Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

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

 

**CommissionFile Number: 000-53650**

 

**BehringerHarvard 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. Employer  Identification 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 31, 2009,Behringer Harvard Opportunity REIT II, Inc. had 11,151,770****shares of common stock, $.0001 par value,outstanding.

 

 

 

----

Table of Contents

 

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

**FORM 10-Q**

**QuarterEnded June 30, 2009**

 
| ** **                | ** **                                                                                             | **Page** |
|---------------------------|--------------------------------------------------------------------------------------------------------|----------|
|                      |                                                                                                   |     |
| **PART I**           |
| **FINANCIAL INFORMATION** |
| ** **                |
| **Item 1.**               | **Financial Statements  (Unaudited)**                                                                  |     |
|                      |                                                                                                   |     |
|                      | Consolidated  Balance Sheets as of June 30, 2009 and December 31, 2008                       | 3        |
|                      |                                                                                                   |     |
|                      | Consolidated  Statements of Operations for the Three and Six Months Ended June 30,  2009 and 2008 | 4        |
|                      |                                                                                                   |     |
|                      | Consolidated  Statement of Stockholders’ Equity for the Six Months Ended June 30, 2009       | 5        |
|                      |                                                                                                   |     |
|                      | Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008            | 6        |
|                      |                                                                                                   |     |
|                      | Notes to  Consolidated Financial Statements                                                            | 7        |
|                      |                                                                                                   |     |
| **Item 2.**               | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**        | 17       |
|                      |                                                                                                   |     |
| **Item 3.**               | **Quantitative  and Qualitative Disclosures About Market Risk**                                        | 27       |
|                      |                                                                                                   |     |
| **Item 4T.**              | **Controls and  Procedures**                                                                           | 27       |
|                      |                                                                                                   |     |
| **PART II**          |                                                                                                   |
| **OTHER INFORMATION**     |                                                                                                   |
|                      |                                                                                                   |     |
| **Item 1.**               | **Legal Proceedings**                                                                                  | 28       |
|                      |                                                                                                   |     |
| **Item 1A.**              | **Risk Factors**                                                                                       | 28       |
|                      |                                                                                                   |     |
| **Item 2.**               | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                       | 28       |
|                      |                                                                                                   |     |
| **Item 3.**               | **Defaults  Upon Senior Securities**                                                                   | 29       |
|                      |                                                                                                   |     |
| **Item 4.**               | **Submission  of Matters to a Vote of Security Holders**                                               | 29       |
|                      |                                                                                                   |     |
| **Item 5.**               | **Other Information**                                                                                  | 29       |
|                      |                                                                                                   |     |
| **Item 6.**               | **Exhibits**                                                                                           | 29       |
|                      |                                                                                                   |     |
| **Signature**             | 30                                                                                                     |

 

2

----

Table of Contents

 

**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.       Financial Statements.**

 

**BehringerHarvard Opportunity REIT II, Inc.**

**Consolidated Balance Sheets**

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

(Unaudited)

 
| ** **                                                                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                                                                                        |       |              |       |                  |       |
| Real  estate                                                                                                                                                                                      |       |              |       |                  |       |
| Land                                                                                                                                                                                              |       | $                 | 9,000      |                  | $          | 9,000 |   |
| Buildings,  net                                                                                                                                                                                   |       | 25,674            |       | 25,964                |       |
| Total  real estate                                                                                                                                                                                |       | 34,674            |       | 34,964                |       |
|                                                                                                                                                                                              |       |              |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                        |       | 73,796            |       | 47,375                |       |
| Accounts  receivable, net                                                                                                                                                                         |       | 65                |       | 44                    |       |
| Receivable  from related party                                                                                                                                                                    |       | 305               |       | 501                   |       |
| Prepaid  expenses and other assets                                                                                                                                                                |       | 235               |       | 129                   |       |
| Deferred  financing fees, net                                                                                                                                                                     |       | 466               |       | 533                   |       |
| Lease  intangibles, net                                                                                                                                                                           |       | 2,146             |       | 2,797                 |       |
| Total  assets                                                                                                                                                                                     |       | $                 | 111,687    |                  | $          | 86,343 |   |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                     |       |              |       |                  |       |
| Note  payable                                                                                                                                                                                     |       | $                 | 18,500     |                  | $          | 18,500 |   |
| Payables  to related parties                                                                                                                                                                      |       | 6,322             |       | 5,519                 |       |
| Acquired  below-market leases, net                                                                                                                                                                |       | 1,642             |       | 2,262                 |       |
| Distributions  payable                                                                                                                                                                            |       | 418               |       | 181                   |       |
| Accrued  and other liabilities                                                                                                                                                                    |       | 999               |       | 1,059                 |       |
| Total  liabilities                                                                                                                                                                                |       | 27,881            |       | 27,521                |       |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Stockholders’ Equity**                                                                                                                                                                     |       |              |       |                  |       |
| Preferred  stock, $.0001 par value per share; 50,000,000 shares authorized, none  outstanding                                                                                                     |       | —            |       | —                |       |
| Convertible  stock, $.0001 par value per share; 1,000 shares authorized, 1,000 outstanding                                                                                                        |       | —            |       | —                |       |
| Common  stock, $.0001 par value per share; 350,000,000 shares authorized, 10,466,086  and 7,323,180 shares issued and outstanding at June 30, 2009 and  December 31, 2008, respectively |       | 1                 |       | 1                     |       |
| Additional  paid-in capital                                                                                                                                                                       |       | 87,177            |       | 59,987                |       |
| Cumulative  distributions and net loss                                                                                                                                                            |       | (3,372            | )          | (1,166                | )          |
| Total  stockholders’ equity                                                                                                                                                                  |       | 83,806            |       | 58,822                |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                  |       | $                 | 111,687    |                  | $          | 86,343 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

3

----

Table of Contents

 

**BehringerHarvard Opportunity REIT II, Inc.**

**Consolidated Statements of Operations**

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

(Unaudited)

 
| ** **                                             | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                             | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                             | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Rental revenue**                                     |       | $                                    | 1,449      |                               | $          | — |   | $ | 2,774 |   | $ | — |   |
|                                                   |       |                                 |       |                               |       |   |   |   |   |
| **Expenses:**                                          |       |                                 |       |                               |       |   |   |   |   |
| Property  operating expenses                           |       | 277                                  |       | —                             |       | 621 |   | — |   |
| Interest  expense                                      |       | 325                                  |       | —                             |       | 651 |   | — |   |
| Real  estate taxes                                     |       | 140                                  |       | —                             |       | 280 |   | — |   |
| Property  management fees                              |       | 44                                   |       | —                             |       | 90 |   | — |   |
| Asset  management fees                                 |       | 86                                   |       | —                             |       | 172 |   | — |   |
| General  and administrative                            |       | 239                                  |       | 217                                |       | 660 |   | 286 |   |
| Depreciation  and amortization                         |       | 661                                  |       | —                             |       | 1,264 |   | — |   |
| Total  expenses                                        |       | 1,772                                |       | 217                                |       | 3,738 |   | 286 |   |
|                                                   |       |                                 |       |                               |       |   |   |   |   |
| Interest  income, net                                  |       | 125                                  |       | 42                                 |       | 225 |   | 47 |   |
| Net  loss                                              |       | $                                    | (198       | )                                  | $          | (175 | ) | $ | (739 | ) | $ | (239 | ) |
|                                                   |       |                                 |       |                               |       |   |   |   |   |
| Basic  and diluted weighted average shares outstanding |       | 9,519                                |       | 969                                |       | 8,714 |   | 496 |   |
|                                                   |       |                                 |       |                               |       |   |   |   |   |
| Basic  and diluted loss per share                      |       | $                                    | (0.02      | )                                  | $          | (0.18 | ) | $ | (0.09 | ) | $ | (0.48 | ) |

 

*SeeNotes to Consolidated Financial Statements.*

 

4

----

Table of Contents

 

