors I or its affiliates is paid adisposition fee if our advisor provides a substantial amount of services, asdetermined by our independent directors, in connection with the sale of one ormore properties.  In such event, we pay our advisor (1) in the caseof the sale of real property, the lesser of:  (A) one-half of theaggregate brokerage commission paid (including the subordinate disposition fee)or if none is paid, the amount that customarily would be paid, or (B) 3%of the sales price of each property sold, and (2) in the case of the saleof any asset other than real property, 3% of the sales price of suchassets.  This fee shall not be earned or paid unless and until thestockholders have received total distributions in an amount equal to or inexcess of the sum of the aggregate capital contributions by stockholders plus a7% cumulative, non-compounded, annual return on such capitalcontributions. Subordinated disposition fees that are not payable at thedate of sale, because stockholders have not yet received their required minimumdistributions, will be deferred and paid at such time as these subordinationconditions have been satisfied.

 

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 will reimburse our advisor for all expenses paid or incurred by theadvisor in connection with the services provided to us, subject to thelimitation that we will not reimburse our advisor for any amount by which itsoperating expenses (including the asset management fee) at the end of the fourpreceding fiscal quarters exceeds the greater of:  (A) 2% of ouraverage invested assets, or (B) 25% of our net income determined withoutreduction for any additions to reserves for depreciation, bad debts or othersimilar non-cash reserves and excluding any gain from the sale of our assetsfor that period.  Notwithstanding the above, we may reimburse the advisorfor expenses in excess of this limitation if a majority of our independentdirectors determines that such excess expenses are justified based on unusualand non-recurring factors.

 

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 these companieswere unable to provide us with the respective services, we would be required toobtain such services from other sources.

 

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

 
| ** **                                | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                      |       |                         |       |                        |       |
| Advance to Ventures                       |       | $                            | 19,228     |                        | $          | 226,443 |   |
| Reimbursements of pursuit and other costs |       | 209,124                      |       | 74,484                      |       |
| Total Receivables from affiliates         |       | $                            | 228,352    |                        | $          | 300,927 |   |
|                                      |       |                         |       |                        |       |
| Asset management fees                     |       | $                            | 110,202    |                        | $          | 217,837 |   |
| Acquisition and advisory fees             |       | 36,118                       |       | 908,345                     |       |
| Property management fee                   |       | 10,882                       |       | —                      |       |
| General and administrative                |       | 153,941                      |       | —                      |       |
| Due to Ventures                           |       | 8,750                        |       | 4,810                       |       |
| Total Payables to affiliates              |       | $                            | 319,893    |                        | $          | 1,130,992 |   |
|                                      |       |                         |       |                        |       |
| Offering costs                            |       | $                            | 6,063,498  |                        | $          | 50,238 |   |
| Commissions and dealer manager fees       |       | (4,750                       | )          | 231,976                     |       |
| Total Accrued offering costs              |       | $                            | 6,058,748  |                        | $          | 282,214 |   |

 

Offering costs, commissions, and dealer manager fees of approximately$282,214 have been reclassified to accrued offering costs as of December 31,2007.

 

**10.**** ****Supplemental disclosures of cashflow information**

 

Supplemental cash flow information is summarizedbelow:

 
| ** **                                                                                            | ** ** | **For the Nine  Months Ended  September 30, 2008** | ** ** | **For the Nine  Months Ended  September 30, 2007** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Supplemental disclosure of cash flow  information:                                                    |       |                                                                        |       |                                                                        |       |
| Interest paid, net of amounts capitalized                                                             |       | $                                                                           | —     |                                                                        | $          | 31,603 |   |
|                                                                                                  |       |                                                                        |       |                                                                        |       |
| Non-cash investing activities:                                                                        |       |                                                                        |       |                                                                        |       |
| Escrow and prepaid acquisition costs                                                                  |       | $                                                                           | 1,528,953  |                                                                        | $          | — |   |
| Receivable from affiliates                                                                            |       | $                                                                           | 17,784     |                                                                        | $          | 401,055 |   |
| Accrued other assets                                                                                  |       | $                                                                           | 8,049      |                                                                        | $          | — |   |
| Conversion of mortgage note receivable into  investments in unconsolidated real estate joint ventures |       | $                                                                           | —     |                                                                        | $          | 2,782,923 |   |
|                                                                                                  |       |                                                                        |       |                                                                        |       |
| Non-cash financing activities:                                                                        |       |                                                                        |       |                                                                        |       |
| Dividends payable                                                                                     |       | $                                                                           | 433,856    |                                                                        | $          | — |   |
| Accrued offering costs                                                                                |       | $                                                                           | 6,058,748  |                                                                        | $          | — |   |

 

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**11.  Subsequent Events**

 

On November 13, 2008, the Board ofDirectors authorized the payment of cash dividends (each a “Daily Distribution”)to stockholders of record as of the close of business on each day of the periodcommencing January 1, 2009 and ending on February 28, 2009 (each a “RecordDate”), with each Daily Distribution payable as of each Record Date to be$0.0017808 per share of common stock, which is the equivalent to an annualdistribution rate of 6.5% on a share of common stock purchased for $10.00 pershare.  We will pay the DailyDistribution for each day of the month on or before the sixteenth of March 2009.

 

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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 or covenantsshould not be relied upon as accurately describing or reflecting the currentstate 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 in theUnited States. We have since made investments in one operating property andnine properties that are currently under development or redevelopment. As of September 30,2008, we have made investments in ten real estate joint ventures.  These joint ventures have made loans toand/or equity investments in nine development properties in Texas, Virginia,Florida, Colorado, Nevada, Maryland, and an equity investment in one operatingproperty located in 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, loans 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, assets that maybenefit from enhancement or repositioning and development assets for

 

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stabilizationto retain as core assets generating income with potential capital appreciation.Further, we may invest in commercial real estate, including office buildings,shopping centers, business and industrial parks, manufacturing facilities,warehouses and distribution facilities and motel and hotel properties. We mayinvest in real estate-related securities, including securities issued by otherreal estate companies, either for investment or in change of controltransactions completed on a negotiated basis or otherwise. We also mayoriginate or invest in commercial mortgage-backed securities, mortgage, bridge,mezzanine or other loans and Section 1031 tenant-in-common interests(including those issued by programs sponsored by Behringer Harvard Holdings,LLC), or in entities that make investments similar to the foregoing. Althoughwe intend to primarily invest in real estate assets located in the UnitedStates, in the future, we may make investments in real estate assets locatedoutside the United States. We have not made any international investments. Wewill not make international investments until all of our non-independentdirectors and one of our independent directors have at least three years ofrelevant experience acquiring and managing such international 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 and 2009 than in recent years.

