Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

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

 

**CommissionFile Number: 000-53650**

 

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

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

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

(Address ofprincipal executive offices) (Zip Code)

 

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

** **

**None**

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

 

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

 

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

 

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

 

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

 

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

 

As of July 30, 2010,Behringer Harvard Opportunity REIT II, Inc. had 20,262,067 shares of commonstock outstanding.

 

 

 

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**BEHRINGER HARVARD OPPORTUNITY REIT II, INC.**

**FORM 10-Q**

**Quarter Ended June 30, 2010**

 
| ** **                 | ** **                                                                                            | **Page** |
|----------------------------|-------------------------------------------------------------------------------------------------------|----------|
|                       |                                                                                                  |     |
| **PART I**            |
| **FINANCIAL  INFORMATION** |
| ** **                 | ** **                                                                                            |     |
| **Item 1.**                | **Financial  Statements (Unaudited).**                                                                |     |
|                       |                                                                                                  |     |
|                       | Consolidated Balance Sheets as of June 30, 2010  and December 31, 2009                      | 3        |
|                       |                                                                                                  |     |
|                       | Consolidated Statements of Operations for the Three  and Six Months Ended June 30, 2010 and 2009 | 4        |
|                       |                                                                                                  |     |
|                       | Consolidated Statements of Equity for the Six Months  Ended June 30, 2010 and 2009               | 5        |
|                       |                                                                                                  |     |
|                       | Consolidated Statements of Cash Flows for the Six Months  Ended June 30, 2010 and 2009           | 6        |
|                       |                                                                                                  |     |
|                       | Notes to Consolidated Financial Statements                                                            | 7        |
|                       |                                                                                                  |     |
| **Item 2.**                | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations.**      | 23       |
|                       |                                                                                                  |     |
| **Item 3.**                | **Quantitative  and Qualitative Disclosures About Market Risk.**                                      | 35       |
|                       |                                                                                                  |     |
| **Item 4.**                | **Controls and  Procedures.**                                                                         | 35       |
|                       |                                                                                                  |     |
| **PART II**           |
| **OTHER  INFORMATION**     |
|                       |                                                                                                  |     |
| **Item 1.**                | **Legal Proceedings.**                                                                                | 36       |
|                       |                                                                                                  |     |
| **Item 1A.**               | **Risk Factors.**                                                                                     | 36       |
|                       |                                                                                                  |     |
| **Item 2.**                | **Unregistered  Sales of Equity Securities and Use of Proceeds.**                                     | 36       |
|                       |                                                                                                  |     |
| **Item 3.**                | **Defaults  Upon Senior Securities.**                                                                 | 37       |
|                       |                                                                                                  |     |
| **Item 4.**                | **(Removed and  Reserved).**                                                                          |     |
|                       |                                                                                                  |     |
| **Item 5.**                | **Other Information.**                                                                                | 37       |
|                       |                                                                                                  |     |
| **Item 6.**                | **Exhibits.**                                                                                         | 37       |
|                       |                                                                                                  |     |
| **Signature**              |                                                                                                  | 38       |

 

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**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.****                                  ****FinancialStatements.**

** **

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

**ConsolidatedBalance Sheets**

**(in thousands, except shares)**

**(unaudited)**

 
| ** **                                                                                                                                                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| **Assets**                                                                                                                                                                                         |       |              |       |                  |       |
| Real estate                                                                                                                                                                                        |       |              |       |                  |       |
| Land and improvements, net                                                                                                                                                                         |       | $                 | 18,060     |                  | $          | 9,000 |   |
| Buildings, net                                                                                                                                                                                     |       | 57,791            |       | 25,314                |       |
| Total real estate                                                                                                                                                                                  |       | 75,851            |       | 34,314                |       |
|                                                                                                                                                                                               |       |              |       |                  |       |
| Real estate loans receivable, net                                                                                                                                                                  |       | 24,554            |       | 39,712                |       |
| Total real estate and real estate-related  investments, net                                                                                                                                        |       | 100,405           |       | 74,026                |       |
|                                                                                                                                                                                               |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                          |       | 110,679           |       | 67,509                |       |
| Restricted cash                                                                                                                                                                                    |       | 204               |       | —                |       |
| Accounts receivable, net                                                                                                                                                                           |       | 295               |       | 344                   |       |
| Interest receivable-real estate loans receivable                                                                                                                                                   |       | 1,089             |       | 398                   |       |
| Prepaid expenses and other assets                                                                                                                                                                  |       | 1,414             |       | 564                   |       |
| Investment in unconsolidated joint venture                                                                                                                                                         |       | 508               |       | 506                   |       |
| Furniture, fixtures and equipment, net                                                                                                                                                             |       | 1,085             |       | —                |       |
| Acquisition deposits                                                                                                                                                                               |       | 2,007             |       | —                |       |
| Lease intangibles, net                                                                                                                                                                             |       | 3,222             |       | 1,590                 |       |
| Total assets                                                                                                                                                                                       |       | $                 | 220,908    |                  | $          | 144,937 |   |
|                                                                                                                                                                                               |       |              |       |                  |       |
| **Liabilities and Equity**                                                                                                                                                                         |       |              |       |                  |       |
| Notes payable                                                                                                                                                                                      |       | $                 | 48,155     |                  | $          | 18,500 |   |
| Accounts payable                                                                                                                                                                                   |       | 26                |       | 11                    |       |
| Payables to related parties                                                                                                                                                                        |       | 1,016             |       | 582                   |       |
| Acquired below-market leases, net                                                                                                                                                                  |       | 1,051             |       | 1,134                 |       |
| Distributions payable                                                                                                                                                                              |       | 803               |       | 607                   |       |
| Accrued and other liabilities                                                                                                                                                                      |       | 2,827             |       | 1,504                 |       |
| Total liabilities                                                                                                                                                                                  |       | 53,878            |       | 22,338                |       |
|                                                                                                                                                                                               |       |              |       |                  |       |
| **Commitments and contingencies**                                                                                                                                                                  |       |              |       |                  |       |
|                                                                                                                                                                                               |       |              |       |                  |       |
| **Equity**                                                                                                                                                                                         |       |              |       |                  |       |
| Preferred stock, $.0001 par value per share; 50,000,000  shares authorized, none outstanding                                                                                                       |       | —            |       | —                |       |
| Convertible stock, $.0001 par value per share; 1,000  shares authorized, 1,000 outstanding                                                                                                         |       | —            |       | —                |       |
| Common stock, $.0001 par  value per share; 350,000,000 shares authorized, 19,867,509 and 14,648,698 shares  issued and outstanding at June 30, 2010 and December 31, 2009,  respectively |       | 2                 |       | 1                     |       |
| Additional paid-in capital                                                                                                                                                                         |       | 172,622           |       | 126,815               |       |
| Cumulative distributions and net loss                                                                                                                                                              |       | (6,801            | )          | (6,839                | )          |
| Total Behringer Harvard Opportunity REIT  II, Inc. Equity                                                                                                                                     |       | 165,823           |       | 119,977               |       |
| Noncontrolling interest                                                                                                                                                                            |       | 1,207             |       | 2,622                 |       |
| Total equity                                                                                                                                                                                       |       | 167,030           |       | 122,599               |       |
| Total liabilities and equity                                                                                                                                                                       |       | $                 | 220,908    |                  | $          | 144,937 |   |

 

*See Notesto Consolidated Financial Statements.*

 

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

**ConsolidatedStatements of Operations**

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

**(unaudited)**

 
| ** **                                                                                     | ** ** | **Three Months ended June 30,** | ** ** | **Six Months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                     | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                                     | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                                                                   | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rental revenue                                                                                 |       | $                                    | 1,885      |                               | $          | 1,449 |   | $ | 3,197 |   | $ | 2,774 |   |
| Interest income from real estate loans receivable                                              |       | 1,208                                |       | —                             |       | 2,584 |   | — |   |
|                                                                                           |       |                                 |       |                               |       |   |   |   |   |
| Total revenues                                                                                 |       | 3,093                                |       | 1,449                              |       | 5,781 |   | 2,774 |   |
|                                                                                           |       |                                 |       |                               |       |   |   |   |   |
| **Expenses:**                                                                                  |       |                                 |       |                               |       |   |   |   |   |
| Property operating expenses                                                                    |       | 589                                  |       | 277                                |       | 919 |   | 621 |   |
| Interest expense                                                                               |       | 375                                  |       | 325                                |       | 697 |   | 651 |   |
| Real estate taxes                                                                              |       | 200                                  |       | 140                                |       | 360 |   | 280 |   |
| Property management fees                                                                       |       | 63                                   |       | 44                                 |       | 110 |   | 90 |   |
| Asset management fees                                                                          |       | 205                                  |       | 86                                 |       | 391 |   | 172 |   |
| General and administrative                                                                     |       | 475                                  |       | 239                                |       | 856 |   | 660 |   |
| Acquisition expense                                                                            |       | 1,397                                |       | —                             |       | 1,446 |   | — |   |
| Depreciation and amortization                                                                  |       | 1,101                                |       | 661                                |       | 1,658 |   | 1,264 |   |
| Total expenses                                                                                 |       | 4,405                                |       | 1,772                              |       | 6,437 |   | 3,738 |   |
|                                                                                           |       |                                 |       |                               |       |   |   |   |   |
| Interest income, net                                                                           |       | 147                                  |       | 125                                |       | 257 |   | 225 |   |
| Bargain purchase gain                                                                          |       | 5,492                                |       | —                             |       | 5,492 |   | — |   |
| Other expense                                                                                  |       | (138                                 | )          | —                             |       | (138 | ) | — |   |
|                                                                                           |       |                                 |       |                               |       |   |   |   |   |
| Income (loss) before equity in losses of unconsolidated  joint venture                         |       | 4,189                                |       | (198                               | )          | 4,955 |   | (739 | ) |
| Equity in losses of unconsolidated joint venture                                               |       | —                               |       | —                             |       | (7 | ) | — |   |
| Net income (loss)                                                                              |       | 4,189                                |       | (198                               | )          | 4,948 |   | (739 | ) |
| Add: Net income attributable to the noncontrolling  interest                                   |       | (547                                 | )          | —                             |       | (619 | ) | — |   |
|                                                                                           |       |                                 |       |                               |       |   |   |   |   |
| Net income (loss) attributable to Behringer  Harvard Opportunity REIT II, Inc.            |       | $                                    | 3,642      |                               | $          | (198 | ) | $ | 4,329 |   | $ | (739 | ) |
|                                                                                           |       |                                 |       |                               |       |   |   |   |   |
| Weighted average shares outstanding:                                                           |       |                                 |       |                               |       |   |   |   |   |
| Basic and diluted                                                                              |       | 18,612                               |       | 9,519                              |       | 17,282 |   | 8,714 |   |
|                                                                                           |       |                                 |       |                               |       |   |   |   |   |
| Net income (loss) per share attributable to Behringer  Harvard Opportunity REIT II, Inc.: |       |                                 |       |                               |       |   |   |   |   |
| Basic and diluted                                                                              |       | $                                    | 0.20       |                               | $          | (0.02 | ) | $ | 0.25 |   | $ | (0.09 | ) |

 

 

*See Notes to Consolidated Financial Statements.*

 

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

**ConsolidatedStatements of  Equity**

**(in thousands)**

**(unaudited)**

** **
| ** **                                | ** ** | **Convertible  Stock** | ** ** | **Common  Stock** | ** ** | **Additional** | ** ** | **Cumulative** | ** ** | ** **  | ** ** | ** **             | ** ** |
|-------------------------------------------|------------|------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|-------------|------------|------------------------|------------|
| ** **                                | ** ** | **Number**             | ** ** | **Par**           | ** ** | **Number**     | ** ** | **Par**        | ** ** | **Paid-in** | ** ** | **Distributions  and** | ** ** | **Noncontrolling** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | **of  Shares**         | ** ** | **Value**         | ** ** | **of  Shares** | ** ** | **Value**      | ** ** | **Capital** | ** ** | **Net  Income/(Loss)** | ** ** | **Interest** | ** ** | **Equity** | ** ** |
| Balance  at January 1, 2009          |       | 1                      |       | $                 | —     |           | 7,323      |           | $          | 1           |       | $                      | 59,987     |   | $ | (1,166 | ) | $ | — |   | $ | 58,822 |   |
|                                      |       |                   |       |              |       |           |       |           |       |        |       |                   |       |   |   |   |   |
| Issuance  of common stock, net            |       |                   |       |              |       | 3,168          |       |           |       | 27,414      |       |                   |       |   |   | 27,414 |   |
| Redemption  of common stock               |       |                   |       |              |       | (25            | )          |           |       | (224        | )          |                   |       |   |   | (224 | ) |
| Distributions  declared on common stock   |       |                   |       |              |       |           |       |           |       |        |       | (1,467                 | )          |   |   | (1,467 | ) |
| Net  loss                                 |       |                   |       |              |       |           |       |           |       |        |       | (739                   | )          |   |   | (739 | ) |
| Balance  at June 30, 2009            |       | 1                      |       | $                 | —     |           | 10,466     |           | $          | 1           |       | $                      | 87,177     |   | $ | (3,372 | ) | $ | — |   | $ | 83,806 |   |
|                                      |       |                   |       |              |       |           |       |           |       |        |       |                   |       |   |   |   |   |
| Balance  at January 1, 2010          |       | 1                      |       | —            |       | 14,649         |       | $              | 1          |        | $          | 126,815                |       | $ | (6,839 | ) | $ | 2,622 |   | $ | 122,599 |   |
|                                      |       |                   |       |              |       |           |       |           |       |        |       |                   |       |   |   |   |   |
| Issuance  of common stock, net            |       |                   |       |              |       | 5,287          |       | 1              |       | 46,442      |       |                   |       |   |   | 46,443 |   |
| Redemption  of common stock               |       |                   |       |              |       | (68            | )          |           |       | (635        | )          |                   |       |   |   | (635 | ) |
| Distributions  declared on common stock   |       |                   |       |              |       |           |       |           |       |        |       | (4,291                 | )          |   |   | (4,291 | ) |
| Distributions  to noncontrolling interest |       |                   |       |              |       |           |       |           |       |        |       |                   |       | (2,034 | ) | (2,034 | ) |
| Net  income                               |       |                   |       |              |       |           |       |           |       |        |       | 4,329                  |       | 619 |   | 4,948 |   |
| Balance  at June 30, 2010            |       | 1                      |       | $                 | —     |           | 19,868     |           | $          | 2           |       | $                      | 172,622    |   | $ | (6,801 | ) | $ | 1,207 |   | $ | 167,030 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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

**ConsolidatedStatements of Cash Flows**

**(in thousands)**

**(unaudited)**

** **
| ** **                                                                                                | ** ** | **Six Months ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities:**                                                                |       |                               |       |   |   |
| Net income (loss)                                                                                         |       | $                                  | 4,948      |   | $ | (739 | ) |
| Adjustments to reconcile net income (loss) to net  cash flows provided by (used in) operating activities: |       |                               |       |   |   |
| Depreciation and amortization                                                                             |       | 1,201                              |       | 645 |   |
| Amortization of deferred financing fees                                                                   |       | 67                                 |       | 67 |   |
| Equity in losses of unconsolidated joint venture                                                          |       | 7                                  |       | — |   |
| Bargain purchase gain                                                                                     |       | (5,492                             | )          | — |   |
| Change in accounts receivable                                                                             |       | 88                                 |       | (21 | ) |
| Change in interest receivable-real estate loan  receivable                                                |       | (691                               | )          | — |   |
| Change in prepaid expenses and other assets                                                               |       | (1,844                             | )          | 114 |   |
| Change in accounts payable                                                                                |       | (3                                 | )          | — |   |
| Change in accrued and other liabilities                                                                   |       | 1,148                              |       | (60 | ) |
| Change in net payables to related parties                                                                 |       | 16                                 |       | 106 |   |
| Addition of lease intangibles                                                                             |       | (208                               | )          | (89 | ) |
| Cash provided by (used in) operating activities                                                           |       | (763                               | )          | 23 |   |
|                                                                                                      |       |                               |       |   |   |
| **Cash flows from investing  activities:**                                                                |       |                               |       |   |   |
| Acquisition deposits                                                                                      |       | —                             |       | (220 | ) |
| Purchases of real estate                                                                                  |       | (12,483                            | )          | — |   |
| Investment in unconsolidated joint venture                                                                |       | (9                                 | )          | — |   |
| Investment in real estate loans receivable                                                                |       | (11,928                            | )          | — |   |
| Additions of property and equipment                                                                       |       | (453                               | )          | (233 | ) |
| Change in restricted cash                                                                                 |       | (162                               | )          | — |   |
| Cash used in investing activities                                                                         |       | (25,035                            | )          | (453 | ) |
|                                                                                                      |       |                               |       |   |   |
| **Cash flows from financing  activities:**                                                                |       |                               |       |   |   |
| Financing costs                                                                                           |       | (783                               | )          | — |   |
| Proceeds from notes payable                                                                               |       | 29,654                             |       | — |   |
| Issuance of common stock                                                                                  |       | 49,781                             |       | 30,673 |   |
| Redemptions of common stock                                                                               |       | (635                               | )          | (224 | ) |
| Offering costs                                                                                            |       | (5,807                             | )          | (3,288 | ) |
| Distributions                                                                                             |       | (1,208                             | )          | (310 | ) |
| Distributions to noncontrolling interest holders                                                          |       | (2,034                             | )          | — |   |
| Cash provided by financing activities                                                                     |       | 68,968                             |       | 26,851 |   |
|                                                                                                      |       |                               |       |   |   |
| Net change in cash and cash equivalents                                                                   |       | 43,170                             |       | 26,421 |   |
| Cash and cash equivalents at beginning of period                                                          |       | 67,509                             |       | 47,375 |   |
| Cash and cash equivalents at end of period                                                                |       | $                                  | 110,679    |   | $ | 73,796 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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**Behringer HarvardOpportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