**BehringerHarvard Opportunity REIT II, Inc.**

**Consolidated Statement ofStockholders’ Equity**

**(inthousands)**

(Unaudited)

 
| ** **                              | ** ** | **Convertible  Stock** | ** ** | **Common  Stock** | ** ** | **Additional** | ** ** | **Cumulative** | ** ** | **Total**   | ** ** |
|-----------------------------------------|------------|------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|-------------|------------|
| ** **                              | ** ** | **Number**             | ** ** | **Par**           | ** ** | **Number**     | ** ** | **Par**        | ** ** | **Paid-in** | ** ** | **Distributions** | ** ** | **Stockholders’** | ** ** |
| ** **                              | ** ** | **of  Shares**         | ** ** | **Value**         | ** ** | **of  Shares** | ** ** | **Value**      | ** ** | **Capital** | ** ** | **and  Net Loss** | ** ** | **Equity** | ** ** |
| Balance  at January 1, 2009        |       | 1                      |       | $                 | —     |           | 7,323      |           | $          | 1           |       | $ | 59,987 |   | $ | (1,166 | ) | $ | 58,822 |   |
|                                    |       |                   |       |              |       |           |       |           |       |        |       |   |   |   |   |
| Issuance  of common stock, net          |       |                   |       |              |       | 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 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

5

----

Table of Contents

 

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

**Consolidated Statements of Cash Flows**

**(in thousands)**

(Unaudited)

 
| ** **                                                                                        | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                        | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| **Cash flows from operating activities:**                                                         |       |                               |       |   |   |
| Net  loss                                                                                         |       | $                                  | (739       | ) | $ | (239 | ) |
| Adjustments  to reconcile net loss to net cash flows provided by (used in) operating  activities: |       |                               |       |   |   |
| Depreciation  and amortization                                                                    |       | 645                                |       | — |   |
| Amortization  of deferred financing fees                                                          |       | 67                                 |       | — |   |
| Change  in accounts receivable                                                                    |       | (21                                | )          | — |   |
| Change  in prepaid expenses and other assets                                                      |       | 114                                |       | — |   |
| Change  in accrued liabilities                                                                    |       | (60                                | )          | 45 |   |
| Change  in net payables to related parties                                                        |       | 106                                |       | 58 |   |
| Addition  of lease intangibles                                                                    |       | (89                                | )          | — |   |
| Cash  provided by (used in) operating activities                                                  |       | 23                                 |       | (136 | ) |
|                                                                                              |       |                               |       |   |   |
| **Cash flows from investing activities:**                                                         |       |                               |       |   |   |
| Escrow  deposits and other assets                                                                 |       | (220                               | )          | — |   |
| Additions  of property and equipment                                                              |       | (233                               | )          | — |   |
| Cash  used in investing activities                                                                |       | (453                               | )          | — |   |
|                                                                                              |       |                               |       |   |   |
| **Cash flows from financing activities:**                                                         |       |                               |       |   |   |
| Issuance  of common/convertible stock                                                             |       | 30,673                             |       | 21,344 |   |
| Redemptions  of common stock                                                                      |       | (224                               | )          | — |   |
| Offering  costs                                                                                   |       | (3,288                             | )          | (1,969 | ) |
| Distributions                                                                                     |       | (310                               | )          | (8 | ) |
| Change  in subscriptions for common stock                                                         |       | —                             |       | 262 |   |
| Change  in subscription cash received                                                             |       | —                             |       | (262 | ) |
| Cash  provided by financing activities                                                            |       | 26,851                             |       | 19,367 |   |
|                                                                                              |       |                               |       |   |   |
| Net  change in cash and cash equivalents                                                          |       | 26,421                             |       | 19,231 |   |
| Cash  and cash equivalents at beginning of period                                                 |       | 47,375                             |       | 203 |   |
| Cash  and cash equivalents at end of period                                                       |       | $                                  | 73,796     |   | $ | 19,434 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

6

----

Table of Contents

 

**BehringerHarvard Opportunity REIT II, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

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

 

***Business***

 

Behringer Harvard OpportunityREIT II, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”)was organized as a Maryland corporation on January 9, 2007 and intends toqualify as a real estate investment trust (“REIT”) for federal income taxpurposes effective for our taxable year ended December 31, 2008.  We acquire and operate commercial real estateand real estate-related assets.  Inparticular, we focus generally on acquiring commercial properties withsignificant possibilities for short-term capital appreciation, such as thoserequiring development, redevelopment, or repositioning, those located inmarkets and submarkets with high growth potential, and those available fromsellers who are distressed or face time-sensitive deadlines.  In addition, given economic circumstances asof June 30, 2009, our opportunistic investment strategy may also includeinvestments in real estate-related assets that present opportunities for highercurrent income.  Such investments mayalso have capital gain characteristics, whether as a result of a discountpurchase or related equity participations. We may acquire a wide variety of commercial properties, includingoffice, industrial, retail, hospitality, recreation and leisure, single-tenant,multifamily, and other real properties. These properties may be existing, income-producing properties, newlyconstructed properties, or properties under development or construction and mayinclude multifamily properties purchased for conversion into condominiums andsingle-tenant properties 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 on October 28, 2008 and, as of June 30, 2009, itis our only real estate acquisition.

 

Substantially allof our business is conducted through Behringer Harvard Opportunity OP II LP, alimited partnership organized in Delaware on January 12, 2007 (“BehringerHarvard Opportunity OP II”).  As of June 30,2009, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation,was the sole general partner of Behringer Harvard Opportunity OP II and owned a0.1% partnership interest in Behringer Harvard Opportunity OP II.  As of June 30, 2009, our wholly-ownedsubsidiary, BHO Business Trust II, a Maryland business trust, was the solelimited partner of Behringer Harvard Opportunity OP II.

 

We are externally managedand advised by Behringer Harvard Opportunity Advisors II LP (“BehringerOpportunity Advisors II”), a Texas limited partnership formed in January 2007.  Behringer Opportunity Advisors II is ouraffiliate responsible for managing our affairs on a day-to-day basis and foridentifying and making acquisitions and investments on our behalf.

 

Our office is located at15601 Dallas Parkway, Suite 600, Addison, Texas 75001, and our toll-freetelephone number is (866) 655-3600.  Thename Behringer Harvard is the property of Behringer Harvard Holdings, LLC (“BehringerHarvard Holdings”) and is used by permission.

 

***Organization***

 

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

 

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 30,2009, we had 10,466,086 shares of common stock outstanding, which includes the22,471 shares issued to Behringer Harvard Holdings.  As of June 30, 2009, we had 1,000 sharesof convertible stock issued and outstanding to Behringer Harvard Holdings.

 

We commenced operationson April 1, 2008 upon satisfaction of the conditions of our escrowagreement in all states except Pennsylvania and our acceptance of initialsubscriptions of common stock.  On September 19,2008, we satisfied the escrow conditions for Pennsylvania.  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 proceeds are held in short-term, liquid investments.  Through June 30, 2009, we had sold10,470,537 shares in the Offering, including the DRP for gross proceeds of$104.4 million.

 

7

----

Table of Contents

 

**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

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 of liquidatingour assets and distributing the net proceeds to our stockholders within threeto six years after the termination of our primary offering.  If we do not begin an orderly liquidationwithin that period, we may seek to have our shares listed on a nationalsecurities exchange.

 

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

 

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, 2008,which was filed with the SEC on March 31, 2009.  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 stockholders’ equity as of June 30, 2009, the consolidated statementsof operations for the three and six months ended June 30, 2009 and 2008,and cash flows for the six months ended June 30, 2009 and 2008 have notbeen audited by our independent registered public accounting firm.  In the opinion of management, theaccompanying unaudited consolidated financial statements include alladjustments necessary to fairly present our consolidated financial position asof June 30, 2009 and December 31, 2008 and our consolidated resultsof operations and cash flows for the periods ended June 30, 2009 and2008.  Such adjustments are of a normalrecurring nature.

 

Wehave evaluated subsequent events after the balance sheet date of June 30,2009 through August 14, 2009, which is the date the financial statementswere issued.

 

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

 

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

 

The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Theseestimates include such items as 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.

 

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

 

Our consolidatedfinancial statements include our accounts and the accounts of othersubsidiaries 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.

 

There are judgments andestimates involved in determining if an entity in which we have made aninvestment is a VIE and if so, whether we are the primary beneficiary.  The entity is evaluated to determine if it isa VIE by, among other things, calculating the percentage of equity being riskedcompared to the total equity of the entity. Determining expected future losses involves assumptions of variouspossibilities of the results of future operations of the entity, assigning a probabilityto each possibility, and using a discount rate to determine the net presentvalue of those future losses.  A changein the judgments, assumptions, and estimates outlined above could result inconsolidating an entity that should not be consolidated or accounting for aninvestment using the equity method that should in fact be consolidated, theeffects of which could be material to our financial statements.