 

Recently, domestic financial markets haveexperienced unusual volatility and uncertainty. Although this conditionhas   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. On the other hand, we may be able to takeadvantage of the current dislocation in the credit markets to identifychallenged developments or redevelopments or other unique investment opportunitiescreated by the change in liquidity and repricing of risk. In addition, we maybe able to identify acquisitions as they become more attractive due to declinesin commercial real estate prices. As discussed further below, we expect to meetour short-term liquidity requirements through the net cash raised from ourprior private offering, this offering and cash flow from the operations of ourcurrent investments. For purposes of our long-term liquidity requirements, weexpect that the net cash from this offering and from our current and futureinvestments will generate sufficient cash flow to cover operating expenses andour monthly distribution. Multifamily community demand is also affected bychanges in credit market liquidity and repricing of risk affects the cost andavailability of financing for purchase of single family homes.

 

We actively search for real estate opportunities androutinely evaluate making investments in potential projects and operatingproperties. We expect to use the proceeds from our public offering tosubstantially increase the number and amount of our investments in potentialprojects and operating 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 September 30, 2008, we have used the proceedsfrom the private offering, as well as borrowings under our prior creditfacility with Behringer Harvard Operating Partnership I LP, to acquire equityinterests in 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 has made an equity investment inan operating property. Under arrangements managed by Behringer HarvardInstitutional GP LP, a Texas limited partnership, which is an affiliate of ouradvisor and is indirectly wholly owned by Behringer Harvard Holdings, we haveentered into, and it is intended that we will continue to enter into, a seriesof co-investment agreements with Behringer Harvard Master Partnership I LP, a

 

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Delawarelimited partnership for 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 and provide equity and/or loans for a particular project(our “Project Commitments”). We fund an initial amount under our ProjectCommitments at contract inception and fund additional amounts as constructionprogresses, typically spanning one to three years. Estimated remaining paymentson our Project Commitments for 2008 are approximately $5.8 million and areexpected to be funded from current cash balances. See “Item 3. Properties” formore discussion of our investments.

 

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

 
| **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                           |       | $                                            | 3,371      |   |
|                          |       |                                |       |                       |       |                                            |       |                             |       |                                         |       |
| The Eclipse                   |       | Development                         |       | Equity and  Mezzanine Loan |       | Houston, Texas                                  |       | Apr-07                           |       | 7,138                                        |       |
|                          |       |                                |       |                       |       |                                            |       |                             |       |                                         |       |
| Fairfield at Baileys Crossing |       | Development                         |       | Mezzanine Loan             |       | Fairfax County  and Arlington  County, Virginia |       | Jul-07                           |       | 12,508                                       |       |
|                          |       |                                |       |                       |       |                                            |       |                             |       |                                         |       |
| Alexan St. Rose               |       | Development                         |       | Mezzanine Loan             |       | Clark County,  Nevada                           |       | Jul-07                           |       | 2,952                                        |       |
|                          |       |                                |       |                       |       |                                            |       |                             |       |                                         |       |
| Johns Creek Walk              |       | Operating                           |       | Equity                     |       | Fulton County,  Georgia                         |       | Aug-07                           |       | 5,028                                        |       |
|                          |       |                                |       |                       |       |                                            |       |                             |       |                                         |       |
| Satori                        |       | Development                         |       | Equity and  Mezzanine Loan |       | Broward County,   Florida                       |       | Oct-07                           |       | 13,040                                       |       |
|                          |       |                                |       |                       |       |                                            |       |                             |       |                                         |       |
| Tower 55 Hundred              |       | Development                         |       | Equity and  Mezzanine Loan |       | Arlington County,  Virginia                     |       | Oct-07                           |       | 13,660                                       |       |
|                          |       |                                |       |                       |       |                                            |       |                             |       |                                         |       |
| Fairfield at Cameron House    |       | Development                         |       | Mezzanine Loan             |       | Silver Spring,  Maryland                        |       | Dec-07                           |       | 10,905                                       |       |
|                          |       |                                |       |                       |       |                                            |       |                             |       |                                         |       |
| Alexan Prospect               |       | Development                         |       | Equity and  Mezzanine Loan |       | Denver, Colorado                                |       | Apr -08                          |       | 8,011                                        |       |
|                          |       |                                |       |                       |       |                                            |       |                             |       |                                         |       |
| Alexan Russell Lofts          |       | Development                         |       | Equity and  Mezzanine Loan |       | Clark County,  Nevada                           |       | Jun-08                           |       | 5,013                                        |       |
|                          |       |                                |       |                       |       |                                            |       |                             |       | $                                            | 81,626     |   |

 

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

 
| ** **                       | ** ** | **Number of Rental Units** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| **Property Type**           | ** ** | **September 30, 2008**     | ** ** | **December 31, 2007** | ** ** |
|                             |       |                                 |       |   |   |
| Stabilized operating properties: |       |                                 |       |   |   |
| Johns Creek, 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 assetsand liabilities. We evaluate these judgments, assumptions and estimates forchanges which would affect the reported amounts. These estimates are based onmanagement’s historical industry experience and on various other judgments andassumptions that are believed to be reasonable under the circumstances. Actualresults may differ from these judgments, assumptions and estimates. Oursignificant judgments, assumptions and estimates include the consolidation ofvariable interest entities (“VIEs”), the allocation of the purchase price ofacquired properties and evaluating our real-estate related investments forimpairment.

 

***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 minimum percentageas 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 or accountingfor an investment on the equity method that should in fact be consolidated, theeffects of which could be material to our results of operations and financialcondition.

 

***Mortgage Notes Receivable***

 

Mortgage notes receivable are reported at their outstandingprincipal balances net of any unearned income and unamortized deferred fees andcosts. Loan origination fees and certain direct origination costs are generallydeferred and recognized as adjustments to interest income over the lives of therelated 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 Ventures account for all of their loans,as a loan, and not as investments in real estate pursuant to Exhibit I ofAICPA Practice Bulletin 1 and EITF 86-21.

 

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

 

Substantially all of our current investments havebeen made through a Co-Investment Venture managed by us or a subsidiary ofours. We  are the manager of theCo-Investment Venture’s affairs, but the operation of Co-Investment Venturesare conducted in accordance with operating plans prepared by us and approved byus 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 September 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.

 

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***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 IntangibleAssets.”  Identified intangible assetsconsist of the fair value of above-market and below-market leases, in-placeleases, in-place tenant improvements, in-place leasing commissions and tenantrelationships. Initial valuations are subject to change until our informationis finalized, which will be no later than twelve months from the acquisitiondate.

 

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 land andbuildings. 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 lease andour overall relationship with that respective tenant. The aggregate value fortenant improvements and leasing commissions will be based on estimates of thesecosts incurred at inception of the acquired leases, amortized through the dateof 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.The value 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 theseestimates. A change in these estimates and assumptions could result in thevarious categories of our real estate assets or related intangibles beingoverstated or understated which could result in an overstatement orunderstatement of depreciation or amortization expense. These variances couldbe material to our results of operations and financial condition.