**1.****                                     ****Businessand Organization**

 

***Business***

 

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

 

We****acquire and operatecommercial real estate and real estate-related assets.  In particular, we focus generally onacquiring commercial properties with significant possibilities for short-termcapital appreciation, such as those requiring development, redevelopment, orrepositioning, those located in markets and submarkets with high growthpotential, and those available from sellers who are distressed or facetime-sensitive deadlines.  In addition,given economic conditions as of June 30, 2010, our opportunisticinvestment strategy also includes investments in real estate-related assetsthat present opportunities for higher current income.  Such investments may have capital gaincharacteristics, whether as a result of a discount purchase or related equityparticipations.  We may acquire a widevariety of commercial properties, including office, industrial, retail,hospitality, recreation and leisure, single-tenant, multifamily, and other realproperties.  These properties may beexisting, income-producing properties, newly constructed properties, orproperties under development or construction and may include multifamilyproperties purchased for conversion into condominiums and single-tenantproperties that may be converted for multi-tenant use.  Further, we may invest in real estate-relatedsecurities, including securities issued by other real estate companies, eitherfor investment or in change of control transactions completed on a negotiatedbasis or otherwise.  We also mayoriginate or invest in collateralized mortgage-backed securities, mortgage,bridge or mezzanine loans, and Section 1031 tenant-in-common interests(including those issued by affiliates of our advisor), or in entities that makeinvestments similar to the foregoing.  Weexpect to make our investments in or in respect of real estate assets locatedin the United States and other countries based on our view of existing marketconditions.  We completed our firstproperty acquisition, an office building located in Denver, Colorado, on October 28,2008, and, as of June 30, 2010, we have invested in five real estate andreal estate-related assets.

 

Substantially all of our business is conducted through BehringerHarvard Opportunity OP II LP, a limited partnership organized in Delaware on January 12,2007 (“Behringer Harvard Opportunity OP II”). As of June 30, 2010, our wholly-owned subsidiary, BHO II, Inc.,a Delaware corporation, was the sole general partner of Behringer HarvardOpportunity OP II and owned a 0.1% partnership interest in Behringer HarvardOpportunity OP II.  As of June 30,2010, our wholly-owned subsidiary, BHO Business Trust II, a Maryland businesstrust, was the sole limited partner of Behringer Harvard Opportunity OP II andowned the remaining 99.9% interest in Behringer Harvard Opportunity OP II.

 

Weare externally managed and advised by Behringer Harvard Opportunity AdvisorsII, LLC, a Texas limited liability company that was formed on March 16,2010 (“Behringer Opportunity Advisors II”) when Behringer Harvard OpportunityAdvisors II LP, a Texas limited partnership formed in January 2007 wasconverted to a limited liability company. Behringer Opportunity Advisors II is responsible for managing ourday-to-day affairs and for identifying and making acquisitions and investmentson our behalf.

 

Ouroffice is located at 15601 Dallas Parkway, Suite 600, Addison, Texas75001, and our toll-free telephone number is (866) 655-3600.  The name Behringer Harvard is the property ofBehringer Harvard Holdings, LLC (“Behringer Harvard Holdings”) and is used bypermission.

 

***Organization***

 

OnFebruary 26, 2007, we filed a Registration Statement on Form S-11with the Securities and Exchange Commission (“SEC”) to offer up to 125,000,000shares of common stock for sale to the public (the “Offering”), of which25,000,000 shares are being offered pursuant to our distribution reinvestmentplan (the “DRP”).  We reserve the rightto reallocate the shares we are offering between our primary offering and theDRP.  The SEC declared our RegistrationStatement effective on January 4, 2008, and we commenced our ongoinginitial public offering on January 21, 2008.

 

Inconnection with our initial capitalization, on January 19, 2007, we issued22,471 shares of our common stock and 1,000 shares of our convertible stock toBehringer Harvard Holdings, an affiliate of our advisor.  As of June 30,2010, we had 19,867,509 shares of common stock outstanding, which includes the22,471 shares issued to Behringer Harvard Holdings.  As of June 30, 2010, we had 1,000 sharesof convertible stock issued and outstanding to Behringer Opportunity AdvisorsII.

 

We commenced operations onApril 1, 2008 upon satisfaction of the conditions of our escrow agreementand our acceptance of initial subscriptions of common stock.  Upon admission of new stockholders,subscription proceeds are used for payment of dealer manager fees and sellingcommissions and may be utilized as consideration for investments and thepayment or reimbursement of offering expenses and operating expenses.  Until required for such purposes, netoffering

 

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**Behringer HarvardOpportunity REIT II, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

proceedsare held in short-term, liquid investments. Through June 30, 2010, we had sold 19,997,452 shares in theOffering, including the DRP, for gross proceeds of $199.3 million.

 

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

 

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

 

Theaccompanying consolidated financial statements should be read in conjunctionwith the consolidated financial statements and notes thereto included in ourAnnual Report on Form 10-K for the year ended December 31, 2009,which was filed with the SEC on March 30, 2010.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”)have been condensed or omitted from this quarterly report pursuant to the rules andregulations of the SEC.

 

Theresults for the interim periods shown in this report are not necessarilyindicative of future financial results. The accompanying consolidated balance sheet and consolidated statementof equity as of June 30, 2010, the consolidated statements of operationsfor the three and six months ended June 30, 2010 and 2009, and theconsolidated statements of cash flows for the six months ended June 30,2010 and 2009 have not been audited by our independent registered publicaccounting firm.  In the opinion ofmanagement, the accompanying unaudited consolidated financial statementsinclude all adjustments necessary to fairly present our consolidated financialposition as of June 30, 2010 and December 31, 2009 and our consolidatedresults of operations and cash flows for the periods ended June 30, 2010and 2009.  Such adjustments are of anormal recurring nature.

 

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

 

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

 

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Theseestimates include such items as purchase price allocation for real estateacquisitions, impairment of long-lived assets, depreciation and amortization,and allowance for doubtful accounts. Actual results could differ from those estimates.

 

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

 

Ourconsolidated financial statements include our accounts and the accounts ofother subsidiaries over which we have control. All inter-company transactions, balances, and profits have beeneliminated in consolidation.  Interestsin entities acquired will be evaluated based on applicable GAAP, which includesthe requirement to consolidate entities deemed to be variable interest entities(“VIE”) in which we are the primary beneficiary.  If the interest in the entity is determinednot to be a VIE, then the entities will be evaluated for consolidation based onlegal form, economic substance, and the extent to which we have control and/orsubstantive participating rights under the respective ownership agreement.  In the Notes to Consolidated FinancialStatements, all dollar and share amounts in tabulation are in thousands ofdollars and shares, respectively, unless otherwise noted.

 

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

 

Wehave evaluated subsequent events for recognition or disclosure in ourconsolidated financial statements.

 

***Real Estate***

 

Upon the acquisition of real estate properties, we recognize the assetsacquired, the liabilities assumed, and any noncontrolling interest as of theacquisition date, measured at their fair values.  The acquisition date is the date on which weobtain control of the real estate property. The assets acquired and liabilities assumed may consist of buildings,any assumed

 

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**Behringer HarvardOpportunity REIT II, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

debt,identified intangible assets and asset retirement obligations.  Identified intangible assets generallyconsist of the above-market and below-market leases, in-place leases, in-placetenant improvements and tenant relationships. Goodwill is recognized as of the acquisition date and measured as theaggregate fair value of the consideration transferred and any noncontrollinginterests in the acquiree over the fair value of identifiable net assetsacquired.  Likewise, a bargain purchasegain is recognized in current earnings when the aggregate fair value of theconsideration transferred and any noncontrolling interests in the acquiree isless than the fair value of the identifiable net assets acquired.  Acquisition-related costs are expensed in theperiod incurred.

 

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

 

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

 

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

 

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

 

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

 

Weamortize the value of in-place leases to expense over the term of therespective leases.  The value of tenantrelationship intangibles is amortized to expense over the initial term and anyanticipated renewal periods, but in no event does the amortization period forintangible assets exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, theunamortized portion of the in-place lease value and tenant relationshipintangibles is charged to expense.  As ofJune 30, 2010, the estimated remaining useful life for acquired leaseintangibles was approximately five years.

 

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**Behringer HarvardOpportunity REIT II, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

Anticipated amortization expense associated with the acquired leaseintangibles as of June 30, 2010 is as follows:

 

| ** **                                 | ** ** | **Lease**       | ** ** |
|--------------------------------------------|------------|-----------------|------------|
| **Year**                                   | ** ** | **Intangibles** | ** ** |
| July 1, 2010 - December 31, 2010 |       | $               | 1,218      |   |
| 2011                                       |       | 412             |       |
| 2012                                       |       | 377             |       |
| 2013                                       |       | 357             |       |
| 2014                                       |       | 330             |       |
|                                            |            |                 |            |  |

 

Accumulateddepreciation and amortization related to our consolidated investments in realestate assets and intangibles were as follows:

 
| ** **                           | ** ** | ** **        | ** ** | ** **       | ** ** | ** **      | ** ** | **Acquired**     | ** ** |
|--------------------------------------|------------|-------------------|------------|------------------|------------|-----------------|------------|------------------|------------|
| ** **                           | ** ** | **Buildings and** | ** ** | **Land and**     | ** ** | **Lease**       | ** ** | **Below-Market** | ** ** |
| **As of  June 30, 2010**        | ** ** | **Improvements**  | ** ** | **Improvements** | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** |
| Cost                                 |       | $                 | 59,728     |             | $          | 18,065          |       | $                | 5,113      |   | $ | (2,447 | ) |
| Less:  depreciation and amortization |       | (1,937            | )          | (5               | )          | (1,891          | )          | 1,396            |       |
| Net                                  |       | $                 | 57,791     |             | $          | 18,060          |       | $                | 3,222      |   | $ | (1,051 | ) |

 
| ** **                           | ** ** | ** **        | ** ** | ** **       | ** ** | ** **      | ** ** | **Acquired**     | ** ** |
|--------------------------------------|------------|-------------------|------------|------------------|------------|-----------------|------------|------------------|------------|
| ** **                           | ** ** | **Buildings and** | ** ** | **Land and**     | ** ** | **Lease**       | ** ** | **Below-Market** | ** ** |
| **As of  December 31, 2009**    | ** ** | **Improvements**  | ** ** | **Improvements** | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** |
| Cost                                 |       | $                 | 26,548     |             | $          | 9,000           |       | $                | 2,787      |   | $ | (2,143 | ) |
| Less:  depreciation and amortization |       | (1,234            | )          | —           |       | (1,197          | )          | 1,009            |       |
| Net                                  |       | $                 | 25,314     |             | $          | 9,000           |       | $                | 1,590      |   | $ | (1,134 | ) |

 

***Cash and Cash Equivalents***

 

Weconsider investments in highly-liquid money market funds or investments withoriginal maturities of three months or less to be cash equivalents.  The carrying amount of cash and cashequivalents reported on the balance sheet approximates fair value.

 

***Restricted Cash***

 

Asrequired by our lenders, restricted cash is held in escrow accounts for realestate taxes and other reserves for our consolidated properties.

 

***Investment Impairment***

 

Forreal estate we wholly own, we monitor events and changes in circumstancesindicating that the carrying amounts of the real estate assets may not berecoverable.  When such events or changesin circumstances are present, we assess potential impairment by comparingestimated future undiscounted operating cash flows expected to be generatedover the life of the asset and from its eventual disposition to the carryingamount of the asset.  In the event thatthe carrying amount exceeds the estimated future undiscounted operating cashflows, we recognize an impairment loss to adjust the carrying amount of theasset to estimated fair value.  Weconsider projected future undiscounted cash flows, trends, strategic decisionsregarding future development plans, and other factors in our assessment ofwhether impairment conditions exist. While we believe our estimates of future cash flows are reasonable,different assumptions regarding factors such as market rents, economicconditions, and occupancy rates could significantly affect these estimates.

 

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

 

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**Behringer HarvardOpportunity REIT II, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

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

 

Webelieve the carrying value of our operating real estate and loan investment iscurrently recoverable.  Accordingly,there were no impairment charges for the three or six months ended June 30,2010 or 2009.  However, if marketconditions worsen beyond our current expectations, or if changes in ourstrategy significantly affect any key assumptions used in our fair valuecalculations, we may need to take charges in future periods for impairmentsrelated to our existing investments.  Anysuch non-cash charges would have an adverse effect on our consolidatedfinancial position and results of operations.

 

***Revenue Recognition***

 

We recognize rental income generated from leases onreal estate assets on a straight-line basis over the terms of the respectiveleases, including the effect of rent holidays, if any.  Straight-line rental revenue of less than$0.1 million was recognized in rental revenues for both the three and sixmonths ended June 30, 2010. Straight-line rental revenue of less than $0.1 million was recognized inrental revenues for both the three and six months ended June 30,2009.  Below market lease amortization of$0.3 million and $0.5 million was recognized in rental revenues for the threeand six months ended June 30, 2010, respectively.  Below market lease amortization of $0.3million and $0.6 million was recognized in rental revenues for the three monthsand six months ended June 30, 2009, respectively.

 

We recognize interest income from real estate loansreceivable on an accrual basis over the life of the loan using the interestmethod.  Direct loan origination fees andorigination or acquisition costs, as well as acquisition premiums or discounts,are amortized over the life of the loan as an adjustment to interest income.  We will stop accruing interest on loans whenthere is concern as to the ultimate collection of principal or interest of theloan.  In the event that we stop accruinginterest on a loan, we will generally not recognize subsequent interest incomeuntil cash is received or we make the decision to restart interest accrual onthe loan.

 

***Accounts Receivable***

 

Accountsreceivable primarily consist of straight-line rental revenue receivables of$0.2 million as of June 30, 2010 and receivables from our tenants relatedto 1875 Lawrence, a multi-tenant office building located in Denver, Colorado (“1875Lawrence”), Palms of Monterrey, a multifamily investment located in Fort Myers,Florida (“Palms of Monterrey”), and Holstenplatz, a multi-tenant officebuilding located in Hamburg, Germany (“Holstenplatz”).  As of December 31, 2009, accountsreceivable primarily consist of straight-line rental revenue receivables of$0.2 million and receivables from our tenants related to 1875 Lawrence.

 

***Prepaid Expenses and Other Assets***

 

Prepaidexpenses and other assets include prepaid directors’ and officers’ insurance,as well as prepaid insurance of our consolidated property.

 

***Furniture, Fixtures, and Equipment***

 

Furniture,fixtures, and equipment are recorded at cost and are depreciated using thestraight-line method over their estimated useful lives of five to sevenyears.  Maintenance and repairs arecharged to operations as incurred while renewals or improvements to such assetsare capitalized.  Accumulateddepreciation associated with our furniture, fixtures, and equipment was lessthan $0.1 million as of June 30, 2010. We had no furniture, fixtures, and equipment as ofDecember 31, 2009.

 

***Deferred Financing Fees***

 

Deferredfinancing fees are recorded at cost and are amortized to interest expense ofour note payable using a straight-line method that approximates the effectiveinterest method over the life of the related debt.  Accumulated amortization of deferredfinancing fees was $0.2 million and $0.1 million as of June 30, 2010 andthe year ended December 31, 2009, respectively.