 

***RealEstate***

 

Upon theacquisition of real estate properties, we recognize the assets acquired, theliabilities assumed, and any noncontrolling interest as of the acquisitiondate, measured at their fair values.  Theacquisition date is the date on which we obtain control of the real estateproperty.  The assets acquired andliabilities assumed may consist of buildings, any assumed debt, identifiedintangible 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

 

8

----

Table of Contents

 

**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

noncontrolling interestsin the acquiree over the fair value of identifiable net assets acquired.  Likewise, a bargain purchase gain isrecognized in current earnings when the aggregate fair value of theconsideration transferred and any noncontrolling interests in the acquiree isless than the fair value of the identifiable net assets acquired.  Acquisition-related costs are expensed in theperiod incurred.

 

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

 

We determine the fairvalue of assumed debt by calculating the net present value of the schedulednote payments using interest rates for debt with similar terms and remainingmaturities that we believe we could obtain. Any difference between the fair value and stated value of the assumeddebt is recorded as a discount or premium and amortized over the remaining lifeof the loan.

 

The fair value of thetangible assets acquired, consisting of land and buildings, is determined byvaluing the property as if it were vacant, and the “as-if-vacant” value is thenallocated to land and buildings.  Landvalues are derived from appraisals, and building values are calculated asreplacement cost less depreciation or management’s estimates of the relativefair value of these assets using discounted cash flow analyses or similarmethods.  The value of the commercialoffice building is depreciated over the estimated useful life of 25 years usingthe straight-line method.

 

We determine the value ofabove-market and below-market in-place leases for acquired properties based onthe present value (using an interest rate that reflects the risks associatedwith the leases acquired) of the difference between (1) the contractualamounts to be paid pursuant to the in-place leases and (2) management’sestimate of current market lease rates for the corresponding in-place leases,measured over a period equal to (a) the remaining non-cancelable leaseterm for above-market leases, or (b) the remaining non-cancelable leaseterm plus any fixed rate renewal option for below-market leases.  We record the fair value of above-market andbelow-market leases as intangible assets or intangible liabilities,respectively, and amortize them as an adjustment to rental income over theabove determined lease term.

 

The total value ofidentified real estate intangible assets acquired is further allocated toin-place lease values and tenant relationships based on our evaluation of thespecific characteristics of each tenant’s lease and our overall relationshipwith that respective tenant.  Theaggregate value of in-place leases acquired and tenant relationships is determinedby applying a fair value model.  Theestimates of fair value of in-place leases include an estimate of carryingcosts during the expected lease-up periods for the respective spaces,considering current market conditions. In estimating fair value of in-place leases, we consider items such asreal estate taxes, insurance and other operating expenses, as well as lostrental revenue during the expected lease-up period and carrying costs thatwould have otherwise been incurred had the leases not been in place, includingtenant improvements and commissions.  Theestimates of the fair value of tenant relationships also include costs toexecute similar leases, including leasing commissions, legal costs and tenantimprovements as well as an estimate of the likelihood of renewal as determinedby management on a tenant-by-tenant basis.

 

We amortize the value ofin-place leases to expense over the term of the respective leases.  The value of tenant relationship intangiblesis amortized to expense over the initial term and any anticipated renewalperiods, but in no event does the amortization period for intangible assetsexceed 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, 2009, the estimated remaining useful life for acquired leaseintangibles was approximately two years.

 

Anticipated amortizationexpense associated with the acquired lease intangibles as of June 30, 2009is as follows:

 
| ** **                                 | ** ** | **Lease  Intangibles** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| July 1, 2009 - December 31, 2009 |       | $                      | 100        |   |
| 2010                                       |       | 228                    |       |
| 2011                                       |       | 38                     |       |
| 2012                                       |       | —                 |       |
| 2013                                       |       | —                 |       |
|                                            |            |                        |            |  |

 

9

----

Table of Contents

 

**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

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

 
| ** **                           | ** ** | ** **        | ** ** | ** **      | ** ** | **Acquired**     | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| ** **                           | ** ** | **Buildings and** | ** ** | **Lease**       | ** ** | **Below-Market** | ** ** |
| **As of  June 30, 2009**        | ** ** | **Improvements**  | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** |
| Cost                                 |       | $                 | 26,371     |            | $          | 3,010            |       | $ | (2,317 | ) |
| Less:  depreciation and amortization |       | (697              | )          | (864            | )          | 675              |       |
|                                 |       |              |       |            |       |             |       |
| Net                                  |       | $                 | 25,674     |            | $          | 2,146            |       | $ | (1,642 | ) |

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

 

***Cashand Cash Equivalents***

 

We consider investmentsin highly-liquid money market funds or investments with original maturities ofthree months or less to be cash equivalents. The carrying amount of cash and cash equivalents reported on the balancesheet approximates fair value.

 

***InvestmentImpairment***

 

For real estate we whollyown, we monitor events and changes in circumstances indicating that thecarrying amounts of the real estate asset may not be recoverable.  When such events or changes in circumstancesare present, we assess potential impairment by comparing estimated futureundiscounted operating cash flows expected to be generated over the life of theasset and from its eventual disposition to the carrying amount of the asset.  In the event that the carrying amount exceedsthe estimated future undiscounted operating cash flows, we recognize animpairment loss to adjust the carrying amount of the asset to estimated fairvalue.  We consider projected futureundiscounted cash flows, trends, strategic decisions regarding futuredevelopment plans, and other factors in our assessment of whether impairmentconditions exist.  While we believe ourestimates of future cash flows are reasonable, different assumptions regardingsuch factors as market rents, economies, and occupancies could significantlyaffect these estimates.

 

In evaluating ourinvestment for impairment, management may use appraisals and makes estimatesand assumptions, including, but not limited to, the projected date ofdisposition of the properties, the estimated future cash flows of theproperties during our ownership, and the projected sales price of each of theproperties.  A change in these estimatesand assumptions could result in understating or overstating the book value ofour investment, which could be material to our financial statements.  Due to the judgment and assumptions appliedin the estimation process with respect to impairments, including the fact thatlimited market information regarding the value of comparable land exists atthis time, it is possible actual results could differ substantially from thoseestimated.

 

We believe the carryingvalue of our operating real estate asset is currently recoverable.  Accordingly, there were no impairment chargesfor the six months ended June 30, 2009 or 2008.  However, if market conditions worsen beyondour current expectations, or if changes in our development 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 asset.  Any such non-cashcharges would have an adverse effect on our consolidated financial position andresults of operations.

 

***RevenueRecognition***

 

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

 

10

----

Table of Contents

 

**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

***Organizationand Offering Expenses***

 

We reimburse our advisoror its affiliates for any organization and offering expenses incurred on ourbehalf in connection with the primary offering (other than selling commissionsand the dealer manager fee) provided that at no point will we reimburseexpenses that would cause our total organization and offering expenses (otherthan selling commissions and the dealer manager fee) related to our primaryoffering to exceed 1.5% of gross offering proceeds from the primaryoffering.  Organization and offeringexpenses are defined generally as any and all costs and expenses incurred by usin connection with our formation, preparing for the Offering, the qualificationand registration of the Offering, and the marketing and distribution of ourshares.  Organization and offeringexpenses include, but are not limited to, accounting and legal fees, costs toamend the registration statement and supplement the prospectus, printing,mailing and distribution costs, filing fees, amounts to reimburse our advisoror its affiliates for the salaries of employees, and other costs in connectionwith preparing supplemental sales literature, telecommunication costs, fees ofthe transfer agent, registrars, trustees, escrow holders, depositories andexperts, and fees and costs for employees of our advisor or its affiliates toattend industry conferences.  At eachbalance sheet date, we estimate the total gross public offering proceedsexpected to be received under the Offering and recognize the amount oforganization and offering reimbursement. We record 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.

 

All offering costs arerecorded as an offset to additional paid-in capital, and all organization costsare recorded as an expense at the time we become liable for the payment ofthese amounts.