 

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**Results ofOperations**

 

As of September 30, 2008, we and/or our Co-InvestmentVentures had acquired joint venture interests in nine properties underdevelopment and acquired one joint venture interest in an operating apartmentcommunity. As of September 30, 2007, we and/or our Co-Investment Ventureshad acquired joint venture interests in four properties under development andone operating apartment community. We began acquiring interests in real estatein April 2007. Accordingly, our results of operations for each periodpresented reflect significant increases in 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 September 30,2008 as compared to the three months ended September 30, 2007*

 

*Asset Management Fees.*Assetmanagement fees for the three months ended September 30, 2008 and 2007were approximately $244,000 and $66,000, respectively. The increase is dueto acquiring joint venture interests in five properties subsequent to September 30,2007.  We expect increases in these fees as a result of owning andacquiring additional joint venture interests and real estate.

 

*Property ManagementFees.*Propertymanagement fees for the three months ended September 30, 2008 wereapproximately $11,000. There were no property management fees for the threemonths ended September 30, 2007. We expect increases in these fees asa result of owning and acquiring interests in operating properties.

 

*Interest Expense*. Interest expense for the threemonths ended September 30, 2008 and 2007 was approximately $0 and$354,000, respectively, and was comprised of interest costs due for borrowingsunder the credit facility with Behringer Harvard Operating Partnership I LP. Weentered into this credit facility in April 2007 and borrowed a total of$15 million during the three months ending September 30, 2007. We repaid$6 million of these borrowings as of September 30, 2007. Thiscredit facility was terminated on December 20, 2007; all amounts were paidin full. Inthe ordinary course of our business, we may enter into borrowing arrangementsin the future, which will create additional expenses.

 

*General and Administrative Expense*. General and administrative expenses for thethree months ended September 30, 2008 and 2007 were approximately $426,000and $176,000 respectively, and included corporate general and administrativeexpenses, as well as 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*. Organization expense for the three months ended September 30,2008 and 2007 was approximately $9,500 and $2,000, respectively.  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 thepro-rated share of organization expenses embedded in the fee as an expense. Theprivate offering was terminated on December 28, 2007.  In connection with the September 2, 2008amendment to our Advisory Management Agreement, we recorded the remainingunreimbursed organization costs. We do not expect any significantadditional organization expenses in the future.

 

*Depreciation and Amortization Expense.*Depreciation and amortization expenses forthe three months ended September 30, 2008 was approximately $8,400 andincluded amortization of deferred costs related to joint venture investments.There was no depreciation and amortization expense for the three months ended September 30,2007. We expect increases as a result of owning, and acquiringadditional joint venture interests and real estate.

 

*Interest Income.*Interest income for the three months ended September 30, 2008 and2007 was approximately $162,000 and $11,000, respectively, and primarilyincluded interest earned on our funds on deposit with banks that resulted fromthe receipt 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.

 

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*Equity in Earnings of Joint Venture Investments.*Equity in earnings of joint ventureinvestments for the three months ended September 30, 2008 and 2007 wasapproximately $1.3 million and $254,000, respectively, and included our sharein earnings from our unconsolidated joint venture investments. These netearnings increased due to the acquisition of five joint venture investmentssubsequent to September 30, 2007. Equity in earnings generated from thejoint venture investments were due primarily from interest and fees accrued onloans made to project development borrowers. Equity in earnings was reduced, inpart, from a joint venture investment in an operating property that incurred anet loss after deducting depreciation and amortization. For our existing jointventures, we expect this trend to continue for the duration of 2008 and expectnet equity in 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.

 

*The nine months ended September 30, 2008 as compared tothe nine months ended September 30, 2007*

 

*AssetManagement Fees.* Assetmanagement fees for the nine months ended September 30, 2008 and 2007 wereapproximately $649,000 and $74,000, respectively. The increase is due toacquiring joint venture interests in five properties subsequent to September 30,2007.  We expect increases in these feesas a result of owning and acquiring additional joint venture interests and realestate.

 

*Property ManagementFees.*Propertymanagement fees for the nine months ended September 30, 2008 wereapproximately $11,000. There were no property management fees for the ninemonths ended September 30, 2007. We expect increases in these fees asa result of owning and acquiring interests in operating properties.

 

*InterestExpense.*Interest expense for the nine monthsended September 30, 2008 and 2007 was approximately $0 and $526,000,respectively, and was comprised of interest costs due for borrowings under thecredit facility with Behringer Harvard Operating Partnership I LP.  We entered into this credit facility in April 2007and borrowed a total of $23 million during the nine months ending September 30,2007.  We paid $14 million of theborrowings as of September 30, 2007. This credit facility was terminatedon December 20, 2007; all amounts were paid in full. In the ordinarycourse of our business, we may enter into borrowing arrangements in the future,which will create additional expenses.

 

*Generaland Administrative Expenses.* General andadministrative expenses for the nine months ended September 30, 2008 and2007 were approximately $967,000 and $345,000, respectively, and includedcorporate general and administrative expenses, as well as compensation of ourboard of directors, auditing and tax fees, and legal fees.  We expect increases as a result of owning,and acquiring additional joint venture interests and real estate.

 

*Organization Expense*. Organization expense for the nine months ended September 30,2008 and 2007 was approximately $9,500 and $50,000, respectively.  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 thepro-rated share of organization expenses embedded in the fee as an expense. Theprivate offering was terminated on December 28, 2007.  In connection with the September 2, 2008amendment to our Advisory Management Agreement, we recorded the remainingunreimbursed organization costs. We do not expect any significantorganization expenses in the future.

 

*Depreciation and AmortizationExpense. *Depreciationand amortization expenses for the nine months ended September 30, 2008 wasapproximately $38,000 and included amortization of deferred costs related tojoint venture investments.  There was nodepreciation and amortization expense for the nine months ended September 30,2007.  We expect increases as a result ofowning and acquiring additional joint venture interests and real estate.

 

*Interest Income. *Interest incomefor the nine months ended September 30, 2008 and 2007 was approximately$813,000 and $87,000, respectively, and primarily included interest earned onour funds on deposit with banks that resulted from the receipt of proceeds fromour private offering which terminated on December 28, 2007 as well asinterest earned on the Lovers Lane Townhomes loans during the period they wereaccounted for as a loan.  We expectincreases in the future as we maintain our current bank deposits and fromproceeds received from our public offering.

 

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*Equity in Earnings of JointVenture Investments. *Equityin earnings of joint venture investments for the nine months ended September 30,2008 and 2007 was approximately $3.2 million and $285,000, respectively, andincluded our share in earnings from our unconsolidated joint ventureinvestments.  These net earningsincreased due to the acquisition of five joint venture investments subsequentto September 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.