 

***Organization and Offering Expenses***

 

Wereimburse our advisor or its affiliates for any organization and offeringexpenses incurred on our behalf in connection with the primary offering (otherthan selling commissions and the dealer manager fee).  Before October 2, 2009

 

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**Behringer HarvardOpportunity REIT II, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

wedid not reimburse expenses that caused our total organization and offeringexpenses (other than selling commissions and the dealer manager fee) related toour primary offering to exceed 1.5% of gross offering proceeds from the primaryoffering as of the date of reimbursement. At each balance sheet date, we estimated the total gross public offeringproceeds expected to be received under the Offering and recognized the amountof organization and offering reimbursement. We recorded the amount of reimbursement at the lower of (a) 1.5% ofthe estimated gross public offering proceeds, or (b) the actualorganization and offering costs incurred by our advisor or its affiliates.  Effective October 2, 2009, we changedthe timing in determining the limit on the amount of the reimbursement oforganization and offering expenses (other than selling commissions and thedealer manager fee).  Until $7.5 millionof organization and offering expenses are reimbursed, we record the actualorganization and offering costs incurred by our advisor or its affiliates andreimbursed by us.  See Note 11.

 

Organizationand offering expenses are defined generally as any and all costs and expensesincurred by us in connection with our formation, preparing for the Offering,the qualification and registration of the Offering, and the marketing anddistribution of our shares.  Organizationand offering expenses include, but are not limited to, accounting and legalfees, costs to amend the registration statement and supplement the prospectus,printing, mailing and distribution costs, filing fees, amounts to reimburse ouradvisor or its affiliates for the salaries of employees, and other costs inconnection with preparing supplemental sales literature, telecommunicationcosts, fees of the transfer agent, registrars, trustees, escrow holders,depositories and experts, and fees and costs for employees of our advisor orits affiliates to attend industry conferences.

 

Alloffering costs are recorded as an offset to additional paid-in capital, and allorganization costs are recorded as an expense at the time we become liable forthe payment of these amounts.

 

***Income Taxes***

 

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, 2008.  To qualify as a REIT, we must meet a numberof organizational and operational requirements, including a requirement that wedistribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subjectto federal income tax at the corporate level. We are organized and operate in such a manner as to qualify for taxationas a REIT under the Code and intend to continue to operate in such a manner,but no assurance can be given that we will operate in a manner so as to qualifyor remain qualified as a REIT.

 

Wehave reviewed our tax positions under GAAP guidance that clarifies the relevantcriteria and approach for the recognition and measurement of uncertain taxpositions.  The guidance prescribes arecognition threshold and measurement attribute for the financial statementrecognition of a tax position taken, or expected to be taken, in a tax return.  A tax position may only be recognized in thefinancial statements if it is more likely than not that the tax position willbe sustained upon examination.  Webelieve it is more likely than not that the tax positions taken relative to ourstatus as a REIT will be sustained in any tax examination.

 

***Foreign Currency Translation***

 

Forour international investment where the functional currency is other than the USdollar, assets and liabilities are translated using period-end exchange rates,while the statement of operations amounts are translated using the averageexchange rates for the respective period. Differences arising from the translation of assets and liabilities incomparison with the translation of the previous periods or from initialrecognition during the period are included as a separate component ofaccumulated other comprehensive income (loss).

 

The Euro is the functional currency for theoperations of Holstenplatz.  We also maintain aEuro-denominated bank account that is translated into U.S. dollars at thecurrent exchange rate at each reporting period. The resulting translation adjustments are recorded as a separatecomponent of accumulated other comprehensive income (loss) in our consolidatedstatement of equity.  As of June 30,2010, there was no currency translation adjustment recorded in accumulatedother comprehensive income (loss) as we acquired Holstenplatz on June 30,2010.

 

***Stock-Based Compensation***

 

Wehave adopted a stock-based incentive award plan for our directors andconsultants and for employees, directors and consultants of ouraffiliates.  We have not issued anystock-based awards under the plan as of June 30, 2010.

 

***Concentration of Credit Risk***

 

AtJune 30, 2010 and December 31, 2009, we had cash and cash equivalentsdeposited in certain financial institutions in excess of federally insuredlevels.  We have diversified our cash andcash equivalents among several banking

 

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**Behringer HarvardOpportunity REIT II, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

institutionsin an attempt to minimize exposure to any one of these entities.  We regularly monitor the financial stabilityof these financial institutions and believe that we are not exposed to anysignificant credit risk in cash and cash equivalents or restricted cash.

 

***Noncontrolling Interest***

 

Noncontrollinginterest represents the noncontrolling ownership interest’s proportionate shareof the equity in our consolidated real estate investments including the 10%,unaffiliated partner’s share of the equity in Palms of Monterrey.  Income and losses are allocated tononcontrolling interest holder based on their ownership percentage.

 

***Earnings per Share***

 

Netincome (loss) per share is calculated based on the weighted average number ofcommon shares outstanding during each period. The weighted average shares outstanding used to calculate both basic anddiluted income (loss) per share were the same for the three and six monthsended June 30, 2010 and 2009 as there were no stock-based awardsoutstanding.

 

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

 

Therehave been no developments to new accounting pronouncements, including theexpected dates of adoption and estimated effects on our consolidated financialstatements, from those disclosed in our 2009 Annual Report on Form 10-K.

 

**5.****                                     ****RealEstate and Real Estate Investments**

 

As of June 30, 2010, we consolidated four realestate assets.  In addition, we have anoncontrolling, unconsolidated ownership interest in one real estate asset thatwe account for using the equity method. The following table presents certain information about our consolidatedinvestments as of June 30, 2010:

 
| ** **         | ** ** | ** **        | ** ** | **Approximate**    | ** ** | ** **                   | ** ** | ** **    | ** ** |
|--------------------|------------|-------------------|------------|--------------------|------------|------------------------------|------------|---------------|------------|
| ** **         | ** ** | ** **        | ** ** | **Rentable**       | ** ** | ** **                   | ** ** | **Ownership** | ** ** |
| **Property  Name** | ** ** | **Location**      | ** ** | **Square Footage** | ** ** | **Description**              | ** ** | **Interest**  | ** ** |
| 1875 Lawrence      |       | Denver,  CO       |       | 185,000            |       | 15-story  office building    |       | 100%          |       |
| PAL Loan           |       | (1)               |       | n/a                |       | redevelopment  property      |       | Lender        |       |
| Palms of Monterrey |       | Fort  Myers, FL   |       | (2)                |       | multifamily                  |       | 90%           |       |
| Holstenplatz       |       | Hamburg,  Germany |       | 80,000             |       | eight-story  office building |       | 100%          |       |

 

----

| (1) | Hotel lodging units  located on U.S. Army installations at Fort Hood, Texas; Fort Leavenworth,  Kansas; Fort Myer, Virginia; Fort Polk, Louisiana; Fort Riley, Kansas; Fort  Rucker, Alabama; Fort Sam Houston, Texas; Tripler Army Medical Center and  Fort Shafter, Hawaii; Fort Sill, Oklahoma; and Yuma Proving Ground, Arizona. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | 408 units.                                                                                                                                                                                                                                                                                                                           |

 

***Real Estate Asset Acquisitions***

 

*Palms of Monterrey*

 

OnMay 10, 2010, we obtained a 90% fee simple interest in the Palms ofMonterrey, a 408-unit multifamily complex located in Fort Myers, Florida.  Prior to May 10, 2010, we were theholder of a 90% interest in a promissory note secured by a first lien mortgagein the property.  On January 20,2010, we reached an agreement with the borrower so that the borrower would notcontest the foreclosure proceedings in exchange for $0.3 million.  A final judgment of foreclosure was enteredon March 22, 2010 and the foreclosure sale for Palms of Monterrey was heldon April 27, 2010.  We were the onlybidder in the sale and acquired the fee simple interest in the property on May 10,2010.  Total consideration transferredfor the Palms of Monterrey was cash of $26.8 million of which our 90% interestwas paid from the proceeds of our Offering. As a result of obtaining a fee simple interest in Palms of Monterrey,the identifiable assets and liabilities assumed were measured at fair value,resulting in a bargain purchase gain of $5.5 million which was recognized inthe line item ‘bargain purchase gain’ in the consolidated statement ofoperations for the three and six months ended June 30, 2010.  In determining fair value, we obtained anappraisal and utilized assumptions including estimated cash flows, discountrates, and capitalization rates.

 

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**Behringer HarvardOpportunity REIT II, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

Palmsof Monterrey contributed rental revenue of $0.6 million and a net loss of $0.3million to our consolidated statements of operations for the period from May 10,2010 to June 30, 2010.  Thefollowing unaudited pro forma summary presents consolidated information as ifthe business combination had occurred on January 1, 2009:

 

| ** **                   | ** ** | **Pro Forma for the Six Months Ended** | ** ** |
|------------------------------|------------|----------------------------------------|------------|
| ** **                   | ** ** | **June 30,**                      | ** ** |
| ** **                   | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Revenue                      |       | $                                      | 7,891      |   | $ | 4,900 |   |
| Net  income (loss)           |       | $                                      | 5,571      |   | $ | (1,128 | ) |
| Net  income (loss) per share |       | $                                      | 0.32       |   | $ | (0.13 | ) |

 

Thesepro forma amounts have been calculated after applying our accounting policiesand adjusting the results of Palms of Monterrey to reflect additionaldepreciation and amortization that would have been charged assuming the fairvalue adjustments to the tangible and intangible assets had been applied from January 1,2009.  Included in the pro forma netincome (loss) for the six months ended June 30, 2010 and 2009 isdepreciation and amortization expense of $0.6 million and $1.6 million,respectively.

 

Duringthe six months ended June 30, 2010, we incurred $0.1 million inacquisition expenses related to the Palms of Monterrey acquisition.  The following table summarizes the amounts ofidentified assets acquired and liabilities assumed at the acquisition date:

 

| ** **                         | ** ** | **Palms of**  | ** ** |
|------------------------------------|------------|---------------|------------|
| ** **                         | ** ** | **Monterrey** | ** ** |
| Land                               |       | $             | 5,800      |   |
| Land  improvements                 |       | 562           |       |
| Building                           |       | 23,604        |       |
| Lease  intangibles, net            |       | 1,028         |       |
| Acquired  below-market leases, net |       | (16           | )          |
| Furniture,  fixtures and equipment |       | 1,123         |       |
| Working  capital                   |       | 482           |       |
| Total  identifiable net assets     |       | $             | 32,583     |   |

 

Weare in the process of finalizing our acquisition allocations, which is subjectto change until our information is finalized, no later than twelve months fromthe acquisition date.

 

*Holstenplatz*

 

OnJune 30, 2010, we acquired a 100% interest in a multi-tenant officebuilding known as Holstenplatz, located in Hamburg, Germany (“Holstenplatz”).  Holstenplatz is an eight-story officebuilding containing approximately 80,000 rentable square feet.  Total consideration transferred for Holstenplatzwas $12.5 million and consisted of cash of $2.8 million from the proceeds ofour Offering, and proceeds of $9.7 million from a loan with a financialinstitution (see Note 8).

 

Dueto the timing of the acquisition, Holstenplatz did not contribute anymeaningful revenue or earnings for the three and six months ended June 30,2010.  The following unaudited pro formasummary presents consolidated information as if the business combination hadoccurred on January 1, 2009:

 

| ** **                   | ** ** | **Pro Forma for the Six Months Ended** | ** ** |
|------------------------------|------------|----------------------------------------|------------|
| ** **                   | ** ** | **June 30,**                      | ** ** |
| ** **                   | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Revenue                      |       | $                                      | 6,460      |   | $ | 3,453 |   |
| Net  income (loss)           |       | $                                      | 4,878      |   | $ | (809 | ) |
| Net  income (loss) per share |       | $                                      | 0.28       |   | $ | (0.09 | ) |

 

Thesepro forma amounts have been calculated after applying our accounting policiesand adjusting the results of Holstenplatz to reflect additional depreciationand amortization that would have been charged assuming the fair valueadjustments to the tangible and intangible assets had been applied from January 1,2009.  Included in the pro forma net

 

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**Behringer HarvardOpportunity REIT II, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

income(loss) for both the six months ended June 30, 2010 and 2009 isdepreciation and amortization expense of $0.3 million and interest expense of$0.2 million, respectively.

 

Duringthe six months ended June 30, 2010, we incurred $1.4 million ofacquisition expenses related to the Holstenplatz acquisition.  The following table summarizes the amounts ofidentified assets acquired and liabilities assumed at the acquisitiondate.  In determining fair value, weobtained an appraisal and utilized assumptions including estimated cash flows,discount rates, and capitalization rates.

 

| ** **                         | ** ** | **Holstenplatz** | ** ** |
|------------------------------------|------------|------------------|------------|
| Land                               |       | $                | 2,703      |   |
| Building                           |       | 8,858            |       |
| Lease  intangibles, net            |       | 1,079            |       |
| Acquired  below-market leases, net |       | (127             | )          |
| Total  identifiable net assets     |       | $                | 12,513     |   |

 

Weare in the process of finalizing our acquisition allocations, which is subjectto change until our information is finalized, no later than twelve months fromthe acquisition date.

 

***Investment in Unconsolidated Joint Venture***

 

Thefollowing table presents certain information about our unconsolidatedinvestment as of June 30, 2010 and December 31, 2009.

 
| ** **         | ** ** | ** **    | ** ** | **Carrying Value of Investment** | ** ** |
|--------------------|------------|---------------|------------|----------------------------------|------------|
| **Property  Name** | ** ** | **Ownership** | ** ** | **June 30, 2010**           | ** ** | **December 31, 2009** | ** ** |
| Stone  Creek       |       | 9.99          | %          | $                                | 508        |   | $ | 506 |   |
|                    |            |               |            |                                  |            |  |  |  |  |

 

Our investment in an unconsolidated joint venture asof June 30, 2010 and December 31, 2009 consisted of our proportionateshare of the combined assets and liabilities of our investment property asfollows:

 

| ** **                    | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------|------------|------------------------|------------|----------------------------|------------|
| Real estate assets, net       |       | $                      | 13,457     |                       | $          | 13,886 |   |
| Cash  and cash equivalents    |       | 516                    |       | 641                        |       |
| Other  assets                 |       | 372                    |       | 46                         |       |
| Total  assets                 |       | $                      | 14,345     |                       | $          | 14,573 |   |
|                          |       |                   |       |                       |       |
| Notes  payable                |       | $                      | 12,618     |                       | $          | 12,917 |   |
| Other  liabilities            |       | 300                    |       | 151                        |       |
| Total  liabilities            |       | 12,918                 |       | 13,068                     |       |
|                          |       |                   |       |                       |       |
| Equity                        |       | 1,427                  |       | 1,505                      |       |
| Total  liabilities and equity |       | $                      | 14,345     |                       | $          | 14,573 |   |

 

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**Behringer HarvardOpportunity REIT II, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

Our equity in losses from this investment is ourproportionate share of the combined loss of our unconsolidated joint venturefor the three and six months ended June 30, 2010.  We had no unconsolidated joint ventures forthe three and six months ended June 30, 2009.

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|-----------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **June 30, 2010** | ** ** | **June 30, 2010** | ** ** |
| Revenue                           |       | $                      | 708        |                   | $          | 1,414 |   |
| Operating  expenses:              |       |                   |       |                   |       |
| Operating  expenses               |       | 124                    |       | 346                    |       |
| Property  taxes                   |       | 82                     |       | 164                    |       |
| Total  operating expenses         |       | 206                    |       | 510                    |       |
| Operating  income                 |       | 502                    |       | 904                    |       |
| Non-operating  expenses:          |       |                   |       |                   |       |
| Depreciation  and amortization    |       | 241                    |       | 483                    |       |
| Interest  and other, net          |       | 262                    |       | 498                    |       |
| Total  non-operating expenses     |       | 503                    |       | 981                    |       |
| Net  loss                         |       | $                      | (1         | )                      | $          | (77 | ) |
|                              |       |                   |       |                   |       |
| Company’s  share of net loss |       | $                      | —     |                   | $          | (7 | ) |

 

**6.****                                     ****Variable Interest Entities**

 

GAAP requires the consolidation of VIEs in which anenterprise has a controlling financial interest.  A controlling financial interest will haveboth of the following characteristics: (a) the power to direct theactivities of a VIE that most significantly impact the VIEs economicperformance and (b) the obligation to absorb losses of the VIE that couldpotentially be significant to the VIE or the right to receive benefits from theVIE that could potentially be significant to the VIE.

 

Our variable interest in VIEs may be in the form of(1) equity ownership and/or (2) loans provided by us to a VIE, orother partner.  We examine specificcriteria and use judgment when determining if we are the primary beneficiary ofa VIE.  Factors considered in determiningwhether we are the primary beneficiary include risk and reward sharing,experience and financial condition of other partner(s), voting rights,involvement in day-to-day capital and operating decisions, representation on aVIE’s executive committee, existence of unilateral kick-out rights or votingrights, level of economic disproportionality between us and the otherpartner(s), and contracts to purchase assets from VIEs.