 

***IncomeTaxes***

 

We intend to make anelection to be taxed as a REIT under Sections 856 through 860 of the InternalRevenue Code commencing with our taxable year ended December 31,2008.  If we qualify for taxation as aREIT, we generally will not be subject to federal corporate income tax to theextent we distribute our REIT taxable income to our stockholders, so long as wedistribute at least 90 percent of our REIT taxable income (which is computedwithout regard to the dividends paid deduction or net capital gain and whichdoes not necessarily equal net income as calculated in accordance withGAAP).  REITs are subject to a number ofother organizational and operations requirements.  Even if we qualify for taxation as a REIT, wemay be subject to certain state and local taxes on our income and property, andfederal income and excise taxes on our undistributed income.

 

***Stock-BasedCompensation***

 

We have adopted astock-based incentive award plan for our directors and consultants and for employees,directors and consultants of our affiliates. We have not issued any stock-based awards under the plan as of June 30,2009.

 

***Concentrationof Credit Risk***

 

At June 30, 2009, wehad cash and cash equivalents deposited in certain financial institutions inexcess of federally insured levels.  Wehave diversified our cash and cash equivalents among several bankinginstitutions in 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.  The Federal Deposit Insurance Corporation, or“FDIC,” generally only insures limited amounts per depositor per insured bank. Beginning October 3, 2008 through December 31, 2009, the FDIC willinsure up to $250,000 per depositor per insured bank; on January 1, 2010,the standard coverage limit will return to $100,000 for most depositcategories.  Unlimited deposit insurancecoverage will be available to our non-interest bearing transaction accountsheld at those institutions participating in FDIC’s Temporary LiquidityGuarantee Program through December 31, 2009.

 

***Earningsper Share***

 

Earnings (loss) per shareis calculated based on the weighted average number of common shares outstandingduring each period.  The weighted averageshares outstanding used to calculate both basic and diluted income (loss) pershare were the same for the three and six months ended June 30, 2009 and 2008as there were no stock-based awards outstanding.

 

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

 

In November 2008,the Financial Accounting Standards Board (“FASB”) reached a consensus onEmerging Issues Task Force (“EITF”) Issue No. 08-6, “Equity MethodInvestment Accounting Considerations” (“EITF 08-6”), which was issued toclarify how the application of equity method accounting will be affected byStatement of Financial Accounting Standards Board (“SFAS”) SFAS No. 141(R) andSFAS No. 160.  EITF 08-6 clarifiesthat an entity shall continue to use the cost accumulation model for its equitymethod investments.  It also confirmspast accounting practices related to the 

 

11

----

Table of Contents

 

**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

treatment of contingentconsideration and the use of the impairment model under Accounting PrinciplesBoard (“APB”) Opinion No. 18, “The Equity Method of Accounting forInvestments in Common Stock” (“APB No. 18”).  Additionally, it requires an equity methodinvestor to account for a share issuance by an investee as if the investor hadsold a proportionate share of the investment. This issue was effective January 1, 2009, and appliesprospectively.

 

In April 2009, theFASB issued FASB Staff Position (“FSP”) FAS 157-4, “Determining Fair Value Whenthe Volume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly,” which providesadditional guidance for estimating fair value in accordance with SFAS No. 157when the volume and level of activity for the asset or liability havesignificantly decreased.   We adopted the provisions of FSP FAS 157-4effective April 1, 2009, and it did not have a material effect on ourconsolidated financial statements.

 

In April 2009, theFASB issued FSP FAS 107-1 “Interim Disclosures about Fair Value of FinancialInstruments.”  The FSP amends SFAS No. 107“Disclosures about Fair Value of Financial Instruments” to require an entity toprovide disclosures about fair value of financial instruments in interimfinancial information.  This FSP is to beapplied prospectively and is effective for interim and annual periods endingafter June 15, 2009 with early adoption permitted for periods ending afterMarch 15, 2009. We have included the required disclosures in thisquarterly report on Form 10-Q for the quarter ended June 30, 2009(See Note 9).

 

In May 2009, the FASB issued SFAS No. 165, “SubsequentEvents” (“SFAS No. 165”).  SFAS No. 165establishes general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued.   Itrequires the disclosure of the date through which an entity has evaluatedsubsequent events and the basis for that date; that is, whether the daterepresents the actual date the financial statements were issued or wereavailable to be issued.  SFAS No. 165is effective for interim and annual financial periods ending after June 15,2009.  We have included the requireddisclosures in this quarterly report on Form 10-Q for the quarter ended June 30,2009.

 

In June 2009, the FASB issued SFAS No. 167, “Amendmentsto FASB Interpretation No. 46(R)” (“SFAS No. 167”).  SFAS No. 167 eliminates Interpretation46(R)’s exceptions to consolidating qualifying special-purpose entities,contains new criteria for determining the primary beneficiary, and increasesthe frequency of required reassessments to determine whether a company is theprimary beneficiary of a VIE.  SFAS No. 167also contains a new requirement that any term, transaction, or arrangement thatdoes not have a substantive effect on an entity’s status as a VIE, a company’spower over a VIE, or a company’s obligation to absorb losses or its rights toreceive benefits of an entity must be disregarded in applying Interpretation46(R)’s provisions.  SFAS No. 167 isapplicable for annual periods after November 15, 2009 and interim periodsthereafter.  We are currently assessingthe impact, if any, on our consolidated financial statements.

 

**5****.****                                     ****Note Payable**

 

Thefollowing table sets forth our note payable on 1875 Lawrence as of June 30,2009.

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

 

----

(1) 30-day LIBOR was 0.309% at June 30,2009.  The loan has a minimum interestrate of 6.25%.

 

We have unconditionallyguaranteed payment of the loan for an amount not to exceed the lesser of (i) $11.75million and (ii) 50% of the total amount advanced under the loan agreementif the aggregate amount advanced is less than $23.5 million.

 

We are subject to affirmative,negative, and financial covenants, representations, warranties and borrowingconditions, all as set forth in the loan agreement.  As of June 30, 2009, we believe we werein compliance with the covenants under our loan agreement.

 

Thefollowing table summarizes our contractual obligations for principal paymentsas of June 30, 2009:

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

 

12

----

Table of Contents

 

**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

**6.****                                     ****Leasing Activity**

 

Futureminimum base rental payments due to us under non-cancelable leases in effect asof June 30, 2009 for 1875 Lawrence are as follows:

 
| ** **                                 | ** ** | **Minimum  Rental  Payments** | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|
| July 1, 2009 - December 31, 2009 |       | $                             | 1,697      |   |
| 2010                                       |       | 3,002                         |       |
| 2011                                       |       | 1,652                         |       |
| 2012                                       |       | 1,006                         |       |
| 2013                                       |       | 699                           |       |
| Thereafter                                 |       | 225                           |       |
|                                       |       |                          |       |
| Total                                      |       | $                             | 8,281      |   |

 

As of June 30,2009, one of our tenants accounted for 10% or more of our aggregate annualrental revenues from our consolidated property, 1875 Lawrence.  Policy Studies, Inc. accounted forrental revenue of approximately $0.4 million, or approximately 14%, of ouraggregate rental revenues for the six months ended June 30, 2009. Therewas no contingent rent included in rental revenue for the three and six monthsended June 30, 2009 or 2008.

 

**7.****                                     ****Distributions**

 

We initiated thepayment of monthly distributions in April 2008 in the amount of a 3%annualized rate of return, based on an investment in our common stock of $10.00per share and calculated on a daily record basis of $0.0008219 per share.  The annualized rate of return was raised to5% effective June 1, 2009, calculated on a daily record basis of $0.0013699per share.  A portion of eachdistribution is expected to constitute a return of capital for taxpurposes.  Pursuant to the DRP,stockholders may elect to reinvest any cash distribution in additional sharesof common stock.  We record all distributionswhen declared, except that the stock issued through the DRP is recorded whenthe shares are actually issued. Distributions declared and payable as of June 30, 2009 were $0.4million, which included $0.1 million of cash distributions payable.

 

The followingare the distributions declared for the three and six months ended June 30,2009 and 2008.