 

**Cash Flow Analysis**

 

*The nine months ended September 30,2008 as compared to the nine months ended September 30, 2007*

 

Asof September 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 nine months ended September 30, 2008reflect significant differences from the cash flows for the nine months ended September 30,2007.  We began to receive proceeds fromour private offering of our common stock in April 2007 which terminated onDecember 28, 2007.

 

Cash flows provided byoperating activities for the nine months ended September 30, 2008 were $2.0million and included our net income of $2.3 million; depreciation andamortization of $38,000; equity in earnings of $3.2 million which is includedin our net income offset by distributions from our unconsolidated real estatejoint venture investments of $3.2 million, and other net changes used inworking capital accounts of $294,000. During the nine months ended September 30, 2007, cash flows used inoperating activities were $307,000 and included our net loss of $623,000;amortization of $157,000; equity in earnings of $285,000 which is included inour net income; and other net changes in working capital of $444,000. Operatingcash flows were significantly lower for the nine months ended September 30,2007 due to having recent investments in only five projects and less corporateactivity.

 

Cash flows used ininvesting activities for the nine months ended September 30, 2008 were$20.9 million. During the period we invested $22.0 million to acquire interestsin real estate ventures; cash distributions from our real estate venturesexceeded GAAP earnings, resulting in $1.0 million being accounted for as areturn of investment; and we had short-term repayments of advances to jointventures of $40,000. During the nine months ended September 30, 2007, cashflows used in investing activities were $27.5 million including $24.4 millionin investments in real estate ventures, $3.0 million in issuances of mortgagenotes receivable, $156,000 in net short-term advances to and from jointventures, offset by $2.0 million in proceeds from sales of interests in jointventures, and $1.9 million in prepaid acquisition expense and escrow deposits.

 

Cash flows used infinancing activities for the nine months ended September 30, 2008 were$4.2 million. During the period, we redeemed common stock in the amount of$50,000.  We paid dividends of $3.9 million and paid cash of $245,000 toaffiliates for offering costs.  During the nine months ended September 30,2007, cash flows provided by financing activities were $34.2 million and werecomprised primarily of funds received from the issuance of stock, net ofoffering costs, of $25.6 million.  Wereceived $23.0 million in proceeds from our credit facility loan and repaid$14.0 million.  We paid credit facilityfinancing fees in the amount of $318,000 and paid dividends of $119,000.

 

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In accordance with the Statement of Policy Regarding RealEstate Investment Trusts published by the North American SecuritiesAdministrators Association, also known as the NASAA REIT Guidelines, our charterrequires that we monitor our expenses on a trailing twelve month basis. Our charter defines the following terms and requires that our Total OperatingExpenses (“TOE”) are deemed to be excessive if at the end of any quarter theyexceed for the prior trailing twelve month period the greater of 2% of ourAverage Invested Assets (“AIA”) or 25% of our Net Income (“NI”).  For thetrailing twelve months ended September 30, 2008, TOE of approximately $1.9million exceeded 2% of our AIA (which was approximately $1.4 million) byapproximately $452,000.  Our Board of Directors, including all of ourindependent directors, have reviewed this analysis and unanimously determinedthe excess to be justified considering the fact that we were in theregistration for our initial public offering of common stock from December 31,2007 through September 2, 2008 and our rate of investments thereaftercaused the expenses incurred as a result of being a public company andcommencing an initial public offering for audit and legal services, directorand officer liability insurance and fees for Board members in connection withservice on the Board and its committees to be disproportionate to the Company’sAIA and NI.

 

**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, making investmentsin real estate and loans and the receipt of income from such investments, whichcould result in a delay in the benefits to our stockholders of returnsgenerated from our operations.  Assumingunder our Initial Public Offering no shares are reallocated from ourdistribution reinvestment plan, or DRIP offering, to our Initial PrimaryOffering and the maximum offering amount of $2,475,000,000 is raised, we expectto use approximately 91.6% of the gross proceeds raised in this offering (89.6%with respect to gross proceeds from our primary offering and 100% with respectto gross proceeds from our distribution reinvestment plan) to make investmentsin real estate, loans and other investments, paying acquisition fees andexpenses incurred in making such investments and for any capital reserves wemay establish.  We expect to useapproximately 91.6% of the gross proceeds if no shares are reallocated from ourdistribution reinvestment plan to this offering and the maximum offering israised (89.6% with respect to gross proceeds from our primary offering and100.0% with respect to gross proceeds from our distribution reinvestment plan)to make investments in real estate, loans and other investments and to useapproximately 2.1% of the gross proceeds for establishment of capital reservesand payment of acquisition fees and expenses related to the selection andacquisition of our investments, assuming no debt financing fee (2.1% withrespect to gross proceeds from our primary offering and 2.3% with respect to grossproceeds from our distribution reinvestment plan).

 

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.

 

Distributions will beauthorized at the discretion of our board of directors, based on its analysisof our earnings, cash flow, anticipated cash flow, capital expenditurerequirements and general financial condition. The board’s discretion will be influenced, in substantial part, by itsobligation to cause us to comply with REIT requirements.  Until we generate sufficient cash flow fromoperations to fully fund the payment of distributions, we have and will continueto pay some or all of our distributions from other sources.  We may generate cash to pay distributionsfrom financing activities, components of which may include borrowings(including borrowings secured by our assets) in anticipation of future operatingcash flow and proceeds of our Initial Public Offering.  In addition, from time to time, our advisorand its affiliates may agree to waive or defer all, or a portion, of theacquisition, asset management or other fees or other incentives due to them, enterinto lease agreements for unleased space, pay general administrative expensesor otherwise supplement investor returns in order to increase the amount ofcash available to make distributions to our stockholders.

 

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We had the abilityto borrow funds and use guarantees and letters of credit under a creditagreement with Behringer Harvard Operating Partnership I LP (the “CreditFacility”), and used borrowings under the Credit Facility to fund certain ofour investments.  We pledgedsubstantially all of the assets of Behringer Harvard Multifamily OP I andsubsidiaries as collateral for the Credit Facility.  The Credit Facility provided us with anoptional source of funds, guarantees, and letters of credit issued on ourbehalf. The Credit Facility had an aggregate commitment of $100 million, whichcould have been increased to a maximum of $400 million. Principal and interestcould be prepaid without 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:

 

·         Interest at rates between 7.5% and 13%, depending onour leverage-to-tangible assets ratio as of the prior calendar quarter end.

 

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

 

·         Facility Fee of 0.1% for the average unused portion ofthe maximum commitment amount (including loans, commitment letters andguarantees); paid annually. Total facility fees paid were $68,000.

 

·         Letter of credit fees of 1.5% of aggregate faceamount; paid quarterly in advance. We paid no letter of credit fees.