 

*PAL Loan*

 

OnAugust 14, 2009, we entered into a loan agreement with an unaffiliatedthird party (borrower) to provide up to $25 million of second lien financingfor the privatization of, and improvements to, approximately 3,200 hotellodging units on ten U.S. Army installations, the PAL Loan.  As of June 30, 2010, $24.4 million ofthe aggregate $25 million available under the loan agreement was outstandingand is included in real estate loans receivable on the consolidated balancesheet at June 30, 2010.  Based onour evaluation, we have determined that the unaffiliated third party entitymeets the criteria of a variable interest entity but that we are not theprimary beneficiary because we do not have the power to direct the activitiesthat most significantly affect the entity’s economic performance.  The power to direct these activities resideswith the general partner of the unaffiliated third party.  Accordingly, we do not consolidate theunaffiliated third party entity.

 

*Stone Creek*

 

InNovember 2009, we acquired a 9.99% limited partnership interest in amultifamily property, Stone Creek, in Killeen, Texas for $0.5 million.  Based on our evaluation, we have determinedthat the entity meets the criteria of a variable interest entity under GAAP butthat we are not the primary beneficiary because we do not have a significantobligation to absorb losses or significant right to receive benefits.  These obligations and rights are held by theowner of the 90% interest.  Accordingly,we do not consolidate the Stone Creek entity and instead account for it underthe equity method of accounting.

 

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**Behringer HarvardOpportunity REIT II, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

At June 30, 2010 and December 31, 2009,our recorded investment in VIEs that are unconsolidated and our maximumexposure to loss were as follows:

 

| ** **                    | ** ** | **Investments in**      | ** ** | **Our Maximum**      | ** ** |
|-------------------------------|------------|-------------------------|------------|----------------------|------------|
| **As of  June 30, 2010** | ** ** | **Unconsolidated VIEs** | ** ** | **Exposure to Loss** | ** ** |
| PAL  Loan (1)                 |       | $                       | —     |                 | $          | 25,000 |   |
| Stone  Creek                  |       | 508                     |       | 508                  |       |
|                          |       | $                       | 508        |                 | $          | 25,508 |   |

 

| ** **                        | ** ** | **Investments in**      | ** ** | **Our Maximum**      | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------------------|------------|
| **As of  December 31, 2009** | ** ** | **Unconsolidated VIEs** | ** ** | **Exposure to Loss** | ** ** |
| PAL  Loan (1)                     |       | $                       | —     |                 | $          | 25,000 |   |
| Stone  Creek                      |       | 506                     |       | 506                  |       |
|                              |       | $                       | 506        |                 | $          | 25,506 |   |

 

----

(1) We have no equityinterest in the PAL Loan VIE. Our maximum exposure to loss consists of the $25million loan commitment of second lien financing.

 

**7.****                                     ****Real Estate Loans Receivable**

 

Asof June 30, 2010 we had an investment in one real estate loan receivable,the PAL Loan.  As of December 31,2009, we had invested in two real estate loans receivable, the PAL Loan and thePalms of Monterrey loan.

 
| ** **          | ** ** | ** **             | ** ** | ** **        | ** ** | ** **        | ** ** | ** **        | ** ** | **Annual**        | ** ** | ** **        | ** ** |
|---------------------|------------|------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **          | ** ** | ** **             | ** ** | ** **        | ** ** | **Book Value as** | ** ** | **Book Value as** | ** ** | **Effective**     | ** ** | ** **        | ** ** |
| **Loan Name**       | ** ** | **Date Acquired** | ** ** | **Property Type** | ** ** | **of 6/30/2010**  | ** ** | **of 12/31/2009** | ** ** | **Interest Rate** | ** ** | **Maturity Date** | ** ** |
| PAL  Loan           |       | 8/14/2009              |       | Hospitality       |       | $                 | 24,554     |              | $          | 12,634            |       | 18%               |       | 9/1/2016 |   |
| Palms  of Monterrey |       | 10/2/2009              |       | Multifamily       |       | —            |       | 27,078            |       | (1)               |       | (1)               |       |
|                |       |                   |       |              |       | $                 | 24,554     |              | $          | 39,712            |       |              |       |   |   |

 

----

(1) We acquired theloan in default with the intent to foreclose on the borrower and secure a feesimple interest in the underlying collateral. We obtained the fee simpleinterest on May 10, 2010.

 

Duringthe six months ended June 30, 2010, we earned $2.6 million in interestincome from our real estate loans receivable, including $1.5 million related tothe PAL Loan.  Until the foreclosureprocess was complete on the Palms of Monterrey, we recognized interest incomeon the defaulted note when cash was received. During the three and six months ended June 30, 2010, we received$0.3 million and $1.1 million, respectively, related to the Palms of Monterreyreal estate loan receivable, which was recognized as interest income in theperiod received.  A final judgment offoreclosure was entered on March 22, 2010 and the foreclosure sale forPalms of Monterrey was held on April 27, 2010.  We were the only bidder in the sale and weacquired a fee simple interest in the property on May 10, 2010 (See Note5).

 

**8****.****                                     ****Notes Payable**

 

Thefollowing table sets forth information on our notes payable as of June 30,2010 and December 31, 2009.

 
| ** **         | ** ** | ** **             | ** ** | ** **                 | ** ** | **Interest**                 | ** ** | **Maturity**                | ** ** |
|--------------------|------------|------------------------|------------|----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Description**    | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** | **Rate**                     | ** ** | **Date**                    | ** ** |
| 1875 Lawrence      |       | $                      | 18,750     |                       | $          | 18,500                       |       | 30-day  LIBOR + 2.5% (1)(2) |       | 12/31/12 |   |
| Palms of Monterrey |       | 19,700                 |       | —                     |       | 30-day  LIBOR + 3.35% (1)(3) |       | 07/01/17                    |       |
| Holstenplatz       |       | 9,705                  |       | —                     |       | 3.887%                       |       | 04/30/15                    |       |
|               |       | 48,155                 |       | 18,500                     |       |                         |       |                        |       |
|                    |            |                        |            |                            |            |                              |            |                             |            |  |  |

 

----

(1) 30-day LIBOR was0.347% at June 30, 2010.

(2) The loan has aminimum interest rate of 6.25%.

(3) The loan has amaximum interest rate of 7%.

 

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Table of Contents

 

**Behringer HarvardOpportunity REIT II, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

Wehave unconditionally guaranteed payment of the note payable related to 1875Lawrence for an amount not to exceed the lesser of (i) $11.75 million and (ii) 50%of the total amount advanced under the loan agreement if the aggregate amountadvanced is less than $23.5 million.  Wehave guaranteed payment of the note payable related to Palms of Monterrey and,as guarantor, are subject to certain recourse liabilities with respect tocertain “bad boy” acts as set forth in the Guaranty in favor of theunaffiliated lender.

 

Dueto the variable interest rate nature of the loans related to 1875 Lawrence andPalms of Monterrey, we believe that these loans are stated at their fair valueas of June 30, 2010.  We believethat the Holstenplatz fixed rate note payable is also stated at its fair valueas it was originated in June 2010.

 

Weare subject to customary affirmative, negative, and financial covenants,representations, warranties and borrowing conditions, all as set forth in theloan agreements.

 

Thefollowing table summarizes our contractual obligations for principal paymentsas of June 30, 2010:

 

| **Year**                                   | ** ** | **Amount Due** | ** ** |
|--------------------------------------------|------------|----------------|------------|
| July 1, 2010 - December 31, 2010 |       | $              | 101        |   |
| 2011                                       |       | 498            |       |
| 2012                                       |       | 18,797         |       |
| 2013                                       |       | 559            |       |
| 2014                                       |       | 572            |       |
| Thereafter                                 |       | 27,628         |       |
|                                       |       | $              | 48,155     |   |

 

*Palms of Monterrey*

 

OnJune 11, 2010, we entered into a Freddie Mac-financed mortgage loan withan unaffiliated lender to borrow $19.7 million. The loan is secured by a firstmortgage lien on the Palms of Monterrey in Fort Myers, Florida that we acquiredon May 10, 2010.

 

TheLoan bears interest at a variable annual rate equal to the one-month LIBOR plus3.35%, with a ceiling of 7%.  Commencingon August 1, 2010 and continuing through July 1, 2012, monthlypayments of accrued unpaid interest are required.  Commencing on August 1, 2012 andcontinuing until July 1, 2017 (the “Maturity Date”), monthly payments ofprincipal and interest are required with principal calculated using anamortization term of 30 years.  Theunpaid principal balance and all accrued unpaid interest is due and payable onthe Maturity Date.  We have the right toprepay the entire outstanding amount of the Loan provided that if prepayment ismade prior to April 1, 2017, a prepayment premium is required.

 

*Holstenplatz*

 

OnJune 30, 2010, in connection with the acquisition of the Holstenplatzproperty, we entered into a loan agreement with a financial institution toborrow up to $10.1 million. The outstanding balance of the loan as of June 30,2010 was $9.7 million.  The loan issecured by a first mortgage lien on Holstenplatz.  The loan bears interest at a fixed annualrate of 3.887% and requires monthly payments of principal and interest.  The loan matures on April 30, 2015.

 

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**Behringer HarvardOpportunity REIT II, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

**9.****                                     ****LeasingActivity**

 

Futureminimum base rental payments due to us under non-cancelable leases in effect asof June 30, 2010 for our consolidated properties are as follows:

 

| ** **                                 | ** ** | **Minimum**  | ** ** |
|--------------------------------------------|------------|--------------|------------|
| ** **                                 | ** ** | **Rental**   | ** ** |
| **Year**                                   | ** ** | **Payments** | ** ** |
| July 1, 2010 - December 31, 2010 |       | $            | 1,876      |   |
| 2011                                       |       | 2,961        |       |
| 2012                                       |       | 2,332        |       |
| 2013                                       |       | 1,465        |       |
| 2014                                       |       | 826          |       |
| Thereafter                                 |       | 1,719        |       |
| Total                                      |       | $            | 11,179     |   |

 

Theschedule above does not include rental payments due to us from our multifamilyproperties as leases associated with these properties typically includecancellation rights.  As of June 30,2010, one of our tenants accounted for 10% or more of our aggregate annualrental revenues from our consolidated properties.  Policy Studies, Inc., a tenant in thehealthcare consulting services industry, accounted for rental revenue ofapproximately $0.4 million, or approximately 13%, of our aggregate rentalrevenues for the six months ended June 30, 2010.  Policy Studies, Inc. has exercised itstermination option and plans to vacate the building on or beforeAugust 31, 2010.

 

**10.****                              ****Distributions**

 

Weinitiated the payment of monthly distributions in April 2008 in an amountequal to a 3% annualized rate of return, based on an investment in our commonstock of $10.00 per share and calculated on a daily record basis of $0.0008219per share.  The annualized rate of returnwas raised to 5% effective June 1, 2009, calculated on a daily recordbasis of $0.0013699 per share.  A portionof each distribution is expected to constitute a return of capital for taxpurposes.  Pursuant to the DRP,stockholders may elect to reinvest any cash distribution in additional sharesof common stock.  We record alldistributions when declared, except that the stock issued through the DRP isrecorded when the shares are actually issued. Distributions declared and payable as of June 30, 2010 were $0.8million, which included $0.3 million of cash distributions payable.  Distributions declared and payable as of June 30,2009 were $0.4 million, which included $0.1 million of cash distributionspayable.

 

Thefollowing are the distributions declared for the first and second quarters of2010 and 2009:

 

| **2010**     | ** ** | **Cash** | ** ** | **DRP** | ** ** | **Total** | ** ** | **Per Share** | ** ** |
|--------------|------------|----------|------------|---------|------------|-----------|------------|---------------|------------|
| 2nd  Quarter |       | $        | 716        |    | $          | 1,607     |       | $             | 2,323      |   | $ | 0.125 |   |
| 1st  Quarter |       | 571      |       | 1,396   |       | 1,967     |       | 0.123         |       |
|         |       | $        | 1,287      |    | $          | 3,003     |       | $             | 4,290      |   | $ | 0.248 |   |

 

| **2009**     | ** ** | **Cash** | ** ** | **DRP** | ** ** | **Total** | ** ** | **Per Share** | ** ** |
|--------------|------------|----------|------------|---------|------------|-----------|------------|--------------------|------------|
| 2nd  Quarter |       | $        | 227        |    | $          | 654       |       | $                  | 881        |   | $ | 0.091 |   |
| 1st  Quarter |       | 147      |       | 439     |       | 586       |       | 0.074              |       |
|         |       | $        | 374        |    | $          | 1,093     |       | $                  | 1,467      |   | $ | 0.165 |   |

 

OnJune 22, 2010, the Company’s board of directors declared distributionspayable to stockholders of record each day during the months of July, August,and September 2010.  Distributionspayable to each stockholder of record will be paid on or before the 16th day ofthe following month.

 

**11.****                              ****RelatedParty Transactions**

 

Ouradvisor and certain of its affiliates will receive fees and compensation inconnection with the Offering, and in connection with the acquisition,management, and sale of our assets.

 

BehringerSecurities LP (“Behringer Securities”), the dealer-manager and an affiliate ofour advisor, receives commissions of up to 7% of gross offering proceeds.  Behringer Securities reallows 100% of sellingcommissions earned to participating broker-dealers.  In addition, we pay Behringer Securities adealer manager fee of up to 2.5% of gross offering 

 

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**Behringer Harvard OpportunityREIT II, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

proceeds.  Pursuant to separately negotiated agreements,Behringer Securities may reallow a portion of its dealer manager fee in anaggregate amount up to 2% of gross offering proceeds to broker-dealersparticipating in the Offering; provided, however, that Behringer Securities mayreallow, in the aggregate, no more than 1.5% of gross offering proceeds formarketing fees and expenses, conference fees and non-itemized, non-invoiced duediligence efforts and no more than 0.5% of gross offering proceeds forout-of-pocket and bona fide, separately invoiced due diligence expensesincurred as fees, costs or other expenses from third parties.  Further, in special cases pursuant to separatelynegotiated agreements and subject to applicable limitations imposed by theFinancial Industry Regulatory Authority, Behringer Securities may use a portionof its dealer manager fee to reimburse certain broker-dealers participating inthe Offering for technology costs and expenses associated with the Offering andcosts and expenses associated with the facilitation of the marketing andownership of our shares by such broker-dealers’ customers.  No selling commissions or dealer manager feewill be paid for sales under the DRP. For the six months ended June 30, 2010, Behringer Securities earnedselling commissions and dealer manager fees of $3.4 million and $1.2 million,respectively, which were recorded as a reduction to additional paid-incapital.  For the six months ended June 30,2009, Behringer Securities earned selling commissions and dealer manager feesof $2.1 million and $0.8 million, respectively, which were recorded as areduction to additional paid-in capital.

 

Wereimburse Behringer Opportunity Advisors II or its affiliates for anyorganization and offering expenses incurred on our behalf in connection withour primary offering (other than selling commissions and the dealer managerfee).  On October 2, 2009, weentered into an Amended and Restated Advisory Management Agreement withBehringer Opportunity Advisors II.  TheAmended and Restated Advisory Management Agreement changes the timing indetermining the reimbursement of organization and offering expenses by usduring the offering and waives the reimbursement of $3.5 million oforganization and offering expenses (other than selling commissions and thedealer manager fee) the advisor incurred on our behalf through December 31,2008.  We wrote off the $3.5 million oforganization and offering expenses in the fourth quarter of 2009 which reducedthe outstanding balance payable to affiliates, and increased our additionalpaid-in capital.  Pursuant to the Amendedand Restated Advisory Management Agreement we will reimburse our advisor fororganization and offering expenses (other than selling commissions and thedealer manager fee) incurred on our behalf until an aggregate of $7.5 millionof such organization and offering expenses have been reimbursed to ouradvisor.  Thereafter, we will notreimburse any such organization and offering expenses until the completion ofour primary offering.  Upon completion ofour primary offering, we will reimburse our advisor for any additionalorganization and offering expenses (other than selling commissions and thedealer manager fee) incurred up to 1.5% of the gross proceeds from thecompleted primary offering; provided however, we will not be required toreimburse our advisor any additional amounts and our advisor will be requiredto reimburse us to the extent that the total amount spent by us on organizationand offering expenses (other than selling commissions and the dealer managerfee) would exceed 1.5% of the gross proceeds from the completed primaryoffering.  In connection with the Amendedand Restated Advisory Management Agreement, we reimbursed $3.4 million oforganization and offering expenses to Behringer Opportunity Advisors II on October 20,2009.