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

 
| **2008**     | ** ** | **Cash** | ** ** | **DRP** | ** ** | **Total** | ** ** |
|--------------|------------|----------|------------|---------|------------|-----------|------------|
| 2nd  Quarter |       | $        | 17         |    | $          | 57        |       | $ | 74 |   |
| 1st  Quarter |       | —   |       | —  |       | —    |       |
| Total        |       | $        | 17         |    | $          | 57        |       | $ | 74 |   |

 

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

 

Behringer Securities LP (“BehringerSecurities”), the dealer-manager and an affiliate of our advisor, receivescommissions 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 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 toseparately negotiated agreements and subject to 

 

13

----

Table of Contents

 

**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

applicable limitationsimposed by the Financial Industry Regulatory Authority, Behringer Securitiesmay use a portion of its dealer manager fee to reimburse certain broker-dealersparticipating in the Offering for technology costs and expenses associated withthe Offering and costs and expenses associated with the facilitation of themarketing and ownership 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, 2009, BehringerSecurities earned selling commissions and dealer manager fees of $2.1 millionand $0.8 million, respectively, which were recorded as a reduction to additionalpaid-in capital.  For the six monthsended June 30, 2008, Behringer Securities earned selling commissions anddealer manager fees of $1.4 million and $0.5 million, respectively, which wererecorded as a reduction to additional paid-in capital.

 

We reimburse BehringerOpportunity Advisors II or its affiliates for any organization and offeringexpenses incurred on our behalf in connection with our primary offering (otherthan selling commissions and the dealer manager fee) provided that at no pointwill we reimburse expenses that would cause our total organization and offeringexpenses related to the primary offering (other than selling commissions andthe dealer manager fee) to exceed 1.5% of gross offering proceeds from theprimary offering.  Since our inceptionthrough June 30, 2009, approximately $7.7 million of organization andoffering expenses had been incurred by Behringer Opportunity Advisors II or itsaffiliates on our behalf.  Of thisamount, $1.5 million had been reimbursed by us and $6.2 million ofreimbursements payable is included in payables to affiliates on our balancesheet.  Of the $6.2 million ofreimbursements payable as of June 30, 2009, $0.1 million had been expensedas organizational costs with the remainder recorded as a reduction ofadditional paid-in capital.  BehringerOpportunity Advisors II or its affiliates determines the amount of organizationand offering expenses owed based on specific invoice identification as well asan allocation of costs to us and other Behringer Harvard programs, based onrespective equity offering results of those entities in offering.

 

Our advisor or itsaffiliates will also 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.

 

Our advisor or itsaffiliates also receive an acquisition expense reimbursement in the amount of0.25% of the funds paid for purchasing an asset, including any debtattributable to the asset, plus 0.25% of the funds budgeted for development, construction,or improvement in the case of assets that we acquire and intend to develop,construct, or improve.  Our advisor or its affiliates will also receive anacquisition expense reimbursement in the amount of 0.25% of the funds advancedin respect of a loan or other investment.  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.  Ouradvisor or its affiliates are responsible for paying all of the expenses itincurs associated with persons employed by the advisor to the extent dedicatedto making investments for us, such as wages and benefits of the investmentpersonnel.  Our advisor or its affiliates are also responsible for payingall of the investment-related expenses that we or our advisor or its affiliatesincur that are due to third parties with respect to investments we do notmake.  For the six months ended June 30,2009 and 2008, we incurred no acquisition and advisory fees or acquisitionexpense reimbursements.

 

We pay our advisor or itsaffiliates a debt financing fee of 1% of the amount available under any loan orline of credit made available to us.  Itis anticipated that our advisor will pay some or all of these fees to thirdparties with whom it subcontracts to coordinate financing for us. We incurredno such fees for the six months ended June 30, 2009 or 2008.

 

We pay our advisor or itsaffiliates a development fee in an amount that is usual and customary forcomparable services rendered to similar projects in the geographic market ofthe project if such affiliate provides the development services and if amajority of our independent directors determines that such development fee isfair and reasonable and on terms and conditions not less favorable than thoseavailable from unaffiliated third parties.

 

We pay our propertymanager and affiliate of our advisor, Behringer Harvard Opportunity IIManagement Services, LLC (“BHO II Management”), or its affiliates, fees for themanagement, leasing, and construction supervision of our properties.  Property management fees are 4.5% of thegross revenues of the properties managed by BHO II Management or its affiliatesplus leasing commissions based upon the customary leasing commission applicableto the same geographic location of the respective property.  In the event that we contract directly with athird-party property manager in respect of a property, BHO II Management or itsaffiliates receives an oversight fee equal to 0.5% of the gross revenues of theproperty managed.  In no event will BHOII Management or its affiliates receive both a property management fee and anoversight fee with respect to any particular property.  In the event we own a property through ajoint venture that does not pay BHO II Management directly for its services, wewill pay BHO II Management a management fee or oversight fee, as applicable,

 

14

----

Table of Contents

 

**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

based only on an economicinterest in the property.  We incurredand expensed property management fees or oversight fees to BHO II Management ofless than $0.1 million for the six months ended June 30, 2009.  We incurred no such fees for the six monthsended June 30, 2008.

 

We pay our advisor or itsaffiliates a monthly asset management fee of one-twelfth of 1.0% of the sum ofthe higher of the cost or value of each asset. For the six months ended June 30, 2009, we expensed $0.2 million ofasset management fees.  We incurred nosuch fees for the six months ended June 30, 2008.

 

Our advisor or itsaffiliates also will be paid a disposition fee if the advisor or its affiliatesprovide a substantial amount of services, as determined by our independentdirectors, in connection with the sale of one or more assets.  In such event, our advisor or its affiliateswill receive a disposition fee equal to (1) in the case of the sale ofreal property, the lesser of: (A) one-half of the aggregate brokeragecommission paid (including the disposition fee) or, if none is paid, the amountthat customarily would be paid, or (B) 3% of the sales price of eachproperty sold, and (2) in the case of the sale of any asset other thanreal property, 3% of the sales price of such asset.

 

We reimburse ouradvisor or its affiliates for all expenses paid or incurred by the advisor inconnection with the services provided to us, subject to the limitation that wewill not reimburse our advisor for any amount by which its operating expenses(including the asset management fee) at the end of the four preceding fiscalquarters exceeds the greater of:  (A) 2%of our average invested assets, or (B) 25% of our net income determinedwithout reduction for any additions to reserves for depreciation, bad debts orother similar non-cash reserves and excluding any gain from the sale of ourassets for that period.  Notwithstandingthe above, we may reimburse the advisor for expenses in excess of thislimitation if a majority of our independent directors determines that such excessexpenses are justified based on unusual and non-recurring factors. For the sixmonths ended June 30, 2009 and 2008, we incurred and expensed such costsfor administrative services totaling $0.2 million and less than $0.1million, respectively.

 

We are dependent onBehringer Securities, Behringer Opportunity Advisors II, and BHO II Managementfor certain services that are essential to us, including the sale of shares ofour common stock, asset acquisition and disposition decisions, 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.

 

**9.****                                     ****Fair Value Disclosure ofFinancial Instruments**

 

We determined thefollowing disclosure of estimated fair values using available marketinformation and appropriate valuation methodologies.  However, considerable judgment is necessaryto interpret market data and develop the related estimates of fair value.  Accordingly, the estimates presented hereinare not necessarily indicative of the amounts that could be realized upondisposition of the financial instruments. The use of different market assumptions and/or estimation methodologiesmay have a material effect on the estimated fair value amounts.

 

As of June 30, 2009and December 31, 2008, management estimated that the carrying value ofcash and cash equivalents, accounts receivable, accounts payable, accruedexpenses, other liabilities, payables/receivables from related parties, anddistributions payable were at amounts that reasonably approximated their fairvalue based on their highly-liquid nature and/or short-term maturities.

 

As of June 30, 2009and December 31, 2008, our note payable totaled $18.5 million and consistedof one variable interest loan that we entered into on December 31,2008.  The loan has a variable interestrate with a minimum rate of 6.25%.  Webelieve that the carrying value of this loan approximates its fair value at June 30,2009 and December 31, 2008.

 

The fair value estimatespresented herein are based on information available to our management as of June 30,2009 and December 31, 2008. Although our management is not aware of any factors that wouldsignificantly affect the estimated fair value amounts, such amounts have notbeen comprehensively revalued for purposes of these consolidated financialstatements since that date, and current estimates of fair value may differsignificantly from the amounts presented herein.