 

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

 

The following is a listing of historical borrowings madethrough the Credit Facility and the cash respective repayment:

 
| **Project Name**          | ** ** | **Total Borrowings** | ** **   | **Date Paid in Full** | ** **     |
|--------------------------------|------------|---------------------------|--------------|--------------------------------------|----------------|
| Lovers Lane Townhomes          |       | $                         | 1.6 million  |                                 | June 2007 |   |
| The Eclipse                    |       | 1.0 million               |         | June 2007                       |           |
| Fairfield at Baileys  Crossing |       | 8.0 million               |         | October 2007                    |           |
| Alexan St. Rose                |       | 3.0 million               |         | October 2007                    |           |
| Johns Creek Walk               |       | 4.0 million               |         | November 2007                   |           |
| Satori                         |       | 6.0 million               |         | November 2007                   |           |
| Tower 55 Hundred               |       | 7.0 million               |         | November 2007                   |           |
| Total                          |       | $                         | 30.6 million |                                 |           |   |

 

During the year ended December 31, 2007 total amountsborrowed and repaid under the Credit Facility were approximately $36 million, whichincluded (i) $30.6 million for the projects listed above,(ii) working capital of $4.5 million and (iii) interest andother fees of approximately $925,000.  Allamounts have been repaid.  For the ninemonths ended September 30, 2008 and 2007, we had $0 and $9 million,respectively, in outstanding borrowings.

 

The Reserve at JohnsCreek Walk is an operating apartment community wholly-owned by a single-purposelimited liability company (the “The Reserve at Johns Creek Walk Property Entity”).The Reserve at Johns Creek Walk Property Entity, including its operatingreceipts lock-box account, serves as collateral for an interest-only bank loanwith a principal balance of $23 million from an unaffiliated lender (the “BankLoan”). The Bank Loan was entered into during August 2007, matures in March 2013,and bears interest at a rate of 6.461%. The lender has no recourse to theVenture or us, only to The Reserve at Johns Creek Walk Property Entity.Breaching the Bank Loan’s agreement’s restrictions on encumbrances, sale,transfer, or refinancing of the property could constitute an event of defaultand increase the interest rate by 5%; uncured events of default can acceleratethe loan’s maturity date.  No events ofdefault have occurred. For the nine months ended September 30, 2008, thisproperty paid interest of $1.1 million, and the outstanding principal balanceowed by the property was approximately $23 million.  As of September 30, 2008, the occupancyrate at The Reserve at Johns Creek Walk was 96%.

 

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As of September 30, 2008 and December 31,2007, we were in compliance with all material financial covenants andrestrictions.

 

On December 28, 2007, we ceased offeringshares of common stock under our private offering. We sold a total ofapproximately 14.2 million shares of common stock and raised a total ofapproximately $127.3 million in gross private offering proceeds in the privateoffering.

 

We expect to fund our short-term liquidityrequirements by using the net proceeds realized from our offerings, short-termborrowings and cash flow from the operations of our current investments.  Operating cash flows are expected to increaseas additional real estate assets are added to the portfolio.  For both ourshort-term and long-term liquidity requirements, other potential future sourcesof capital may include proceeds from secured or unsecured financings frombanks or other lenders, proceeds from the sale of our investments, if and whenany are sold, and undistributed funds from operations.  If necessary, wemay use financings or other sources of capital in the event of unforeseensignificant capital expenditures.

 

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. However, for purposes of our long-term liquidity requirements, weexpect that the net cash from this offering and from our current and futureinvestments will generate sufficient cash flow to cover operating expenses andour monthly distribution.

 

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**Distributions**

 

The distributions declared and paid during the nine monthsending September 30, 2008 and 2007 exceeded FFO for the nine months ended September 30,2008 and 2007 by approximately $868,000 and $736,000, respectively.  Accordingly, for the nine months ended September 30,2008 and 2007, approximately 78% and 0% of the distributions were funded fromFFO.  Cash amounts distributed tostockholders in excess of FFO were funded from the following sources: privateoffering proceeds and cash flow from our investments.

 

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

 
| ** **     | ** ** | **Distributions** | ** ** |
|----------------|------------|-------------------|------------|
| **2008**       | ** ** | **Declared**      | ** ** | **Paid** | ** ** |
| ** **     | ** ** | ** **        | ** ** | ** ** | ** ** |
| Third Quarter  |       | $                 | 1,330,495  |   | $ | 1,330,539 |   |
| Second Quarter |       | 1,330,847         |       | 1,330,802 |   |
| First Quarter  |       | 1,301,225         |       | 1,279,428 |   |
|           |       | $                 | 3,962,567  |   | $ | 3,940,769 |   |

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

 

Over the long-term, we expect that a greater percentage ofour distributions will be paid from cash flow from investments and operations(except with respect to distributions related to sales of our assets). However, operating performance cannot be accurately predicted due to numerousfactors, including our ability to raise and invest capital at favorable yields,the financial performance of our investments in the current real estateenvironment, the types and mix of investments in our portfolio and theaccounting treatment of our investments in accordance with our accountingpolicies.  As a result, future distributions declared and paid maycontinue to exceed FFO.  FFO is anon-GAAP financial measure that is widely recognized as a measure of REIToperating performance.  See “Funds fromOperations” on Page 48 for a reconciliation of FFO to our net income.

 

**Off-Balance Sheet Arrangements**

 

Until December 20,2007, we had the ability to borrow funds and use guarantees and letters ofcredit under a credit agreement with Behringer Harvard Operating Partnership ILP (the “Credit Facility”).  We used borrowings under the Credit Facilityto fund our investments but did not use any guarantees or letters ofcredit.  We pledged substantially all of the assets of Behringer HarvardMultifamily OP I and subsidiaries as collateral for the Credit Facility. The Credit Facility provided us with an optional source of funds, guarantees,and letters of credit issued on our behalf. The Credit Facility had anaggregate commitment of $100 million, which could have been increased to amaximum of $400 million. Principal and interest could be prepaid withoutpenalty and were due at the end of the one-year term, April 2, 2008. Theterm of the loan could have been extended until April 1, 2009 upon theagreements of both parties; this Credit Facility was terminated on December 20,2007.

 

On May 7, 2007, affiliates of our advisoragreed to an investment arrangement (the “Master Co-Investment Arrangement”)with Stichting Pensioenfonds Zorg en Welijn, a Dutch foundation (“PGGM”).  PGGM is a Dutch pension fund serving 1.9million families of healthcare and social workers, managing more than $95billion in pension assets and investing in the Netherlands and abroad inequities, fixed-interest securities, real estate, private equity andcommodities.