 

Sinceour inception through June 30, 2010, approximately $11.1 million oforganization and offering expenses had been incurred by Behringer OpportunityAdvisors II or its affiliates on our behalf. Of this amount, $3.5 million had been written off per the Amended andRestated Advisory Management Agreement (discussed above), and $6.7 million hadbeen reimbursed by us.  The total we arerequired to remit to our advisor for organization and offering expensespursuant to the Amended and Restated Advisory Management Agreement is $7.5million (discussed above).  Included inpayables to affiliates on our balance sheet is $0.8 million of reimbursementspayable.  Of the $0.8 million oforganization and offering expenses reimbursable by us through June 30,2010, none was expensed as organizational costs.  Therefore, the entire $0.8 million wasrecorded as a reduction of additional paid-in capital.  Behringer Opportunity Advisors II or itsaffiliates determines the amount of organization and offering expenses owedbased on specific invoice identification as well as an allocation of costs tous and other Behringer Harvard programs, based on respective equity offeringresults of those entities in offering.

 

Ouradvisor or its affiliates receive acquisition and advisory fees of 2.5% of theamount paid and/or budgeted in respect of the purchase, development,construction, or improvement of each asset we acquire, including any debtattributable to these assets.  Ouradvisor and its affiliates will also receive acquisition and advisory fees of2.5% of the funds advanced in respect of a loan or other investment.

 

Ouradvisor or its affiliates also receive an acquisition expense reimbursement inthe amount of 0.25% of the funds paid for purchasing an asset, including anydebt attributable to the asset, plus 0.25% of the funds budgeted fordevelopment, construction, or improvement in the case of assets that we acquireand intend to develop, construct, or improve.  Our advisor or itsaffiliates will also receive an acquisition expense reimbursement in the amountof 0.25% of the funds advanced in respect of a loan or other investment. In addition, to the extent our advisor or its affiliates directly provideservices formerly provided or usually provided by third parties, includingwithout limitation accounting services related to the preparation of 

 

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**Behringer HarvardOpportunity REIT II, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

auditsrequired by the SEC, property condition reports, title services, titleinsurance, insurance brokerage or environmental services related to thepreparation of environmental assessments in connection with a completedinvestment the direct employee costs and burden to our advisor of providingthese services will be acquisition expenses for which we will reimburse ouradvisor.  We also pay third parties, orreimburse the advisor or its affiliates, for any investment-related expensesdue to third parties in the case of a completed investment, including, but notlimited to, legal fees and expenses, travel and communication expenses, costsof appraisals, accounting fees and expenses, third-party brokerage or finder’sfees, title insurance, premium expenses, and other closing costs.  Inaddition, acquisition expenses for which we will reimburse our advisor, includeany payments made to (i) a prospective seller of an asset, (ii) anagent of a prospective seller of an asset, or (iii) a party that has theright to control the sale of an asset intended for investment by us that arenot refundable and that are not ultimately applied against the purchase pricefor such asset.  Except as describedabove with respect to services customarily or previously provided by thirdparties, our advisor is responsible for paying all of the expenses it incursassociated with persons employed by the advisor to the extent dedicated tomaking investments for us, such as wages and benefits of the investmentpersonnel.  Our advisor or its affiliatesare also responsible for paying all of the investment-related expenses that weor our advisor or its affiliates incur that are due to third parties or relatedto the additional services provided by our advisor as described above withrespect to investments we do not make other than certain non-refundablepayments made in connection with any acquisition.  For the six months ended June 30, 2010,we incurred $0.9 million and $0.1 million of acquisition and advisory fees andacquisition expense reimbursements, respectively.  We incurred no such fees for the six monthsended June 30, 2009.

 

Wepay our advisor or its affiliates a debt financing fee of 1% of the amountavailable under any loan or line of credit made available to us.  It is anticipated that our advisor will paysome or all of these fees to third parties with whom it subcontracts tocoordinate financing for us.  We incurreddebt financing fees of $0.3 million for the six months ended June 30,2010.  We did not incur any debtfinancing fees for the six months ended June 30, 2009.

 

Wepay our advisor or its affiliates a development fee in an amount that is usualand customary for comparable services rendered to similar projects in thegeographic market of the project if such affiliate provides the developmentservices and if a majority of our independent directors determines that suchdevelopment fee is fair and reasonable and on terms and conditions not lessfavorable than those available from unaffiliated third parties.  We incurred no such fees for the six monthsended June 30, 2010 or 2009.

 

Wepay our property manager and affiliate of our advisor, Behringer HarvardOpportunity II Management Services, LLC (“BHO II Management”), or itsaffiliates, fees for the management, leasing, and construction supervision ofour properties.  Property management feesare 4.5% of the gross revenues of the properties managed by BHO II Managementor its affiliates plus leasing commissions based upon the customary leasingcommission applicable to the same geographic location of the respectiveproperty.  In the event that we contractdirectly with a third-party property manager in respect of a property, BHO IIManagement or its affiliates receives an oversight fee equal to 0.5% of thegross revenues of the property managed. In no event will BHO II Management or its affiliates receive both aproperty management fee and an oversight fee with respect to any particularproperty.  In the event we own a propertythrough a joint venture that does not pay BHO II Management directly for itsservices, we will pay BHO II Management a management fee or oversight fee, asapplicable, based only on an economic interest in the property.  We incurred and expensed property managementfees or oversight fees to BHO II Management of approximately $0.1 million andless than $0.1 million for the six months ended June 30, 2010 and 2009,respectively.

 

Wepay our advisor or its affiliates a monthly asset management fee of one-twelfthof 1.0% of the sum of the higher of the cost or value of each asset.  For the six months ended June 30, 2010and 2009, we expensed $0.4 million and $0.2 million, respectively, of assetmanagement fees.

 

We reimburse our advisor or its affiliates for all expenses paid orincurred by the advisor in connection with the services provided to us, subjectto the limitation that we will not reimburse our advisor for any amount bywhich its operating expenses (including the asset management fee) at the end ofthe four preceding fiscal quarters exceeds the greater of:  (A) 2% of our average invested assets,or (B) 25% of our net income determined without reduction for anyadditions to reserves for depreciation, bad debts or other similar non-cashreserves and excluding any gain from the sale of our assets for thatperiod.  Notwithstanding the above, wemay reimburse the advisor for expenses in excess of this limitation if amajority of our independent directors determines that such excess expenses arejustified based on unusual and non-recurring factors. For the six months ended June 30,2010 and 2009, we incurred and expensed such costs for administrative servicestotaling $0.3 million and $0.2 million, respectively.

 

Weare dependent on Behringer Securities, Behringer Opportunity Advisors II, andBHO II Management for certain services that are essential to us, including thesale of shares of our common stock, asset acquisition and dispositiondecisions, 

 

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**Behringer Harvard OpportunityREIT II, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

propertymanagement and leasing services, and other general administrativeresponsibilities.  In the event thatthese companies were unable to provide us with their respective services, wewould be required to obtain such services from other sources.

 

**12.****                              ****SupplementalCash Flow Information**

 

Supplementalcash flow information is summarized below:

 
| ** **                                                                                          | ** ** | **Six Months ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                          | ** ** | **2010**                           | ** ** | **2009** | ** ** |
|                                                                                                |       |                               |       |   |   |
| Interest paid                                                                                       |       | $                                  | 625        |   | $ | 488 |   |
| **Non-cash  investing activities:**                                                                 |       |                               |       |   |   |
| Conversion of loan to  equity investment                                                            |       | $                                  | 27,091     |   | $ | — |   |
| Capital expenditures for  real estate under development in accounts payable and accrued liabilities |       | $                                  | 265        |   | $ | — |   |
|                                                                                                |       |                               |       |   |   |
| **Non-cash  financing activities:**                                                                 | * *   | * *                           | * *   | * * | * * |
| Common stock issued in  distribution reinvestment plan                                              |       | $                                  | 2,886      |   | $ | 921 |   |
| Accrued dividends payable                                                                           |       | $                                  | 803        |   | $ | 418 |   |
| Offering costs payable to  related parties                                                          |       | $                                  | 828        |   | $ | 892 |   |

 

**13.****                              ****SubsequentEvent**

 

OnAugust 10, 2010, through a joint venture with unaffiliated third parties,we acquired a 16% interest in a two-building industrial warehouse complexlocated in San Bernardino, California (“El Cajon Distribution Center”) for cashconsideration of $4.2 million.  The ElCajon Distribution Center consists of two state-of-the-art, cross dockindustrial buildings totaling 1.4 million square feet.  Both buildings are currently vacant.

 

*****

 

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

 

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

 

**Forward-LookingStatements**

 

Certainstatements in this Quarterly Report on Form 10-Q constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”) and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements includediscussion and analysis of the financial condition of Behringer HarvardOpportunity REIT II, Inc. and our subsidiaries (which may be referred toherein as the “Company,” “we,” “us” or “our”), including our ability to rentspace on favorable terms, to address our debt maturities and to fund ourliquidity requirements, the value of our assets, our anticipated capitalexpenditures, the amount and timing of anticipated future cash distributions toour stockholders, the estimated per share value of our common stock and othermatters.  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.

 

Theseforward-looking statements are not historical facts but reflect the intent,belief or current expectations of our management based on their knowledge andunderstanding of the business and industry, the economy and other futureconditions.  These statements are notguarantees of future performance, and we caution stockholders not to placeundue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecastedin the forward-looking statements due to a variety of risks, uncertainties andother factors, including but not limited to the factors listed and describedunder Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed withthe Securities and Exchange Commission on March 30, 2010 and the factorsdescribed below:

 

·                  no trading market for our shares and noassurance that one will ever develop;

 

·                  delays in locating suitable investments;

 

·                  our ability to invest in a diverse portfolio;

 

·                  investments in foreign properties susceptibleto currency exchange rate fluctuations, adverse political developments, andchanges in foreign laws;

 

·                  market and economic challenges experienced bythe U.S. and global economies or real estate industry as a whole and the localeconomic conditions in the markets in which our properties are located;

 

·                  the availability of credit generally, and anyfailure to refinance or extend our debt as it comes due or a failure to satisfythe conditions and requirements of that debt;

 

·                  future increases in interest rates;

 

·                  our ability to raise capital in the future byissuing additional equity or debt securities, selling our assets or otherwise;

 

·                  payment of distributions from sources otherthat cash flows from operating activities;

 

·                  our obligation to pay substantial fees to ouradvisor and its affiliates;

 

·                  our ability to retain our executive officersand other key personnel of our advisor, our property manager and theiraffiliates;

 

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

 

·                  unfavorable changes in laws or regulationsimpacting our business or our assets; and

 

·                  factors that could affect our ability toqualify as a real estate investment trust.

 

Forward-lookingstatements in this Quarterly Report on Form 10-Q reflect our management’sview only as of the date of this Report, and may ultimately prove to beincorrect.  We undertake no obligation toupdate or revise forward-looking statements to reflect changed assumptions, theoccurrence of unanticipated events or changes to future operating results.  We intend for these forward-lookingstatements to be covered by the applicable safe harbor provisions created by Section 27Aof the Securities Act and Section 21E of the Exchange Act.

 

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**Cautionary Note**

 

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

 

**ExecutiveOverview**

 

Wewere formed primarily to acquire and operate commercial real estate and realestate-related assets on an opportunistic basis.  In particular, we focus generally onacquiring commercial properties with significant possibilities for short-termcapital appreciation, such as those requiring development, redevelopment orrepositioning, those located in markets and submarkets with high growthpotential, and those available from sellers who are distressed or facetime-sensitive deadlines.  In addition, given current economicconditions, our opportunistic investment strategy may also include investmentsin loans secured by or related to real estate at more attractive rates ofcurrent return than have been available for some time.  Such loan investments may have capital gaincharacteristics, whether as a result of a discount purchase or related equityparticipations.  We may acquire awide variety of commercial properties, including office, industrial, retail,hospitality, recreation and leisure, single-tenant, multifamily, and other realproperties.  These properties may beexisting, income-producing properties, newly constructed properties orproperties under development or construction, and may include multifamilyproperties purchased for conversion into condominiums and single-tenantproperties that may be converted for multi-tenant use.  Further, we may invest in real estate-relatedsecurities, including securities issued by other real estate companies, eitherfor investment or in change of control transactions completed on a negotiatedbasis or otherwise.  We also mayoriginate or invest in collateralized mortgage-backed securities, mortgage,bridge or mezzanine loans, and Section 1031 tenant-in-common interests(including those issued by affiliates of our advisor), or in entities that makeinvestments similar to the foregoing.  Weexpect to make our investments in or in respect of real estate assets locatedin the United States and other countries based on current market conditions.

 

OnFebruary 26, 2007, we filed a Registration Statement on Form S-11with the SEC to offer up to 125,000,000 shares of common stock for sale to thepublic, of which 25,000,000 shares are being offered pursuant to our DRP.  We reserve the right to reallocate the shareswe are offering between our primary offering and the DRP.  The SEC declared our Registration Statementeffective on January 4, 2008, and we commenced our ongoing initial publicoffering on January 21, 2008.  Wecommenced operations on April 1, 2008 upon satisfaction of the conditionsof our escrow agreement and acceptance of initial subscriptions of commonstock.

 

*MarketOutlook*

 

Beginningin 2008, the U.S. and global economies have experienced a significantdownturn.  This downturn includeddisruptions in the broader financial and credit markets, declining consumerconfidence, and an increase in unemployment rates.  These conditions have contributed to weakenedmarket conditions.  Due to the strugglingU.S. and global economies, including losses in the financial and professionalservices industries, overall demand across most real estate sectors includingoffice, multifamily, hospitality, and retail remains low.  We believe that corresponding rental rateswill also remain weak at least through the third quarter of 2010.  The national vacancy percentage for officespace increased from 14.5% in the fourth quarter of 2008 to 19.6% in the firstquarter of 2010.  Office vacancies areexpected to peak at around 20% in 2010. Further, we believe that tenant defaults and bankruptcies are likely toincrease in the short-term.  To date, wehave not experienced any significant tenant defaults resulting in the loss ofmaterial rental income.

 

Inthe multifamily real estate sector, a limited new supply of multifamily assetsis expected in the near future.  Sincehigh quality multifamily developments can take 18 months to 36 months toentitle, obtain necessary permits, and construct, we believe there will be animbalance in supply and demand fundamentals for at least the next couple ofyears.  As the economy improves, weexpect renter demand and effective rents to increase in multifamilycommunities.

 

Asa result of the existing economic conditions, our primary objectives are toraise capital and to take advantage of favorable investment opportunities.  We believe that the current economicenvironment will result in investment opportunities for many high-quality realestate and real estate-related assets. To the extent that we have capital available to invest, we plan toactively pursue investment opportunities.

 

**Liquidityand Capital Resources**

 

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

 

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

 

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

 

Weintend to borrow money to acquire properties and make other investments.  There is no limitation on the amount we mayinvest in any single property or other asset or on the amount we can borrow forthe purchase of any individual property or other investment.  Under our charter, the maximum amount of ourindebtedness shall not exceed 300% of our “net assets” (as defined by ourcharter) as of the date of any borrowing; however, we may exceed that limit ifapproved by a majority of our independent directors.  In addition to our charter limitation, ourboard of directors has adopted a policy to generally limit our aggregateborrowings to approximately 75% of the aggregate value of our assets unlesssubstantial justification exists that borrowing a greater amount is in our bestinterests.  Our policy limitation, however, does not apply to individualreal estate assets and will only apply once we have ceased raising capitalunder the Offering or any subsequent offering and invested substantially all ofour capital.  As a result, we expect to borrow more than 75% of thecontract purchase price of each real estate asset we acquire during the earlyperiods of our operations to the extent our board of directors determines thatborrowing at these levels is prudent.

 

Thecommercial real estate debt markets are continuing to experience volatility asa result of certain factors, including the tightening of underwriting standardsby lenders and credit rating agencies. Credit spreads for major sources of capital have widened significantlyas investors have demanded a higher risk premium.  This is resulting in lenders increasing thecost for debt financing.  Consequently,there is greater uncertainty regarding our ability to access the credit marketsin order to attract financing on reasonable terms.  Our ability to borrow funds to finance futureacquisitions could be adversely affected by our inability to secure permanentfinancing on reasonable terms, if at all.

 

Shouldthe overall cost of borrowings increase, either by increases in the index ratesor by increases in lender spreads, we will need to factor such increases intothe economics of our acquisitions, developments and property contributions.  This may result in our investment operationsgenerating lower overall economic returns and a reduced level of cash flow,which could potentially impact our ability to make distributions to ourstockholders at current levels.  Inaddition, the recent dislocations in the debt markets have reduced the amountof capital that is available to finance real estate, which, in turn: (i) leadsto a decline in real estate values generally; (ii) slows real estatetransaction activity; (iii) reduces the loan to value upon which lendersare willing to extend debt; and, (iv) results in difficulty in refinancingdebt as it becomes due, all of which may reasonably be expected to have amaterial adverse impact on the value of real estate investments and therevenues, income or cash flow from the acquisition and operations of realproperties and mortgage loans.  Inaddition, the current state of the debt markets has negatively impacted theability to raise equity capital.