 

15

----

Table of Contents

 

**BehringerHarvard Opportunity REIT II, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

**10.****                              ****Supplemental Cash Flow Information**

 

Supplemental cash flowinformation is summarized below:

 
| ** **                                                                            | ** ** | **Six  months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                            | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| Interest paid                                                                         |       | $                              | 488        |   | $ | — |   |
|                                                                                  |       |                           |       |   |   |
| **Non-cash investing activities:**                                                    |       |                           |       |   |   |
| Property and  equipment additions and purchases of real estate in accrued liabilities |       | $                              | —     |   | $ | 265 |   |
|                                                                                  |       |                           |       |   |   |
| **Non-cash financing activities:**                                                    |       |                           |       |   |   |
| Common stock  issued in distribution reinvestment plan                                |       | $                              | 921        |   | $ | 25 |   |
| Accrued  dividends payable                                                            |       | $                              | 418        |   | $ | — |   |
| Offering costs  payable to related parties                                            |       | $                              | 892        |   | $ | 3,751 |   |

 

**11.          Subsequent Event**

 

On August 14, 2009, weentered into an agreement to provide $25 million of second lien financingfor the privatization and improvements to approximately 3,200 lodging unitslocated on ten U.S. Army installations. The loan accrues interest at 18%per annum and is scheduled to mature September 1, 2016. Proceeds of ouroffering of common stock to the public were used to fund the loan.

 

*****

 

16

----

Table of Contents

 

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

 

The following discussionand analysis should be read in conjunction with our accompanying financialstatements and the notes thereto.

 

**Forward-Looking Statements**

 

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

 

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

 

### **CautionaryNote**

 

The representations,warranties, and covenants made by us in any agreement filed as an exhibit tothis quarterly report are made solely for the benefit of the parties to theagreement, including, in some cases, for the purpose of allocating risk amongthe parties to the agreement, and should not be deemed to be 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.

 

**Executive Overview**

 

We were formed primarilyto acquire and operate commercial real estate and real estate-related assets onan opportunistic basis.  In particular,we focus generally on acquiring commercial properties with significantpossibilities for short-term capital appreciation, such as those requiringdevelopment, redevelopment or repositioning, those located in markets and submarketswith high growth potential, and those available from sellers who are distressedor face time-sensitive deadlines.  ****In addition, given currenteconomic circumstances, our opportunistic investment strategy may also includeinvestments in loans secured by or related to real estate at more attractiverates of current return than have been available for some time.  Such loan investments may also have capitalgain characteristics, whether as a result of a discount purchase or relatedequity participations.****  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 may originateor invest in collateralized mortgage-backed securities, mortgage, bridge ormezzanine loans, and Section 1031 tenant-in-common interests (includingthose issued by affiliates of our advisor), or in entities that makeinvestments similar to the foregoing.  Weexpect to make our investments in or in respect of real estate assets locatedin the United States and other countries based on our new and existing marketconditions.  As of June 30, 2009, wehad acquired one property, 1875 Lawrence, located in Denver, Colorado.

 

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

 

17

----

Table of Contents

 

2008.  We commenced operations on April 1, 2008upon satisfaction of the conditions of our escrow agreement and acceptance ofinitial subscriptions of common stock.

 

*Market Outlook*

 

During 2008 andcontinuing into the first half of 2009, the U.S. and global economy experienceda significant downturn.  This downturnincluded disruptions in the broader financial and credit markets, decliningconsumer confidence, and an increase in unemployment rates.  These conditions have contributed to weakenedmarket conditions.  Due to the strugglingU.S. and global economies, we believe that overall demand across most realestate sectors including office, multifamily, hospitality, and retail willcontinue to decline due to losses in the financial and professional servicesindustries and increasing unemployment. Further, we believe that corresponding rental rates will also remainweak at least through the remainder of the current year.  The national vacancy percentage for officespace increased from 14.5% in the fourth quarter of 2008 to 15.9% in the secondquarter of 2009.  We also believe thattenant defaults across the nation are likely to increase in theshort-term.  To date, we have notexperienced any significant tenant defaults.

 

Our real estateasset is located in Denver, Colorado. According to Property and Portfolio Research (“PPR”), although theDenver market has been hit hard by the current economic crisis, this market isexpected to be one of the first to rebound with the recovery beginning in2010.  It is anticipated that any reboundwill be led in large part by increases in jobs in business and professionalservices and government hiring, as well as the education, health services, andinformation industries.  According toPPR, office vacancy rates in the Denver market will continue to rise throughthe remainder of 2009.  However, PPRanticipates that Denver may have one of the largest office vacancy recoveriesin the nation due in large part to Denver’s concentration of technology andheath-care employers.

 

While it isunclear as to when the overall economy will recover, we do not expectconditions to improve significantly in the near future.  Management expects that the current volatilityin the capital markets will continue, at least in the short-term.  This volatility has significantly impactedthe availability of credit for borrowers. This tightening of credit may hinderour ability to take advantage of current opportunities in the marketplace.  We have placed a high priority on maintainingstrong relationships with banks and other lenders.  We believe, though the opportunities forobtaining new credit have diminished, that our strong relationships with ourlenders will enhance our opportunities for securing credit for futureinvestments.

 

As a result of theexisting economic conditions, our primary objectives are to raise capital andto take advantage of favorable investment opportunities.  We believe that the current economic environmentwill result in investment opportunities for many high-quality real estate andreal estate-related assets.  To theextent that we have capital available to invest, we plan to actively pursueinvestment opportunities.

 

**Liquidityand Capital Resources**

 

Our principal demands forfunds will be for the acquisition of real estate and real estate-relatedassets, for the payment of operating expenses and distributions, and for thepayment 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.

 

We expect to fund ourshort-term liquidity requirements by using the net proceeds realized from theOffering and cash flow from the operations of investments we acquire. Operating cash flows are expected to increase as additional real estate assetsare added to the portfolio.  For both our short-term and long-termliquidity requirements, other potential future sources of capital may includeproceeds from secured or unsecured financings from banks or other lenders,proceeds from the sale of our investments, if and when any are sold, andundistributed funds from operations.  If necessary, we may use financingsor other sources of capital in the event of unforeseen significant capitalexpenditures.

 

Our advisor may, but isnot required to, establish capital reserves from gross offering proceeds, outof cash flow generated by operating properties and other investments or out ofnon-liquidating net sale proceeds from the sale of our properties and otherinvestments.  Capital reserves aretypically utilized for non-operating expenses such as tenant improvements,leasing commissions and major capital expenditures.  Alternatively, a lender may require its ownformula for escrow of capital reserves.

 

We intend to borrow moneyto 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 the NASAAREIT Guidelines) as of the date of any borrowing; however, we may exceed thatlimit if approved 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, 

 

18

----

Table of Contents

 

does not apply toindividual real estate assets and will only apply once we have ceased raisingcapital under the Offering or any subsequent offering and investedsubstantially all of our capital.  As a result, we expect to borrow morethan 75% of the contract purchase price of each real estate asset we acquireduring the early periods of our operations to the extent our board of directorsdetermines that borrowing at these levels is prudent.

 

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

 

The commercial realestate debt markets are currently experiencing volatility as a result ofcertain factors, including the tightening of underwriting standards by lendersand credit rating agencies and the significant inventory of unsoldcollateralized mortgage-backed securities in the market.  Credit spreads for major sources of capitalhave widened significantly as investors have demanded a higher 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 fundsto finance future acquisitions could be adversely affected by our inability tosecure permanent financing on reasonable terms, if at all.

 

Should the overall costof borrowings increase, either by increases in the index rates or by increasesin lender spreads, we will need to factor such increases into the economics ofour 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.

 

If the current debtmarket environment persists, we may modify our investment strategies in orderto seek to optimize our portfolio performance. Our strategies may include, among other options, limiting or eliminatingthe use of debt and focusing on those investments that do not require the useof leverage to meet our portfolio goals.

 

*DebtFinancings*

 

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

 

At June 30, 2009,our note payable balance was $18.5 million and consisted of the note payablerelated to 1875 Lawrence.  We haveunconditionally guaranteed payment of the loan 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.  At June 30, 2009,the interest rate on this note was 6.25%, and the loan matures on December 31,2012.  Our loan agreement stipulates thatwe comply with certain reporting and financial covenants.  These covenants include, among other things,maintaining minimum debt service coverage ratios.  As of June 30, 2009, we believe we werein compliance with the debt covenants under our loan agreement.