 

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Under arrangements managed by Behringer HarvardInstitutional GP LP, a Texas limited partnership, which is an affiliate of ouradvisor and is indirectly wholly owned by Behringer Harvard Holdings, we haveentered into, and it is intended that we will continue to enter into, a seriesof co-investment agreements for the purposes of forming and operating entitiesthat will be managed by us or a subsidiary of ours and will invest into-be-developed multifamily communities or newly constructed multifamilycommunities that have not yet reached stabilization.  Behringer HarvardMaster Partnership I LP, a Delaware limited partnership (the “Co-InvestmentPartner”), is our co-investment partner for these co-investment projects. Our Co-Investment Partner is owned (i) 99% by PGGM, which serves as thelimited partner of the Co-Investment Partner, and (ii) 1% by BehringerHarvard Institutional GP, which serves as the general partner of theCo-Investment Partner.  PGGM has committed to invest up to $200 million inco-investment ventures through the Co-Investment Partner, but may increase itscommitment to $300 million at any time prior to November 9, 2011. Behringer Harvard Institutional GP will provide the remaining 1% of capital forthe Co-Investment Partner’s investments in co-investment ventures. Generally, the Co-Investment Partner will own 45% of each co-investmentventure, although the Co-Investment Partner may own less than 45% of aco-investment venture if such venture will own a co-investment project withexpected 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 havecontrol over 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.

 

The Reserve at Johns Creek Walk is an operating apartmentcommunity wholly-owned by a single-purpose limited liability company (the “TheReserve at Johns Creek Walk Property Entity”). The Reserve at Johns Creek WalkProperty Entity, including its operating receipts lock-box account, serves ascollateral for an interest-only bank loan with a principal balance of $23million from an unaffiliated lender (the “Bank Loan”). The Bank Loan wasentered into during August 2007, matures in March 2013, and bearsinterest at a rate of 6.461%. The lender has no recourse to the Venture or us,only to The Reserve at Johns Creek Walk Property Entity. Breaching the BankLoan’s restrictions on encumbrances, sale, transfer, or refinancing of theproperty could constitute an event of default and increase the interest rate by5%; uncured events of default can accelerate the loan’s maturity date.  No events of default have occurred. One of theCo-Investment Ventures owns an 80 percent equity interest in The Reserve atJohns Creek Walk Property Entity, with an unaffiliated entity owning theremaining 20 percent.

 

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.

 

We have no other off-balance sheet arrangementsthat are reasonably likely to have a current or future material effect on ourfinancial condition, changes in financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resources.

 

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**ContractualObligations**

** **

In the ordinary course ofbusiness, we and/or Co-Investment Ventures contract with unaffiliatedcommercial property development companies and provide equity and/or loans for aparticular project (our “Project Commitments”).  We fund an initial amountunder our Project Commitments at contract inception and fund additional amountsas construction progresses, typically spanning one to three years.

 

As of September 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 currently funded approximately $141.0 million.  The Co-Investment Ventures will requireadditional capital from us and Behringer Harvard Master Partnership I in orderto fund the remaining commitments of $17.2 million. The Co-Investment Ventureshave also issued contingent sell options to three Project Entities.  In addition, we hold The Lovers LaneTownhomes Junior Mezzanine Loan with a total commitment value of approximately$2.2 million and have funded approximately $1,000; the total commitment valuewas reduced in April 2008.

 

The remaining commitmentsof the Co-Investment Ventures will be funded as actual real estate project constructionprogresses.  Estimated future paymentsare as follows, as of September 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       |       | $                                                                              | 8,608,050  |                                                                                                       | $          | —                                                                                                                               |       | $                                                                     | 4,734,428  |                          | $          | 1,091,466 |   | $ | 5,825,894 |   |
| 2009       |       | 8,608,050                                                                      |       | 11,800,000                                                                                                 |       | 11,224,428                                                                                                                           |       | 1,091,466                                                             |       | 12,315,894                    |       |
| 2010       |       | —                                                                         |       | 43,976,450                                                                                                 |       | 24,187,048                                                                                                                           |       | —                                                                |       | 24,187,048                    |       |
| Total      |       | $                                                                              | 17,216,100 |                                                                                                       | $          | 55,776,450                                                                                                                           |       | $                                                                     | 40,145,904 |                          | $          | 2,182,932 |   | $ | 42,328,836 |   |

 

At December 31, 2007, the Co-Investment Venturesheld contracts for equity investments and/or mortgage loans with a totalcommitment value of approximately $126.5 million and the Ventures had fundedapproximately $102.3 million. The Co-Investment Venturesrequired additional capital from us and Behringer Harvard Master Partnership Iin order to fund the remaining $24.2 million at December 31, 2007. The Co-Investment Ventureshave also issued contingent sell options to the Project Entities. In addition,we held The Lovers Lane Townhomes Junior Mezzanine Loan with a total commitmentvalue of approximately $3.2 million and had currently funded approximately$1,000.

 

The remaining commitments on the real estate investmentdevelopment by the Co-Investment Ventures will be funded as actual real estate 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 |   |

 

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*The Co-Investment**Ventures’ other contingentobligations under sell options issued*

 

The Co-InvestmentVenture which owns investments in the Fairfield at Baileys Crossing ProjectEntity has issued a contingent sell option to the Project Entity. This optionis currently not exercisable and cannot be exercised until development iscomplete and the property has been certified for occupancy. If the sell optionbecomes exercisable, it will expire after three years. If exercised, the Co-InvestmentVenture will be required to purchase the interest of an unaffiliated equityinvestor in the Project Entity, 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 wasapproximately $11.8 million at both September 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 Co-InvestmentVenture which owns investments in the Fairfield at Cameron House Project Entityhas issued a contingent sell option to the Project Entity. This option iscurrently not exercisable and cannot be exercised until development is completeand the property has been certified for occupancy. If the sell option becomesexercisable, it will expire after three years. If exercised, the Co-Investment Venturewill be required to purchase the interest of an unaffiliated equity investor inthe Project Entity, after it is free of all liens, claims, and encumbrances,for cash at a price to be negotiated in the future using market values at thetime of exercise. This investor’s equity balance is approximately $10.3 millionat both September 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 Co-InvestmentVenture which owns investments in the Lovers Lane Townhomes Project Entity hasissued a contingent sell option to the Project Entity. This option is currentlynot exercisable and cannot be exercised until development is complete and theproperty has been certified for occupancy. If this sell option becomesexercisable, it will expire after 30 days. If exercised, the Co-Investment Venturewill be required to purchase The Lovers Lane Townhomes, after it is free of allliens, claims, and encumbrances, for cash in an amount equal to the lower of (a) actualproject costs plus interest charges, or (b) the maximum budgeted costamount plus interest charges. The estimated exercise price of approximately$33.7 million has been included in the above tables as the estimated amountdue. Option exercise is dependent upon construction and may become exercisablein 2009 or 2010. If the Co-Investment Venture were to purchase the property, weestimate the Co-Investment Venture’s total cash outlay will approximate $9.3million after considering the application of estimated proceeds received froman expected senior property mortgage and any unpaid principal and interest onthe Lovers Lane Townhome mezzanine loans issued by us and the Co-Investment Venture.