 

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

 

*Debt Financings*

 

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

 

AtJune 30, 2010, our notes payable balance was $48.2 million and consistedof the notes payable related to 1875 Lawrence, Palms of Monterrey, and Holstenplatz.  We have unconditionally guaranteed payment ofthe note payable related to 1875 Lawrence for an amount not to exceed thelesser of (i) $11.75 million and (ii) 50% of the total amountadvanced under the loan agreement if the aggregate amount advanced is less than$23.5 million.  We have guaranteedpayment of the note payable related to Palms of Monterrey and, as guarantor,are subject to certain recourse liabilities with respect to certain “bad boy”acts as set forth in the Guaranty in favor of the unaffiliated lender.

 

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Ourloan agreements stipulate that we comply with certain reporting and financialcovenants.  These covenants include,among other things, maintaining minimum debt service coverage ratios.  As of June 30, 2010, we believe we werein compliance with the debt covenants under our loan agreements.

 

Oneof our principal long-term liquidity requirements includes the repayment ofmaturing debt.  The following tableprovides information with respect to the maturities and scheduled principalrepayments of our indebtedness as of June 30, 2010.  The table does not represent any extensionoptions.

 
| ** **                                                                                   | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                   | ** ** | **July 1, 2010 -**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                   | ** ** | **December 31, 2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **After 2012** | ** ** | **Total** | ** ** |
| Principal  payments - variable rate debt                                                     |       | $                          | —     |   | $ | 297 |   | $ | 18,596 |   | $ | 19,557 |   | $ | 38,450 |   |
| Principal  payments - fixed rate debt                                                        |       | 101                        |       | 201 |   | 201 |   | 9,202 |   | 9,705 |   |
| Interest  payments - variable rate debt (based on rates in effect as of June 30,  2010) |       | 966                        |       | 1,918 |   | 1,998 |   | 3,219 |   | 8,101 |   |
| Interest  payments - fixed rate debt                                                         |       | 192                        |       | 375 |   | 368 |   | 850 |   | 1,785 |   |
| Total                                                                                        |       | $                          | 1,259      |   | $ | 2,791 |   | $ | 21,163 |   | $ | 32,828 |   | $ | 58,041 |   |

 

**Resultsof Operations**

 

Asof June 30, 2010, we had invested in five real estate and realestate-related assets and consolidated four:

 

·                  1875 Lawrence, an office building located inDenver, Colorado;

 

·                  PAL Loan, a real estate loan receivable toprovide up to $25 million of second lien financing for the privatization of andimprovements to, approximately 3,200 hotel lodging units on ten U.S. Armyinstallations that we purchased in order to provide interest income;

 

·                  Palms of Monterrey, a 90% interest in amultifamily complex on a 28-acre site located in Fort Myers, Florida in whichwe acquired a fee simple interest on May 10, 2010.  Prior to May 10, 2010, we were theholder of a 90% interest in a promissory note secured by a first lien mortgagein the property; and

 

·                  Holstenplatz, an office building located inHamburg, Germany acquired on June 30, 2010.

 

Inaddition, we have a noncontrolling, unconsolidated interest in an investmentthat is accounted for using the equity method of accounting, a 9.99% interestin a multifamily property, Stone Creek, in Killeen, Texas.

 

Asof June 30, 2009, we had invested in one property, 1875 Lawrence, locatedin Denver, Colorado.

 

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*Threemonths ended June 30, 2010 as compared to the three months ended June 30,2009*

 
| ** **                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Increase (Decrease)** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **2010**                             | ** ** | **2009**                | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Revenues:                                          |       |                                 |       |                    |       |   |   |   |   |
| Rental  revenue                                    |       | $                                    | 1,885      |                    | $          | 1,449 |   | $ | 436 |   | 30 | % |
| Interest  income from real estate loans receivable |       | 1,208                                |       | —                  |       | 1,208 |   | n/a |   |
| Total  revenue                                     |       | $                                    | 3,093      |                    | $          | 1,449 |   | $ | 1,644 |   | 113 | % |
|                                               |       |                                 |       |                    |       |   |   |   |   |
| Expenses:                                          |       |                                 |       |                    |       |   |   |   |   |
| Property  operating expenses                       |       | $                                    | 589        |                    | $          | 277 |   | $ | 312 |   | 113 | % |
| Interest  expense                                  |       | 375                                  |       | 325                     |       | 50 |   | 15 | % |
| Real  estate taxes                                 |       | 200                                  |       | 140                     |       | 60 |   | 43 | % |
| Property  management fees                          |       | 63                                   |       | 44                      |       | 19 |   | 43 | % |
| Asset  management fees                             |       | 205                                  |       | 86                      |       | 119 |   | 138 | % |
| General  and administrative                        |       | 475                                  |       | 239                     |       | 236 |   | 99 | % |
| Acquisition  expense                               |       | 1,397                                |       | —                  |       | 1,397 |   | n/a |   |
| Depreciation  and amortization                     |       | 1,101                                |       | 661                     |       | 440 |   | 67 | % |
| Total  expenses                                    |       | $                                    | 4,405      |                    | $          | 1,772 |   | $ | 2,633 |   | 149 | % |

 

*Revenues.*  Revenues forthe three months ended June 30, 2010 were $3.1 million and include rentalrevenue of $1.9 million generated by 1875 Lawrence and Palms of Monterrey.  Total revenue also includes interest incomefrom our real estate loans receivable of $1.2 million, of which $0.9 millionwas related to the PAL real estate loan receivable.  We also received $0.3 million related to thePalms of Monterrey real estate loan receivable, which was recognized asinterest income in the period received and prior to obtaining a fee simpleinterest on the property on May 10, 2010. Revenues for the three months ended June 30, 2009 were $1.4 millionand consisted of rental revenue generated by 1875 Lawrence.  Policy Studies, Inc., a tenant at 1875Lawrence, as exercised its termination option and plans to vacate the buildingon or before August 31, 2010. During the three months ended June 30, 2010, we received $0.2million of rental revenue related to Policy Studies, Inc.  We expect increases in revenue in the futureas we complete the purchase of additional real estate properties.

 

*Property Operating Expenses.*  Property operating expenses for the threemonths ended June 30, 2010 were $0.6 million and were comprised of $0.3million of operating expenses for 1875 Lawrence and $0.3 million of operatingexpenses for Palms of Monterrey. Property operating expenses for the three months ended June 30,2009 were $0.3 million and were comprised of operating expenses for 1875Lawrence.  We expect increases inproperty operating expenses in the future as we purchase additional real estateproperties and as Palms of Monterrey and Holstenplatz are included for a fullperiod.

 

*Interest Expense. *Interestexpense for three months ended June 30, 2010 was $0.4 million and wascomprised of interest expense related to our notes payable balance of $48.2million which is comprised of the notes related to 1875 Lawrence, Palms ofMonterrey, and Holstenplatz.  We enteredinto the loan related to Palms of Monterrey on June 11, 2010 and into theloan related to Holstenplatz on June 30, 2010.  Interest expense for the three months ended June 30,2009 was $0.3 million and was comprised of interest expense related to our notepayable balance on 1875 Lawrence of $18.5 million.

 

*Real Estate Taxes. *Real estatetaxes for the three months ended June 30, 2010 were $0.2 million and werecomprised primarily of real estate taxes related to 1875 Lawrence. Real estatetaxes for the three months ended June 30, 2009 were $0.1 million and werecomprised entirely of real estate taxes related to 1875 Lawrence.  We expect increases in real estate taxes inthe future as we purchase additional real estate properties and as Palms ofMonterrey and Holstenplatz are included for a full period.

 

*Property Management Fees. *Propertymanagement fees for the three months ended June 30, 2010 were $0.1 millionand were comprised of fees related to 1875 Lawrence and Palms ofMonterrey.  Property management fees forthe three months ended June 30, 2009 were less than $0.1 million and werecomprised of fees related to 1875 Lawrence. We expect increases in property management fees in the future as wepurchase additional real estate properties and as Palms of Monterrey andHolstenplatz are included for a full period.

 

*Asset Management Fees.  A*sset managementfees for the three months ended June 30, 2010 were $0.2 million and werecomprised primarily of fees related to 1875 Lawrence, PAL Loan, Palms ofMonterrey, and Stone Creek.  Assetmanagement fees for the three months ended June 30, 2009 were $0.1 millionand were comprised of fees related to 1875 Lawrence.  We expect increases in asset management feesin the future as we purchase additional real estate and real estate-relatedinvestments and as Holstenplatz is included for a full period.

 

*General and Administrative Expenses.* General and administrative expenses for thethree months ended June 30, 2010 and 2009 were $0.5 million and $0.2million, respectively, and were comprised of auditing fees, legal fees, boardof directors’ fees, and other administrative expenses.  We expect increases in general andadministrative expenses in the future as we purchase additional real estate andreal estate-related investments.

 

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*Acquisition Expense. *Acquisition expensefor the three months ended June 30, 2010 was $1.4 million and wascomprised primarily of acquisition expenses related to our acquisitions ofPalms of Monterrey and Holstenplatz.  Wehad no acquisition expense for the three months ended June 30, 2009.

 

*Depreciation and Amortization Expense. *Depreciation and amortization expense for the three months ended June 30, 2010was $1.1 million and was comprised primarily of $0.5 million of depreciationand amortization related to 1875 Lawrence and $0.5 million of depreciation andamortization related to Palms of Monterrey. Depreciation and amortization expense for the three months ended June 30,2009 was $0.7 million and was comprised of depreciation and amortizationrelated to 1875 Lawrence.  We expectincreases in depreciation and amortization expense in the future as we purchaseadditional real estate properties.

 

*BargainPurchase Gain*.  During thethree months ended June 30, 2010, we recognized a bargain purchase gain of$5.5 million related to our purchase of the fee simple interest in the Palms ofMonterrey property.

 

*Sixmonths ended June 30, 2010 as compared to the six months ended June 30,2009*

 
| ** **                                         | ** ** | **Six Months Ended June 30,** | ** ** | **Increase (Decrease)** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **2010**                           | ** ** | **2009**                | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Revenues:                                          |       |                               |       |                    |       |   |   |   |   |
| Rental  revenue                                    |       | $                                  | 3,197      |                    | $          | 2,774 |   | $ | 423 |   | 15 | % |
| Interest  income from real estate loans receivable |       | 2,584                              |       | —                  |       | 2,584 |   | n/a |   |
| Total  revenue                                     |       | $                                  | 5,781      |                    | $          | 2,774 |   | $ | 3,007 |   | 108 | % |
|                                               |       |                               |       |                    |       |   |   |   |   |
| Expenses:                                          |       |                               |       |                    |       |   |   |   |   |
| Property  operating expenses                       |       | $                                  | 919        |                    | $          | 621 |   | $ | 298 |   | 48 | % |
| Interest  expense                                  |       | 697                                |       | 651                     |       | 46 |   | 7 | % |
| Real  estate taxes                                 |       | 360                                |       | 280                     |       | 80 |   | 29 | % |
| Property  management fees                          |       | 110                                |       | 90                      |       | 20 |   | 22 | % |
| Asset  management fees                             |       | 391                                |       | 172                     |       | 219 |   | 127 | % |
| General  and administrative                        |       | 856                                |       | 660                     |       | 196 |   | 30 | % |
| Acquisition  expense                               |       | 1,446                              |       | —                  |       | 1,446 |   | n/a |   |
| Depreciation  and amortization                     |       | 1,658                              |       | 1,264                   |       | 394 |   | 31 | % |
| Total  expenses                                    |       | $                                  | 6,437      |                    | $          | 3,738 |   | $ | 2,699 |   | 72 | % |

 

*Revenues.*  Revenues forthe six months ended June 30, 2010 were $5.8 million and include rentalrevenue of $3.2 million generated by 1875 Lawrence and Palms of Monterrey.  Total revenue also includes interest incomefrom our real estate loans receivable of $2.6 million, of which $1.5 millionwas related to the PAL Loan.  We also received$1.1 million related to the Palms of Monterrey real estate loan receivable,which was recognized as interest income in the period received.  Revenues for the six months ended June 30,2009 were $2.8 million and consisted of rental revenue generated by 1875Lawrence.  Policy Studies, Inc., atenant at 1875 Lawrence, as exercised its termination option and plans tovacate the building on or before August 31, 2010.  During the six months ended June 30,2010, we received $0.4 million of rental revenue related to Policy Studies, Inc.  We expect increases in revenue in the future aswe purchase additional real estate and real estate-related investments.

 

*Property Operating Expenses.*  Property operating expenses for the sixmonths ended June 30, 2010 were $0.9 million and were comprised of $0.6million of operating expenses for 1875 Lawrence and $0.3 million of operatingexpenses for Palms of Monterrey. Property operating expenses for the six months ended June 30, 2009were $0.6 million related to 1875 Lawrence. We expect increases in property operating expenses in the future as wepurchase additional real estate properties and as Palms of Monterrey andHolstenplatz are included for a full period.

 

*Interest Expense. *Interestexpense for the six months ended June 30, 2010 was $0.7 million and wascomprised of interest expense related to our notes payable balance of $48.2million which is comprised of the notes related to 1875 Lawrence, Palms ofMonterrey, and Holstenplatz.  We enteredinto the loan related to Palms of Monterrey on June 11, 2010 and into theloan related to Holstenplatz on June 30, 2010.  Interest expense for the six months ended June 30,2009 was $0.7 million and was comprised of interest expense related to our notepayable balance on 1875 Lawrence of $18.5 million.

 

*Real Estate Taxes. *Real estatetaxes for the six months ended June 30, 2010 were $0.4 million and wereprimarily comprised of real estate taxes related to 1875 Lawrence. Real estatetax for the six months ended June 30, 2009 were $0.3 million and werecomprised of real estate taxes related to 1875 Lawrence.  We expect increases in real estate taxes inthe future as we purchase additional real estate properties and as Palms ofMonterrey and Holstenplatz are included for a full period.

 

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*Property Management Fees. *Propertymanagement fees for each of the six months ended June 30, 2010 and 2009were $0.1 million and were primarily comprised of fees related to 1875 Lawrence.  We expect increases in property managementfees in the future as we purchase additional real estate properties and asPalms of Monterrey and Holstenplatz are included for a full period.

 

*Asset Management Fees.  A*sset managementfees for the six months ended June 30, 2010 were $0.4 million and werecomprised primarily of fees related to 1875 Lawrence, PAL Loan, Palms ofMonterrey, and Stone Creek. Asset management fees for the six months ended June 30,2009 were $0.2 million and were comprised of fees related to 1875Lawrence.  We expect increases in assetmanagement fees in the future as we purchase additional real estate and realestate-related investments and as Holstenplatz is included for a full period.

 

*General and Administrative Expenses.* General and administrative expenses for thesix months ended June 30, 2010 were $0.9 million compared to $0.7million for the six months ended June 30, 2009 and were comprised ofauditing fees, legal fees, board of directors’ fees, and other administrativeexpenses.  We expect increases in generaland administrative expenses in the future as we purchase additional real estateand real estate-related investments.

 

*Acquisition Expense. *Acquisitionexpense for the six months ended June 30, 2010 was $1.4 million andwas comprised primarily of acquisition expenses related to our acquisitions ofPalms of Monterrey and Holstenplatz.  Wehad no acquisition expense for the six months ended June 30, 2009.

 

*Depreciation and Amortization Expense. *Depreciation and amortization expense for the six months endedJune 30, 2010 was $1.7 million and was comprised primarily ofdepreciation and amortization related to 1875 Lawrence of $1.1 million anddepreciation and amortization related to Palms of Monterrey of $0.5 million.  Depreciation and amortization expense for thesix months ended June 30, 2009 was $1.3 million related to 1875Lawrence.  We expect increases indepreciation and amortization expense in the future as we purchase additionalreal estate properties.

 

*BargainPurchase Gain*.  During thesix months ended June 30, 2010, we recognized a bargain purchase gain of$5.5 million related to our purchase of the fee simple interest in the Palms ofMonterrey property.