 

19

----

Table of Contents

 

One of our principallong-term liquidity requirements includes the repayment of maturing debt.  The following table provides information withrespect to the maturities and scheduled principal repayments of ourindebtedness as of June 30, 2009. The table does not represent any extension options.

 
| ** **                                                                                   | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                   | ** ** | **2009**                   | ** ** | **2010-2011** | ** ** | **2012-2013** | ** ** | **After 2013** | ** ** | **Total** | ** ** |
| Principal  payments - variable rate debt                                                     |       | $                          | —     |   | $ | 740 |   | $ | 17,760 |   | $ | — |   | $ | 18,500 |   |
| Interest  payments - variable rate debt (based on rates in effect  as of June 30, 2009) |       | 588                        |       | 2,323 |   | 1,196 |   | — |   | 4,107 |   |
|                                                                                         |       |                       |       |   |   |   |   |   |   |   |   |
| Total                                                                                        |       | $                          | 588        |   | $ | 3,063 |   | $ | 18,956 |   | $ | — |   | $ | 22,607 |   |

 

**Resultsof Operations**

 

As of June 30, 2009,we had invested in one property, 1875 Lawrence, located in Denver,Colorado.  As of June 30, 2008, wehad no real estate or real estate-related assets.  Accordingly, our results of operations forthe respective periods presented reflect increases in most categories due tothe growth of our portfolio.  Managementexpects increases in most categories in the future as we purchase additionalreal estate and real estate-related assets and as we begin to realize the full yearimpact of our 2008 acquisition.

 

*Three months ended June 30, 2009 as comparedto the three months ended June 30, 2008*

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** **              | ** ** | ** **   | ** ** |
|--------------------------------|------------|------------------------|------------|-------------------------|------------|--------------|------------|
| ** **                     | ** ** | **June 30,**           | ** ** | **Increase (Decrease)** | ** ** |
| ** **                     | ** ** | **2009**               | ** ** | **2008**                | ** ** | **Amount**   | ** ** | **Percent** | ** ** |
| ** **                     | ** ** | **(unaudited)**        | ** ** | ** **              | ** ** | ** **   | ** ** |
| Revenue:                       |       | $                      | 1,449      |                    | $          | —       |       | $ | 1,449 |   | n/a |   |
|                           |       |                   |       |                    |       |         |       |   |   |
| Expenses:                      |       |                   |       |                    |       |         |       |   |   |
| Property  operating expenses   |       | $                      | 277        |                    | $          |  — |       | $ | 277 |   | n/a |   |
| Interest expense               |       | 325                    |       | —                  |       | 325          |       | n/a |   |
| Real estate  taxes             |       | 140                    |       | —                  |       | 140          |       | n/a |   |
| Property  management fees      |       | 44                     |       | —                  |       | 44           |       | n/a |   |
| Asset management  fees         |       | 86                     |       | —                  |       | 86           |       | n/a |   |
| General and  administrative    |       | 239                    |       | 217                     |       | 22           |       | 10 | % |
| Depreciation and  amortization |       | 661                    |       | —                  |       | 661          |       | n/a |   |
| Total expenses                 |       | $                      | 1,772      |                    | $          | 217          |       | $ | 1,555 |   | 717 | % |

 

*Revenues.* Revenues for the three months ended June 30, 2009 were $1.4 millionand were generated by our consolidated property, 1875 Lawrence, which wasacquired on October 28, 2008.  Norevenue was generated for the three months ended June 30, 2008.  We expect increases in revenue in the futureas we purchase additional real estate assets.

 

*PropertyOperating Expenses.* Property operating expenses for the three months ended June 30,2009 were $0.3 million and were comprised of operating expenses of 1875Lawrence.  We incurred no propertyoperating expenses for the three months ended June 30, 2008. We expectincreases in property operating expenses in the future as we purchaseadditional real estate assets.

 

*InterestExpense. *Interestexpense for the three months ended June 30, 2009 was $0.3 million and wascomprised of interest related to our note payable on 1875 Lawrence.  There was no interest expense for the threemonths ended June 30, 2008.  Weexpect increases in interest expense in the future as we purchase additionalreal estate assets and assume additional debt.

 

*PropertyManagement Fees. *Propertymanagement fees for the three months ended June 30, 2009 were less than$0.1 million and were comprised of fees related to 1875 Lawrence.  There were no property management fees forthe three months ended June 30, 2008. We expect increases in property management fees in the future as wepurchase additional real estate assets.

 

20

----

Table of Contents

 

*AssetManagement Fees.  A*ssetmanagement fees for the three months ended June 30, 2009 were $0.1 millionand were comprised of fees related to 1875 Lawrence.  There were no asset management fees for thethree months ended June 30, 2008. We expect increases in asset management fees in the future as wepurchase additional real estate assets.

 

*Generaland Administrative Expenses.* General andadministrative expenses for the three months ended June 30, 2009 and2008 were $0.2 million, 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 estateassets.

 

*Six months ended June 30, 2009 as compared tosix months ended June 30, 2008*

 
| ** **                     | ** ** | **Six Months Ended** | ** ** | ** **              | ** ** | ** ** | ** ** |
|--------------------------------|------------|----------------------|------------|-------------------------|------------|------------|------------|
| ** **                     | ** ** | **June 30,**         | ** ** | **Increase (Decrease)** | ** ** |
| ** **                     | ** ** | **2009**             | ** ** | **2008**                | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                     | ** ** | **(unaudited)**      | ** ** | ** **              | ** ** | ** ** | ** ** |
| Revenue:                       |       | $                    | 2,774      |                    | $          | —     |       | $ | 2,774 |   | n/a |   |
|                           |       |                 |       |                    |       |       |       |   |   |
| Expenses:                      |       |                 |       |                    |       |       |       |   |   |
| Property  operating expenses   |       | $                    | 621        |                    | $          | —     |       | $ | 621 |   | n/a |   |
| Interest expense               |       | 651                  |       | —                  |       | 651        |       | n/a |   |
| Real estate  taxes             |       | 280                  |       | —                  |       | 280        |       | n/a |   |
| Property  management fees      |       | 90                   |       | —                  |       | 90         |       | n/a |   |
| Asset management  fees         |       | 172                  |       | —                  |       | 172        |       | n/a |   |
| General and  administrative    |       | 660                  |       | 286                     |       | 374        |       | 131 | % |
| Depreciation and  amortization |       | 1,264                |       | —                  |       | 1,264      |       | n/a |   |
| Total expenses                 |       | $                    | 3,738      |                    | $          | 286        |       | $ | 3,452 |   | 1,207 | % |

 

*Revenues.*  Revenues for the six months ended June 30,2009 were $2.8 million and were generated by our consolidated property, 1875Lawrence, which was acquired on October 28, 2008.  No revenue was generated for the six monthsended June 30, 2008.  We expectincreases in revenue in the future as we purchase additional real estateassets.

 

*PropertyOperating Expenses.* Property operating expenses for the six months ended June 30, 2009were $0.6 million and were comprised of operating expenses of 1875Lawrence.  We incurred no propertyoperating expenses for the six months ended June 30, 2008. We expectincreases in property operating expenses in the future as we purchaseadditional real estate assets.

 

*InterestExpense. *Interestexpense for the six months ended June 30, 2009 was $0.7 million and wascomprised of interest related to our note payable on 1875 Lawrence.  There was no interest expense for the threemonths ended June 30, 2008.  Weexpect increases in interest expense in the future as we purchase additional realestate assets and assume additional debt.

 

*PropertyManagement Fees. *Propertymanagement fees for the six months ended June 30, 2009 were $0.1 millionand were comprised of fees related to 1875 Lawrence.  There were no property management fees forthe six months ended June 30, 2008. We expect increases in property management fees in the future as wepurchase additional real estate assets.

 

*AssetManagement Fees. *Assetmanagement fees for the six months ended June 30, 2009 were $0.2 millionand were comprised of fees related to 1875 Lawrence.  There were no asset management fees for thesix months ended June 30, 2008.  Weexpect increases in asset management fees in the future as we purchaseadditional real estate assets.