 

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**Fundsfrom Operations**

** **

Funds from operations (“FFO”) is a non-GAAPfinancial measure that is widely recognized as a measure of REIT operatingperformance.  We use FFO as defined bythe National Association of Real Estate Investment Trusts to be net income(loss), computed in accordance with GAAP excluding extraordinary items, asdefined by GAAP, and gains (or losses) from sales of property, plusdepreciation and amortization on real estate assets, and after adjustments forunconsolidated partnerships, joint ventures and subsidiaries.  We believe that FFO is helpful to ourinvestors and our management as a measure of operating performance because itexcludes depreciation and amortization, gains and losses from propertydispositions, and extraordinary items, and as a result, when compared year toyear, reflects the impact on operations from trends in occupancy rates, rentalrates, operating costs, development activities, general and administrativeexpenses, and interest costs, which is not immediately apparent from netincome.  Historical cost accounting forreal estate assets in accordance with GAAP implicitly assumes that the value ofreal estate diminishes predictably over time. Since real estate values have historically risen or fallen with marketconditions, many industry investors and analysts have considered thepresentation of operating results for real estate companies that use historicalcost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together withthe required GAAP presentations, provide a more complete understanding of ourperformance.  Factors that impact FFOinclude start-up costs, fixed costs, delay in buying assets, lower yields oncash held in accounts pending investment, income from portfolio properties andother portfolio assets, interest rates on acquisition financing and operatingexpenses.  In addition, FFO will beaffected by the types of investments in our and/or our Co-Investment Ventures’portfolio, which include but are not limited to equity and mezzanine, mortgageand bridge loan investments in existing operating properties and properties invarious stages of development, mezzanine, mortgage and bridge loans and theaccounting treatment of the investments in accordance with our accountingpolicies.  FFO should not be consideredas an alternative to net income (loss), as an indication of our liquidity, noris it indicative of funds available to fund our cash needs, including ourability to make distributions.

 

Our calculations of FFO are presented below:

 
| ** **                    | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                                               | ** ** | **2007**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                          |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income (loss)             |       | $                                                                      | 765,537    |                                                                  | $          | (334,371 | ) | $ | 2,297,317 |   | $ | (622,879 | ) |
|                          |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Real Estate Depreciation  (1) |       | 238,264                                                                |       | 83,946                                                                |       | 797,252 |   | 83,946 |   |
|                          |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Funds from Operations  (FFO)  |       | $                                                                      | 1,003,801  |                                                                  | $          | (250,425 | ) | $ | 3,094,569 |   | $ | (538,933 | ) |
|                          |       |                                                                   |       |                                                                  |       |   |   |   |   |
| GAAP weighted average  shares |       | 14,267,364                                                             |       | 2,152,919                                                             |       | 14,268,418 |   | 1,019,906 |   |

 

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(1) Oneof our Co-Investment Ventures owns a majority equity interest in The Reserve atJohns Creek Walk and recognizes depreciation and amortization.  Our share of the Co-Investment Venture’sdepreciation and amortization is included in our equity in earnings ofunconsolidated real estate joint venture investments, as well as this number.

 

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*Non-cash Items Included in NetIncome (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 withdeferred interest payment terms was approximately $157,000 and $99,000 for thethree months ended September 30, 2008 and 2007, respectively; $412,000 and$154,000 was recognized for the nine months ended September 30, 2008 and2007, respectively.

 

·                  Amortization of intangible lease assetswas approximately $61,000 and $0 for the three months ended September 30,2008 and 2007, respectively; $251,000 and $0 was recognized for the nine monthsended September 30, 2008 and 2007, respectively.

 

·                  Amortized loan fee income wasapproximately $70,000 and $16,000 for the three months ended September 30,2008 and 2007, respectively; $181,000 and $17,000 was recognized for the ninemonths ended September 30, 2008 and 2007, respectively.

 

·                  Amortization of deferred financing andother costs was approximately $18,000 and $4,000 for the three months ended September 30,2008 and 2007, respectively; $66,000 and $4,000 was recognized for the ninemonths ended September 30, 2008 and 2007, respectively.

 

In addition, FFO may be used to fund all or aportion of certain capitalizable items that are excluded from FFO, such ascapital expenditures and payments of principal on debt, each of which mayimpact the amount of cash available for distribution to our stockholders.

 

**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 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 earnings(or another performance indicator if the business entity does not reportearnings) at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15,2007.  We have not elected the fair valuemeasurement option for any financial assets or liabilities at the present time.

 

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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 transferringconsideration.  SFAS No. 141(R) appliesthe same method of accounting (the acquisition method) to all transactions andother events in which one entity obtains control over one or more otherbusinesses.  This Statement also makescertain other modifications to Statement 141, including a broader definition ofa business and the requirement that acquisition related costs are expensed asincurred.  This statement applies tobusiness combinations occurring on or after the beginning of the first annualreporting period beginning on or after December 15, 2008.  Early adoption is not allowed.  The acquisition of a real estate property has beendetermined to meet the definition of a business combination as defined in SFAS No. 141(R).  Therefore, SFAS No. 141(R) willhave a material effect on our accounting for future acquisitions of propertiesas acquisition costs will no longer be capitalized, but will be expensedbeginning January 1, 2009.

 

In December 2007,the FASB issued SFAS No. 160, Non-controlling Interests in ConsolidatedFinancial Statements- An amendment of ARB No. 51.  This Statement amends Accounting ResearchBulletin No. 51 to establish accounting and reporting standards for thenon-controlling interest in a subsidiary and for the deconsolidation of asubsidiary. It clarifies that a non-controlling interest in a subsidiary, whichis sometimes referred to as minority interest, is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements.  Among other requirements,this Statement requires consolidated net income to be reported, on the face ofthe consolidated income statement, at amounts that include the amountsattributable to both the parent and the non-controlling interest. ThisStatement is effective for fiscal years, and interim periods within thosefiscal years, beginning on or after December 15, 2008. Earlier adoption isnot permitted. This Statement shall be applied prospectively as of thebeginning of the fiscal year in which this Statement is initially adopted,except for the presentation and disclosure requirements.  The presentation and disclosure requirementsshall be applied retrospectively for all periods presented.

 

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 nine-month period ended September 30, 2008 or theyear ended December 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 termsis less than 18 months and contains protection provisions applicable toreimbursement billings for utilities.

 

**REITTax Election**

** **

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

 

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

 

Recently, domesticfinancial markets have experienced unusual volatility and uncertainty. Althoughthis condition has occurred most visibly within the “subprime” single-familymortgage lending sector of the credit market, liquidity has tightened inoverall 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.