 

**CashFlow Analysis**

 

Cashused in operating activities for the six months ended June 30, 2010 was$0.8 million, and was comprised primarily of a bargain purchase gain of $5.5million related to the purchase of Palms of Monterrey, an increase in prepaidexpenses and other assets of $1.8 million, and an increase in interestreceivable-real estate loans receivable of $0.7 million offset by net income of$4.9 million, depreciation and amortization of $1.2 million, and an increase inaccrued and other liabilities of $1.1 million, offset by.  Cash provided by operating activities for thesix months ended June 30, 2009 was less than $0.1 million, and wascomprised primarily of net loss of $0.7 million, offset by depreciation andamortization of $0.6 million, changes in prepaid expenses and other assets of$0.1 million, and changes in net payables to related parties of $0.1 million.

 

Cashused in investing activities for the six months ended June 30, 2010 was$25 million, and was comprised primarily of investment in real estate loansreceivable of $11.9 million and purchases of real estate related to ourHolstenplatz acquisition of $12.5 million. Cash used in investing activities for the six months ended June 30,2009 was $0.5 million, and was comprised of additions of property and equipmentat 1875 Lawrence of approximately $0.2 million and escrow deposits andpre-acquisition costs on real estate to be acquired of $0.2 million.

 

Cashprovided by financing activities for the six months ended June 30, 2010was $69 million, and was comprised primarily of the issuance of common stock,net of offering costs, of approximately $44 million and proceeds from notespayable of $29.7 million offset by distributions to noncontrolling interestholders of $2 million and distributions of $1.2 million.  Cash provided by financing activities for thesix months ended June 30, 2009 was $26.9 million, and was comprised of theissuance of common stock, net of offering costs, of approximately $27.4 millionoffset by distributions of $0.3 million and redemptions of common stock of $0.2million.

 

**Total Operating Expenses**

 

Inaccordance with the Statement of Policy Regarding Real Estate Investment Trustspublished by the North American Securities Administrators Association, alsoknown as the NASAA REIT Guidelines, our charter requires that we monitor our expenseson a trailing twelve month basis.  Our charter defines the following termsand requires that our Total Operating Expenses (“TOE”) are deemed to beexcessive if at the end of any quarter they exceed for the prior trailingtwelve month period the greater of 2% of our Average Invested Assets (“AIA”) or25% of our Net Income (“NI”).  For the trailing twelve months ended June 30,2010, TOE of $2.4 million exceeded the greater of 2% of our AIA or 25% of ourNI by $0.5 million.  Our Board of Directors, including all of ourindependent directors, have reviewed this analysis and unanimously determinedthe excess to be justified because the Company was in its development stagethrough April 1, 2008 when the Company accepted its first investors underits initial public offering and did not acquire its first real estate or realestate-related asset until October 28, 2008 and did not acquire anyadditional assets until the third quarter of 2009, which caused the 

 

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expensesit incurred in connection with its organization and as a result of being apublic company for audit and legal services, director and officer liability insurance,and fees and expenses for board members in connection with service on the boardand its committees to be disproportionate to the Company’s AIA and its NI.

 

**Fundsfrom Operations and Modified Funds from Operations**

 

Fundsfrom operations (“FFO”) is a non-GAAP financial measure that is widelyrecognized as a measure of REIT operating performance.  We use FFO, defined by the NationalAssociation of Real Estate Investment Trusts as net income (loss), computed inaccordance with GAAP, excluding extraordinary items, as defined by GAAP, andgains (or losses) from sales of property, plus depreciation and amortization onreal estate assets, and after adjustments for unconsolidated partnerships,joint ventures, subsidiaries, and noncontrolling interests as one measure toevaluate our operating performance.  Inaddition to FFO, we use modified funds from operations (“Modified Funds fromOperations” or “MFFO”), which excludes from FFO acquisition-related costs,impairment charges, and adjustments to fair value for derivatives notqualifying for hedge accounting, to further evaluate our operating performance.

 

Historicalcost accounting for real estate assets in accordance with GAAP implicitlyassumes that the value of real estate diminishes predictably over time.  Since real estate values have historicallyrisen or fallen with market conditions, many industry investors and analystshave considered the presentation of operating results for real estate companiesthat use historical cost accounting alone to be insufficient.  As a result, our management believes that theuse of FFO and MFFO, together with the required GAAP presentations, provides amore complete understanding of our performance.

 

Webelieve that FFO is helpful to investors and our management as a measure ofoperating performance because it excludes depreciation and amortization, gainsand losses from property dispositions, and extraordinary items, and as aresult, when compared year to year, reflects the impact on operations fromtrends in occupancy rates, rental rates, operating costs, developmentactivities, general and administrative expenses, and interest costs, which isnot immediately apparent from net income. We believe MFFO is helpful to our investors and our management as ameasure of operating performance because it excludes costs that managementconsiders more reflective of investing activities and other non-operating itemsincluded in FFO.  By providing MFFO, wepresent information that assists investors in aligning their analysis withmanagement’s analysis of long term, core operating activities.  We believe fluctuations in MFFO are moreindicative of changes in operating activities and provide comparability inevaluating our performance over time and as compared to other real estatecompanies that may not have acquisition activities, derivatives, or affected byimpairments.

 

Asexplained below, management’s evaluation of our operating performance excludesthe items considered in the calculation of MFFO based on the following economicconsiderations:

 

·                  Acquisition-relatedcosts.  In evaluating investments in realestate, including both business combinations and investments accounted forunder the equity method of accounting, management’s investment models andanalysis differentiate costs to acquire the investment from the operationsderived from the investment.  Prior to2009, acquisition costs for these types of investments were capitalized;however beginning in 2009 acquisition costs related to business combinationsare expensed.  We believe by excludingexpensed acquisition costs, MFFO provides useful supplemental information thatis comparable for each type of our real estate investments and is consistentwith management’s analysis of the investing and operating performance of ourproperties.

 

·                  Impairment charges.  An impairment charge represents a downwardadjustment to the carrying amount of a long-lived asset to reflect the currentvaluation of the asset even when the asset is intended to be held long-term.  Such adjustment, when properly recognizedunder GAAP, may lag the underlying consequences related to rental rates,occupancy and other operating performance trends.  The valuation is also based, in part, on theimpact of current market fluctuations and estimates of future capital requirementsand long-term operating performance that may not be directly attributable tocurrent operating performance.  BecauseMFFO excludes impairment charges, management believes MFFO provides usefulsupplemental information by focusing on the changes in our operatingfundamentals rather than changes that may reflect only anticipated losses.

 

·                  Adjustments to fair valuefor derivatives not qualifying for hedge accounting.  Management uses derivatives in the managementof our debt and interest rate exposure. We do not intend to speculate in these interest rate derivatives andaccordingly period-to-period changes in derivative valuations are not primaryfactors in management’s decision-making process.  We believe by excluding the gains or lossesfrom these derivatives, MFFO provides useful supplemental information on therealized economic impact of the hedges independent of short-term marketfluctuations.

 

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FFOor MFFO should not be considered as an alternative to net income (loss), as anindication of our liquidity, nor as an indication of funds available to fundour cash needs, including our ability to make distributions and should bereviewed in connection with other GAAP measurements.

 

For the six months ended June 30,2010, MFFO per share has been impacted by the increase in net proceeds realizedfrom the Offering.  During the six monthsended June 30, 2010, we sold 5 million shares of our common stock,increasing our outstanding shares by 35%. The proceeds from the issuance are temporarily invested in short-termcash equivalents until they can be invested in real estate and realestate-related assets.  Due to lower interestrates on cash equivalent investments, interest earnings were minimal.  We expect to invest these proceeds in higherearning real estate and real estate-related assets consistent with ourinvestment policy.  We believe this willadd value to our stockholders over our longer term investment horizon, even ifthis results in less current period earnings.

 

Ourcalculation of FFO and MFFO for the three and six months ended June 30,2010 and 2009 is presented below (amounts in thousands except per share amounts):
| ** **                                                             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                             | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income (loss)                                                     |       | $                                    | 4,189      |                               | $          | (198 | ) | $ | 4,948 |   | $ | (739 | ) |
| Net  income (loss) attributable to noncontrolling interest             |       | (547                                 | )          | —                             |       | (619 | ) | — |   |
| Adjustments  for:                                                      |       |                                 |       |                               |       |   |   |   |   |
| Real  estate depreciation and amortization                             |       | 1,101                                |       | 661                                |       | 1,658 |   | 1,264 |   |
| Pro  rata share of unconsolidated JV depreciation and amortization (1) |       | 24                                   |       | —                             |       | 48 |   | — |   |
| Noncontrolling  interest depreciation and amortization(2)              |       | (54                                  | )          | —                             |       | (54 | ) | — |   |
| Funds  from operations (FFO)                                           |       | $                                    | 4,713      |                               | $          | 463 |   | $ | 5,981 |   | $ | 525 |   |
| Other  Adjustments:                                                    |       |                                 |       |                               |       |   |   |   |   |
| Acquisition  expenses                                                  |       | 1,396                                |       | —                             |       | 1,440 |   | — |   |
| MFFO                                                                   |       | $                                    | 6,109      |                               | $          | 463 |   | $ | 7,421 |   | $ | 525 |   |
| GAAP  weighted average shares:                                         |       |                                 |       |                               |       |   |   |   |   |
| Basic  and diluted                                                     |       | 18,612                               |       | 9,519                              |       | 17,282 |   | 8,714 |   |
| MFFO  per share                                                        |       | $                                    | 0.33       |                               | $          | 0.05 |   | $ | 0.43 |   | $ | 0.06 |   |

 

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(1) This represents ourshare of depreciation and amortization expense of Stone Creek which we accountfor under the equity method of accounting.

(2) This reflects thenoncontrolling interest adjustment for the third-party partners’ proportionateshare of the real estate depreciation and amortization.

(3) This reflects ourshare of acquisition expenses.

 

Provided below is additional information related to selected non-cashitems included in net income (loss) above, which may be helpful in assessingour operating results.

 

·                  Straight-linerental revenue of less than $0.1 million was recognized for both the three andsix months ended June 30, 2010. Straight-line rental revenue of less than $0.1 million was recognizedfor both the three and six months ended June 30, 2009.

 

·                  During thethree months ended June 30, 2010, we recognized a bargain purchase gain of$5.5 million related to our purchase of the fee simple interest in the Palms ofMonterrey property.

 

·                  Amortization ofintangible lease assets and liabilities was recognized as a net increase torental revenues of $0.3 million and $0.5 million for the three and six monthsended June 30, 2010, respectively. Amortization of intangible lease assets and liabilities was recognizedas a net increase to rental revenues of $0.3 million and $0.6 million for thethree and six months ended June 30, 2009, respectively.

 

·                  We incurred nobad debt expense for the three and six months ended June 30, 2010 and2009.

 

·                  Amortization ofdeferred financing costs of less than $0.1 million and $0.1 million wasrecognized as interest expense for our notes payable for the three and sixmonths ended June 30, 2010, respectively. Amortization of deferred financing costs of less than $0.1 million wasrecognized as interest expense for our note payable for both the three and sixmonths ended June 30, 2009.

 

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In addition, cash from MFFO may be used to fund all or a portion ofcertain capitalizable items that are excluded from MFFO, such as capital expendituresand payments of principal on debt, each of which may impact the amount ofcash available for distribution to our stockholders.

 

**Distributions**

 

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

 

Untilproceeds from the Offering are fully invested and generating sufficientoperating cash flow to fully fund the payment of distributions to ourstockholders, we have and will continue to pay some or all of our distributionsfrom sources other than operating cash flow. We may, for example, generate cash to pay distributions from financingactivities, components of which may include proceeds from the Offering andborrowings (including borrowings secured by our assets) in anticipation offuture operating cash flow.  In addition,from time to time, our advisor and its affiliates may agree to waive or deferall, or a portion, of the acquisition, asset management or other fees orincentives due to them, pay general administrative expenses or otherwisesupplement investor returns in order to increase the amount of cash that wehave available to pay distributions to our stockholders.

 

Cashamounts distributed to stockholders during the six months ended June 30,2010 were $1.2 million.  Distributionsfunded through the issuance of shares under the DRP during the six months endedJune 30, 2010 were $2.9 million. For the six months ended June 30, 2010, cash flows used inoperating activities were $0.8 million. Accordingly, for the six months ended June 30, 2010, none of thecash flows from operating activities exceeded cash amount distributed tostockholders.  The shortfall for the sixmonths ended June 30, 2010 was funded from proceeds from theOffering.  Cash amounts distributed tostockholders during the six months ended June 30, 2009 were $0.3million.  Distributions funded throughthe issuance of shares under the DRP during the six months ended June 30,2009 were $0.9 million.  For the sixmonths ended June 30, 2009, cash flows provided by operating activitieswere less than $0.1 million. Accordingly, for the six months ended June 30, 2009, cash amountsdistributed to stockholders exceeded cash flow provided by operations byapproximately $0.3 million.  Theshortfall for the six months ended June 30, 2009 was funded from proceedsfrom the Offering.

 

Thefollowing are the distributions paid and declared as of June 30, 2010 and2009 (amounts in thousands except per share amounts).

 
| ** **  | ** ** | ** **             | ** ** | ** **            | ** ** | ** **        | ** ** | **Cash Flow**      | ** ** | **Total**    | ** ** | **Declared**  | ** ** |
|-------------|------------|------------------------|------------|-----------------------|------------|-------------------|------------|--------------------|------------|--------------|------------|---------------|------------|
| ** **  | ** ** | **Distributions Paid** | ** ** | **Provided by (Used** | ** ** | **Distributions** | ** ** | **Distribution**   | ** ** |
| **2010**    | ** ** | **Cash**               | ** ** | **Reinvested**        | ** ** | **Total**         | ** ** | **In) Operations** | ** ** | **Declared** | ** ** | **Per Share** | ** ** |
| 2nd Quarter |       | $                      | 677        |                  | $          | 1,553             |       | $                  | 2,230      |         | $          | (1,933        | )          | $ | 2,323 |   | $ | 0.125 |   |
| 1st Quarter |       | 531                    |       | 1,333                 |       | 1,864             |       | 1,170              |       | 1,967        |       | 0.123         |       |
| Total       |       | $                      | 1,208      |                  | $          | 2,886             |       | $                  | 4,094      |         | $          | (763          | )          | $ | 4,290 |   | $ | 0.248 |   |

 
| ** **  | ** ** | ** **              | ** ** | ** **             | ** ** | ** **        | ** ** | **Cash Flow**       | ** ** | **Total**    | ** ** | **Declared**   | ** ** |
|-------------|------------|-------------------------|------------|------------------------|------------|-------------------|------------|---------------------|------------|--------------|------------|----------------|------------|
| ** **  | ** ** | **Distributions  Paid** | ** ** | **Provided  by (Used** | ** ** | **Distributions** | ** ** | **Distribution**    | ** ** |
| **2009**    | ** ** | **Cash**                | ** ** | **Reinvested**         | ** ** | **Total**         | ** ** | **In)  Operations** | ** ** | **Declared** | ** ** | **Per  Share** | ** ** |
| 2nd Quarter |       | $                       | 172        |                   | $          | 505               |       | $                   | 677        |         | $          | 174            |       | $ | 881 |   | $ | 0.091 |   |
| 1st Quarter |       | 138                     |       | 416                    |       | 554               |       | (151                | )          | 586          |       | 0.074          |       |
| Total       |       | $                       | 310        |                   | $          | 921               |       | $                   | 1,231      |         | $          | 23             |       | $ | 1,467 |   | $ | 0.165 |   |

 

Distributionsdeclared per share assumes the share was issued and outstanding each day duringthe period and was based on a declared daily distribution rate of $0.0008219per share per day for the period through May 31, 2009.  As of June 1, 2009, the effective dailydistribution rate is $0.0013699.  Eachday during the first and second quarters of 2010 was a record date fordistributions.  On June 22, 2010,the Company’s board of directors declared distributions payable to thestockholders of record each day during the months of July, August, and September 2010.  Distributions payable to each stockholder ofrecord will be paid in cash on or before the 16th day of the following month.

 

Operatingperformance cannot be accurately predicted due to numerous factors, includingour ability to raise and invest capital at favorable yields, the financialperformance of our investments in the current real estate environment, the 

 

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typesand mix of investments in our portfolio and the accounting treatment of ourinvestments in accordance with our accounting policies.

 

**Off-BalanceSheet Arrangements**

 

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

 

**CriticalAccounting Policies and Estimates**

 

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

 

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

 

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

 

Ourconsolidated financial statements include our accounts and the accounts ofother subsidiaries over which we have control. All inter-company transactions, balances, and profits have beeneliminated in consolidation.  Interestsin entities acquired will be evaluated based on applicable GAAP, which includesthe requirement to consolidate entities deemed to be variable interest entities(“VIE”) in which we are the primary beneficiary.  If the interest in the entity is determinednot to be a VIE, then the entities will be evaluated for consolidation based onlegal form, economic substance, and the extent to which we have control and/orsubstantive participating rights under the respective ownership agreement.