 

We are exposed tointerest rate changes primarily as a result of our long-term debt used toacquire properties.  Our interest rate risk management objectives areprimarily to limit the impact of interest rate changes on earnings and cashflows and to lower overall borrowing costs. To achieve these objectives, weintend to borrow primarily at fixed rates or variable rates with the lowestmargins available and in some cases, the ability to convert variable rates tofixed rates. With regard to variable rate financing, we will assess interestrate cash flow risk by continually identifying and monitoring changes ininterest rate exposures that may adversely impact expected future cash flowsand by evaluating hedging opportunities.

 

The Reserve at Johns Creek Walk is an operating apartmentcommunity wholly-owned by a single-purpose limited liability company (the “TheReserve at Johns Creek Walk Property Entity”). The Reserve at Johns Creek WalkProperty Entity, including its operating receipts lock-box account, serves ascollateral for an interest-only bank loan with a principal balance of $23million from an unaffiliated lender (the “Bank Loan”). The Bank Loan wasentered into during August 2007, matures in March 2013, and bearsinterest at a rate of 6.461%. The lender has no recourse to the Co-Investment Ventureor us, only to The Reserve at Johns Creek Walk Property Entity. Breaching theBank Loan’s restrictions on encumbrances, sale, transfer, or refinancing of theproperty could constitute an event of default and increase the interest rate by5%; uncured events of default can accelerate the loan’s maturity date.  No events of default have occurred. One of ourCo-Investment Ventures owns an 80 percent equity interest in The Reserve atJohns Creek Walk Property Entity, with an unaffiliated entity owning theremaining 20 percent.

 

                We do not have any foreignoperations and thus we are not exposed to foreign currency fluctuations.

 

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

 

*Evaluation ofDisclosure Controls and Procedures*

 

Asrequired by Rule 13a-15(b) and Rule 15d-15(b) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), ourmanagement, including our Chief Executive Officer and Chief Financial Officer,evaluated, as of September 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 September 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.

 

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

 

*Changes inInternal Control over Financial Reporting*

 

Therehas been no change in internal control over financial reporting that occurredduring the quarter ended September 30, 2008 that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

 

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**PART II**

**OTHER INFORMATION**

 

**Item 1.                    LegalProceedings****.**

 

We arenot party to, and our properties are not subject to, any material pending legalproceedings.

 

**Item 1A.                 RiskFactors.**

 

 The following risk factors update the riskfactors contained in the “Risk Factors — Risks Related to Our Business inGeneral” section set forth in our Amendment No. 1 to Form 10, filedwith the Securities and Exchange Commission on June 9, 2008.

 

***The failure of any bank in which we depositour funds could reduce the amount of cash we have available to pay distributionsand make additional investments.***

 

Wehave diversified our cash and cash equivalents between several bankinginstitutions in an attempt to minimize exposure to any one of theseentities.  However, the Federal Deposit Insurance Corporation, or “FDIC,”only insures amounts up to $250,000 per depositor per insured bank.  At September 30,2008 and December 31, 2007, we had cash and cash equivalents andrestricted cash deposited in certain financial institutions in excess offederally insured levels.  If any of the banking institutions in which wehave deposited funds ultimately fails, we may lose our deposits over$250,000.  The loss of our deposits could reduce the amount of cash wehave available to distribute or invest and could result in a decline in the valueof your investment.

 

****Our reliance on common developers/guarantors related tomultiple development projects in which we may invest may materially adverselyaffect our operations should a developer/guarantor become unable to meet itsobligations to us.  As of September 30, 2008, our interests in threeloans on three separate development projects with a common developer/guarantortotaled 29% of our total assets.****

 

Wehave made and may continue to make investments in multifamily developmentprojects with common developers/guarantors, which increases our risks should adeveloper/guarantor become unable to meet its obligations to us.  As ofthe date of this prospectus, three of our mezzanine loan investments onmultifamily development projects contained provisions that provide a limitedsafeguard against the risk of bankruptcy of the project owner and the failureto complete the development project.  Under the terms of these threeprojects, a common developer, Fairfield Residential, LLC is obligated to completethe projects should the project owners fail to do so, is liable forconstruction cost overruns in excess of the construction budgets and has agreedto repay the loans should the project owners become the subject of a bankruptcyproceeding to which our joint venture did not consent.  Our portion of theinvestments in these three loans collectively was $29,980,382 (26% of our totalassets) and $32,753,206 (29% of our total assets) as of December 31, 2007and September 30, 2008**,**respectively. Should Fairfield Residential become unable to meet its obligations to us, ouroperations may be adversely effected, which could materially reduce the levelof distributions to our stockholders.

 

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

 

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

 

**Item 3.                    DefaultsUpon Senior Securities.**

 

None.

 

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

 

None.

 

**Item 5.                    Other Information.**

 

None.

 

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| **Item 6.**               | ** ** | **Exhibits.**                                                                                                                                                                                                                     |
|---------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                | ** ** | ** **                                                                                                                                                                                                                        |
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                   |
|                      |       |                                                                                                                                                                                                                              |
| 3.1                       |       | Articles  of Restatement (incorporated by reference to Exhibit 3.1.2 to  Form 8-K filed on September 8, 2008)                                                                                                      |
| 3.2*                      |       | Third  Amended and Restated Bylaws                                                                                                                                                                                                |
| 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) |
| 4.2                       |       | Share  Redemption Program (incorporated by reference from the description under  “Description of Shares—Share Redemption Program” in the  424(b)(3) prospectus filed on September 9, 2008)               |
| 4.3                       |       | Form of  Subscription Agreement (incorporated by reference to Exhibit B to the  424(b)(3) prospectus filed on September 9, 2008)                                                                              |
| 4.4                       |       | Distribution  Reinvestment Plan (incorporated by reference to Exhibit C to the  424(b)(3) prospectus filed on September 9, 2008)                                                                                   |
| 4.5                       |       | Automatic  Purchase Plan (incorporated by reference to Exhibit D to the  4242(b)(3) prospectus filed on September 9, 2008)                                                                                         |
| 10.1*                     |       | Amended  and Restated Advisory Management Agreement                                                                                                                                                                               |
| 10.2*                     |       | Amended  and Restated Property Management Agreement                                                                                                                                                                               |
| 10.4*                     |       | Service  Mark Agreement                                                                                                                                                                                                           |
| 31.1*                     |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                         |
| 31.2*                     |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                         |
| 32.1*                     |       | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002**                                                            |

 

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*Filed herewith

 

**In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is notdeemed “filed” for purposes of Section 18 of the Exchange Act or otherwisesubject to the liabilities of that section.  Such certifications will notbe deemed incorporated by reference into any filing under the Securities Act orthe Exchange Act, except to the extent that the registrant specificallyincorporates it by reference.

 

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**SIGNATURE**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

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

 

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