 

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

 

***Real Estate***

 

Upon the acquisition of real estate properties, we recognize the assetsacquired, the liabilities assumed, and any noncontrolling interest as of theacquisition date, measured at their fair values.  The acquisition date is the date on which weobtain control of the real estate property. The assets acquired and liabilities assumed may consist of buildings, anyassumed debt, identified intangible assets and asset retirementobligations.  Identified intangibleassets generally consist of the above-market and below-market leases, in-placeleases, in-place tenant improvements and tenant relationships.  Goodwill is recognized as of the acquisitiondate and measured as the aggregate fair value of the consideration transferredand any noncontrolling interests in the acquiree over the fair value ofidentifiable net assets acquired. Likewise, a bargain purchase gain is recognized in current earnings whenthe aggregate fair value of the consideration transferred and anynoncontrolling interests in the acquiree is less than the fair value of theidentifiable net assets acquired.  Acquisition-relatedcosts are expensed in the period incurred.

 

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

 

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

 

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

 

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

 

***Revenue Recognition***

 

We recognize rental income generated from leases onreal estate assets on a straight-line basis over the terms of the respectiveleases, including the effect of rent holidays, if any.  Straight-line rental revenue of less than$0.1 million was recognized in rental revenues for both the three and sixmonths ended June 30, 2010. Straight-line rental revenue of less than $0.1 million was recognized inrental revenues for both the three and six months ended June 30, 2009.

 

We recognize interest income from real estate loansreceivable on an accrual basis over the life of the loan using the interestmethod.  Direct loan origination fees andorigination or acquisition costs, as well as acquisition premiums or discounts,are amortized over the life of the loan as an adjustment to interestincome.  We will stop accruing intereston loans when there is concern as to the ultimate collection of principal orinterest of the loan.  In the event thatwe stop accruing interest on a loan, we will generally not recognize subsequentinterest income until cash is received or we make the decision to restartinterest accrual on the loan.

 

***Investment Impairments***

 

Forreal estate we wholly own, we monitor events and changes in circumstancesindicating that the carrying amounts of the real estate assets may not berecoverable.  When such events or changesin circumstances are present, we assess potential impairment by comparingestimated future undiscounted operating cash flows expected to be generatedover the life of the asset and from its eventual disposition to the carryingamount of the asset.  In the event thatthe carrying amount exceeds the estimated future undiscounted operating cashflows, we recognize an impairment loss to adjust the carrying amount of theasset to estimated fair value.  Weconsider projected future undiscounted cash flows, trends, strategic decisionsregarding future development plans, and other factors in our assessment ofwhether impairment conditions exist.  Whilewe believe our estimates of future cash flows are reasonable, differentassumptions regarding factors such as market rents, economic conditions, andoccupancy rates could significantly affect these estimates.

 

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

 

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

 

Webelieve the carrying value of our operating real estate and loan investments iscurrently recoverable.  Accordingly,there were no impairment charges for the six months ended June 30, 2010 or2009.  However, if market conditionsworsen beyond our current expectations, or if changes in our strategysignificantly affect any key assumptions used in our fair value calculations,we may need to take charges in future periods for impairments related to ourexisting investments.  Any such non-cashcharges would have an adverse effect on our consolidated financial position andresults of operations.

 

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**Item 3.                    Quantitative and Qualitative Disclosures AboutMarket Risk.**

 

*Foreign Currency Exchange Risk*

 

Wemaintain less than $0.1 million in Euro-denominated accounts at Europeanfinancial institutions.  Accordingly, weare not materially exposed to any significant foreign currency fluctuationsrelated to these accounts.

 

*Interest Rate Risk*

 

Wemay be exposed to interest rate changes primarily as a result of long-term debtused to acquire properties and make loans and other permitted investments.  Our management’s objectives, with regard tointerest rate risks, are to limit the impact of interest rate changes onearnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, we will borrowprimarily at fixed rates or variable rates with the lowest margins availableand in some cases, with the ability to convert variable rates to fixed rates.  With regard to variable rate financing, wewill assess interest rate cash flow risk by continually identifying andmonitoring changes in interest rate exposures that may adversely impactexpected future cash flows and by evaluating hedging opportunities.  We may enter into derivative financialinstruments such as options, forwards, interest rate swaps, caps, or floors tomitigate our interest rate risk on a related financial instrument or toeffectively lock the interest rate portion of our variable rate debt.  Of our $48.2 million in notes payable at June 30,2010, $38.5 million represented debt subject to variable interest rates.  If our variable interest rates increased 100basis points, we estimate that total annual interest cost, including interestexpensed, and interest capitalized, would increase by $0.2 million.

 

Interestrate fluctuations will generally not affect our future earnings or cash flowson our fixed rate real estate loan receivable, the PAL Loan, unless suchinstruments mature or are otherwise terminated.  However, interest ratechanges will affect the fair value of our fixed rate instrument.  As we expect to hold the PAL Loan to maturityand the amounts due under the loan would be limited to the outstandingprincipal balance and any accrued and unpaid interest, we do not expect thatfluctuations in interest rates would have a significant impact on the cashflows of our fixed rate real estate loan receivable.

 

ThePAL Loan, a fixed rate real estate loan receivable, with $24.4 millionoutstanding under the loan as of June 30, 2010, has a maturity date of September 1,2016 and accrues interest at 18% per annum. The PAL Loan is subject to market risk to the extent that the statedinterest rate varies from current market rates for loans made under similarterms.

 

**Item 4.    Controls and Procedures.**

 

*Evaluationof Disclosure Controls and Procedures*

 

Asrequired by Rule 13a-15(b) and Rule 15d-15(b) under theExchange Act, our management, including our Chief Executive Officer and ChiefFinancial Officer, evaluated, as of June 30, 2010, the effectiveness ofour disclosure controls and procedures as defined in Exchange ActRule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective, as of June 30, 2010, toprovide reasonable assurance that information required to be disclosed by us inthis report is recorded, processed, summarized and reported within the timeperiods specified by the rules and forms of the Exchange Act and is accumulatedand communicated to our management, including our Chief Executive Officer andChief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosures.

 

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

 

*Changes in Internal Control over Financial Reporting*

 

Therehas been no change in internal control over financial reporting that occurredduring the quarter ended June 30, 2010 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II**

** **

**OTHER INFORMATION**

 

**Item 1.                    Legal Proceedings.**

 

Weare not a party to, and none of our properties are subject to, any materialpending legal proceedings.

 

**Item 1A.                 Risk Factors.**

 

Therehave been no material changes from the risk factors set forth in our AnnualReport on Form 10-K for the year ended December 31, 2009.

 

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

 

**Use ofProceeds from Registered Securities**

 

On January 4, 2008, our Registration Statementon Form S-11 (File No. 333-140887), covering a public offering of upto 125,000,000 shares of common stock, was declared effective under theSecurities Act of 1933. The Offering commenced on January 21, 2008 and isongoing.  We expect to offer the sharesregistered in our public offering over a three-year period.  Under rules promulgated by the SEC, insome circumstances we may continue the offering beyond this date.  Our board of directors has the discretion toextend the offering period for the shares offered under the DRP up to the sixthanniversary of the termination of the primary offering.

 

We are offering a maximum of 100,000,000 shares inour primary offering at an aggregate offering price of up to $1 billion,or $10.00 per share with discounts available to certain categories ofpurchasers.  The 25,000,000 sharesoffered under the DRP are being offered at an aggregate offering price of$237.5 million, or $9.50 per share.  Wemay reallocate the shares of common stock being offered between the primaryoffering and the DRP.  BehringerSecurities LP, an affiliate of our advisor, is the dealer manager of ouroffering.  As of June 30, 2010, wehad sold 19,997,452 shares of our common stock, net of the 22,471 shares issuedto Behringer Harvard Holdings, on a best efforts basis pursuant to the Offeringfor gross offering proceeds of approximately $199.3 million.

 

From the commencement of the Offering through June 30,2010, we incurred the following expenses in connection with the issuance anddistribution of the registered securities pursuant to the Offering ($ inthousands):

 
| **Type of  Expense**              | ** ** | **Amount** | ** ** |
|-----------------------------------|------------|------------|------------|
| Other  expenses to affiliates (1) |       | $          | 25,613     |   |
| Other  expenses to non-affiliates |       | —     |       |
| Total  expenses                   |       | $          | 25,613     |   |

 

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(1)“Other expenses to affiliates” includes commissions and dealermanager fees paid to Behringer Securities, which reallowed all or a portion ofthe commissions and fees to soliciting dealers.

 

Fromthe commencement of the Offering through June 30, 2010, the net offeringproceeds to us from the Offering, including the DRP, after deducting the totalexpenses incurred described above, were $173.7 million.  From the commencement of the Offering throughJune 30, 2010, we had used $51.1 million of such net proceeds to purchaseinterests in real estate (net of notes payable) and real estate-relatedinvestments.  Of the amount used for thepurchase of these investments, $3 million was paid to Behringer OpportunityAdvisors II, as acquisition and advisory fees and acquisition expensereimbursement.

 

**RecentSales of Unregistered Securities**

 

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

 

**ShareRedemption Program**

 

Ourboard of directors has adopted a share redemption program that permitsstockholders to sell their shares back to us after they have held them for atleast one year, subject to the significant conditions and limitations of theprogram.  Our board of directors canamend the provisions of our share redemption program without the approval ofour stockholders.  The terms on which weredeem shares may differ between redemptions upon a stockholder’s death, “qualifyingdisability” (as defined in the share redemption program) or confinement to along-term care facility (collectively referred to herein as

 

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“ExceptionalRedemptions”) and all other redemptions (referred to herein as “OrdinaryRedemptions”).  The purchase price forshares redeemed under the redemption program is set forth below.

 

Inthe case of Ordinary Redemptions, the purchase price per share will equal 90%of (i) the most recently disclosed estimated value per share as determinedin accordance with our valuation policy, less (ii) the aggregatedistributions per share of any net sale proceeds from the sale of one or moreof our assets, or other special distributions so designated by our board ofdirectors, distributed to stockholders after the valuation was determined (the “ValuationAdjustment”); provided, however, that the purchase price per share shall notexceed: (1) prior to the first valuation conducted by the board ofdirectors, or a committee thereof (the “Initial Board Valuation”), under thevaluation policy, 90% of (i) average price per share the originalpurchaser or purchasers of shares paid to us for all of his or her shares (asadjusted for any stock dividends, combinations, splits, recapitalizations andthe like with respect to our common stock) (the “Original Share Price”) less (ii) theaggregate distributions per share of any net sale proceeds from the sale of oneor more of our assets, or other special distributions so designated by theboard of directors, distributed to stockholders prior to the redemption date(the “Special Distributions”); or (2) on or after the Initial BoardValuation, the Original Share Price less any Special Distributions.

 

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

 

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

 

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

 

Duringthe second quarter ended June 30, 2010, we redeemed shares asfollows:

 
| ** ** | ** ** | ** **          | ** ** | ** **         | ** ** | **Total Number of**  | ** ** | **Maximum**          | ** ** |
|------------|------------|---------------------|------------|--------------------|------------|----------------------|------------|----------------------|------------|
| ** ** | ** ** | ** **          | ** ** | ** **         | ** ** | **Shares Purchased** | ** ** | **Number of Shares** | ** ** |
| ** ** | ** ** | ** **          | ** ** | ** **         | ** ** | **as Part of**  | ** ** | **That May Be** | ** ** |
| ** ** | ** ** | ** **          | ** ** | ** **         | ** ** | **Publicly**         | ** ** | **Purchased Under**  | ** ** |
| ** ** | ** ** | **Total Number of** | ** ** | **Average Price**  | ** ** | **Announced Plans**  | ** ** | **the Plans or**     | ** ** |
| **2010**   | ** ** | **Shares Redeemed** | ** ** | **Paid Per Share** | ** ** | **or Programs**      | ** ** | **Programs**         | ** ** |
| April      |       | —              |       | $                  | —     |                 | —     |                 |       |   |
| May        |       | 36,487              |       | $                  | 9.58       |                 | 36,487     |                 | (1)        |   |
| June       |       | —              |       | $                  | —     |                 | —     |                 |       |   |
|       |       | 36,487              |       | $                  | 9.58       |                 | 36,487     |                 | (1)        |   |

 

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(1) Adescription of the maximum number of shares that may be purchased under ourredemption program is included in the narrative preceding this table.

 

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

 

None.

 

**Item 4.                    (Removed and Reserved.)**

 

**Item 5.                    Other Information.**

 

None.

 

**Item 6.                    Exhibits.**

 

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

 

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**SIGNATURE**

 

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

 

 
|                         | **BEHRINGER HARVARD OPPORTUNITY REIT II, INC.** |
|------------------------------|------------------------------------------------------|
|                         |                                                 |
|                         |                                                 |
| Dated:  August 13, 2010 | By:                                                  | /s/  Gary S. Bresky |
|                         |                                                 | Gary  S. Bresky |
|                         |                                                 | Executive  Vice President and Chief Financial Officer |
|                         |                                                 | (Principal  Financial Officer) |

 

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**Index to Exhibits**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                |
|-------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1                     |       | Second Articles of Amendment and Restatement as  amended by the First Articles of Amendment and the Second Articles of  Amendment (incorporated by reference to Exhibit 3.1 to Form 10-Q  filed on November 14, 2008)                                                                                                                                                                           |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2                     |       | Amended and Restated Bylaws (incorporated by  reference to Exhibit 3.2 to Form 10-K filed on March 30, 2010)                                                                                                                                                                                                                                                                                    |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2(a)                  |       | Amendment to the Amended and Restated Bylaws  (incorporated by reference to Exhibit 3.2(a) to Form 10-K  filed on March 30, 2010)                                                                                                                                                                                                                                                          |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1                     |       | Form of Subscription Agreement (incorporated  by reference to Exhibit 4.1 to Post-Effective Amendment No. 10 to  the Company’s Registration Statement on Form S-11, Commission File  No. 333-140887)                                                                                                                                                                             |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2                     |       | Amended and Restated Distribution Reinvestment  Plan (incorporated by reference to Exhibit 4.2 to Post-Effective  Amendment No. 10 to the Company’s Registration Statement on  Form S-11, Commission File No. 333-140887)                                                                                                                                                             |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.3                     |       | Amended and Restated Automatic Purchase Plan  (incorporated by reference to Exhibit 4.3 to Post-Effective Amendment  No. 10 to the Company’s Registration Statement on Form S-11,  Commission File No. 333-140887)                                                                                                                                                                    |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.4                     |       | Amended and Restated Share Redemption Program  (incorporated by reference to Exhibit 99.2 to Form 10-Q filed on  November 12, 2009)                                                                                                                                                                                                                                                             |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.5                     |       | Statement regarding restrictions on  transferability of shares of common stock (to appear on stock certificate or  to be sent upon request and without charge to stockholders issued shares  without certificates) (incorporated by reference to Exhibit 4.5 to  Pre-Effective Amendment No. 3 to the Company’s Registration Statement on  Form S-11, Commission File No. 333-140887) |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1                    |       | Multifamily  Mortgage, Assignment of Rents and Security Agreement between 15250 Sonoma  Drive Fee Owner, LLC and Holliday Fenoglio Fowler, L.P. dated as of  June 11, 2010, incorporated by reference to Exhibit 10.26 to  Post-Effective Amendment No. 11 to the Company’s Registration Statement  on Form S-11, Commission File No. 333-140887                                 |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2                    |       | Multifamily  Note made by 15250 Sonoma Drive Fee Owner, LLC in favor of Holliday Fenoglio  Fowler, L.P. dated as of June 11, 2010, incorporated by reference to  Exhibit 10.27 to Post-Effective Amendment No. 11 to the Company’s  Registration Statement on Form S-11, Commission File No. 333-140887                                                                          |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3                    |       | Guaranty  by Behringer Harvard Opportunity REIT II, Inc. for the benefit of  Holliday Fenoglio Fowler, L.P. effective as of June 11, 2010,  incorporated by reference to Exhibit 10.28 to Post-Effective Amendment  No. 11 to the Company’s Registration Statement on Form S-11,  Commission File No. 333-140887                                                            |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1*                   |       | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                                                                                                                                                               |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2*                   |       | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                                                                                                                                                               |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1*                   |       | Section 1350  Certifications**                                                                                                                                                                                                                                                                                                                                                                            |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 99.1                    |       | Valuation Policy (incorporated by reference to  Exhibit 99.1 to Form 10-Q filed on November 12, 2009)                                                                                                                                                                                                                                                                                           |

 

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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 not be deemed incorporated by reference intoany filing under the Securities Act or the Exchange Act, except to the extentthat the registrant specifically incorporates it by reference.

 

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