 

*Generaland Administrative Expenses.* General andadministrative expenses for the six months ended June 30, 2009 were$0.7 million, as compared to $0.3 million for the six months ended June 30,2008, and were comprised of auditing fees, legal fees, board of directors’fees, and other administrative expenses. We expect increases in general and administrative expenses in the futureas we purchase additional real estate assets.

 

**Cash Flow Analysis**

 

Cash provided byoperating activities for the six months ended June 30, 2009 was less than $0.1million, and was comprised primarily of the net loss of $0.7 million, offset bydepreciation and amortization of $0.6 million, changes in prepaid expenses andother assets of $0.1 million, and changes in net payables to related parties of$0.1 million.  Cash used in operatingactivities for the six months ended June 30, 2008 was $0.1 million and wascomprised of the net loss of $0.2 million offset by changes in accruedliabilities and changes in net payables to related parties of less than $0.1million, respectively.

 

21

----

Table of Contents

 

Cash used in investingactivities for the six months ended June 30, 2009 was $0.5 million, andwas comprised of additions of property and equipment at 1875 Lawrence ofapproximately $0.2 million and escrow deposits and pre-acquisition costs onreal estate to be acquired of $0.2 million. There was no cash flow from investing activities for the six monthsended June 30, 2008.

 

Cash provided byfinancing activities for the six months ended June 30, 2009 was $26.9million, and was comprised of the issuance of common stock, net of offeringcosts, of approximately $27.4 million offset by distributions of $0.3 millionand redemptions of common stock of $0.2 million.  Cash provided by financing activities for thesix months ended June 30, 2008 was $19.4 million, and was primarilycomprised of the issuance of common stock, net of offering costs, of$19.4 million.

 

**TotalOperating Expenses**

 

In accordance with the Statement of Policy RegardingReal Estate Investment Trusts published by the North American SecuritiesAdministrators Association, also known as the NASAA REIT Guidelines, ourcharter requires that we monitor our expenses on a trailing twelve monthbasis.  Our charter defines the following terms and requires that ourTotal Operating Expenses (“TOE”) are deemed to be excessive if at the end ofany quarter they exceed for the prior trailing twelve month period the greaterof 2% of our Average Invested Assets (“AIA”) or 25% of our Net Income (“NI”). For the trailing twelve months ended June 30, 2009, TOE of $1.3 millionexceeded the greater of 2% of our AIA or 25% of our NI by $0.8 million. Our Board of Directors, including all of our independent directors, havereviewed this analysis and unanimously determined the excess to be justifiedbecause the Company did not acquire its first real estate or realestate-related asset until October 28, 2008, which caused the expenses itincurred in connection with its organization and as a result of being a publiccompany 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.

 

**Funds from Operations andModified Funds from Operations**

 

Funds from operations (“FFO”)is a non-GAAP financial measure that is widely recognized as a measure of REIToperating performance.  We use FFO,defined by the National Association of Real Estate Investment Trusts as netincome (loss), computed in accordance with GAAP, excluding extraordinary items,as defined by GAAP, and gains (or losses) from sales of property, plus depreciationand amortization on real estate assets, and after adjustments forunconsolidated partnerships, joint ventures, and subsidiaries, as one measureto evaluate our operating performance. In addition to FFO, we use modified funds from operations (“ModifiedFunds from Operations” or “MFFO”), which excludes from FFO acquisition-relatedcosts, impairment charges, and adjustments to fair value for derivatives notqualifying for hedge accounting, to further evaluate our operating performance.

 

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

 

We believe that FFO ishelpful to investors and our management as a measure of operating performancebecause it excludes depreciation and amortization, gains and losses fromproperty dispositions, and extraordinary items, and as a result, when comparedyear to year, reflects the impact on operations from trends in occupancy rates,rental rates, operating costs, development activities, general andadministrative expenses, and interest costs, which is not immediately apparentfrom net income.  We believe MFFO ishelpful to our investors and our management as a measure of operatingperformance because it excludes costs that management considers more reflectiveof investing activities and other non-operating items included in FFO.   By providing MFFO, we present informationwhich assists investors in aligning their analysis with management’s analysisof long term, core operating activities. We believe fluctuations in MFFO are more indicative of changes inoperating activities and provide comparability in evaluating our performanceover time and as compared to other real estate companies that may not haveacquisition activities, derivatives, or affected by impairments.

 

As explainedbelow, management’s evaluation of our operating performance excludes the itemsconsidered in the calculation of MFFO based on the following economicconsiderations:

 

·                  Acquisition-related costs.  In evaluating investments in real estate,including both business combinations and investments accounted for under theequity method of accounting, management’s investment models and analysisdifferentiates costs to acquire the investment from the operations derived fromthe investment.  Prior to 2009,acquisition costs for these types of investments were capitalized; howeverbeginning in 2009 acquisition costs related to business combinations areexpensed.  We believe by excludingexpensed acquisition costs, MFFO provides useful supplemental

 

22

----

Table ofContents

 

information that iscomparable for each type of our real estate investments and is consistent withmanagement’s analysis of the investing and operating performance of ourproperties.

 

·                  Impairment charges. An impairment charge represents a downward adjustment to the carryingamount of a long-lived asset to reflect the current valuation of the asset evenwhen 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 on one-time market valuations.

 

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

 

FFO orMFFO 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 three and six months ended June 30,2009 and 2008, we present only FFO as we did not report any suchacquisition-related expenses, impairment charges, or adjustments to fair valuefor derivatives not qualifying for hedge accounting in our ConsolidatedStatements of Operations nor did we have any derivative financial instrumentsfor the periods presented.  Our FFO aspresented may not be comparable to amounts calculated by other REITs.

 

For the three and six months ended June 30, 2009,FFO per share has been impacted by the increase in net proceeds realized fromour existing offering of shares.  For thethree and six months ended June 30, 2009, we sold 1.9 million and 3.1million shares of our common stock, respectively, increasing our outstandingshares by 22% and 42%, respectively.  Theproceeds from the issuance are temporarily invested in short-term cashequivalents until they can be invested in real estate and real estate-relatedassets.  Due to lower interest rates oncash 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.

 

Our calculation of FFOfor the three and six months ended June 30, 2009 and 2008 is presentedbelow (amounts in thousands except per share amounts):

 
| ** **                     | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **2009**                        | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|                           |       |                            |       |                          |       |   |   |   |   |
| Net  loss, as reported         |       | $                               | (198       | )                             | $          | (175 | ) | $ | (739 | ) | $ | (239 | ) |
| Adjustments  for:              |       |                            |       |                          |       |   |   |   |   |
| Real  estate depreciation (1)  |       | 258                             |       | —                        |       | 523 |   | — |   |
| Real  estate amortization (1)  |       | 403                             |       | —                        |       | 741 |   | — |   |
|                           |       |                            |       |                          |       |   |   |   |   |
| Funds  from operations (FFO)   |       | $                               | 463        |                          | $          | (175 | ) | $ | 525 |   | $ | (239 | ) |
|                           |       |                            |       |                          |       |   |   |   |   |
| GAAP  weighted average shares: |       |                            |       |                          |       |   |   |   |   |
| Basic  and diluted             |       | 9,519                           |       | 969                           |       | 8,714 |   | 496 |   |
| FFO  per share                 |       | $                               | 0.05       |                          | $          | (0.18 | ) | $ | 0.06 |   | $ | (0.48 | ) |

 

----

(1) This represents the depreciation andamortization expense of the property we consolidate.

 

Provided below is additional information related to selected non-cashitems included in net loss above, which may be helpful in assessing ouroperating results.

 

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

 

23

----

Tableof Contents

 

·                  Amortizationof intangible lease assets and liabilities was recognized as a net increase torental revenues of $0.3 million and $0.6 million, respectively, for the threeand six months ended June 30, 2009. There was no amortization of intangible lease assets for the three andsix months ended June 30, 2008.

 

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

 

Inaddition, cash flows generated from FFO may be used to fund all or a portion ofcertain capitalizable items that are excluded from FFO, such as capitalexpenditures and payments of principal on debt, each of which may impactthe amount of cash available for distribution to our stockholders.

 

**Distributions**

 

Distributions areauthorized at the discretion of our board of directors based on its analysis ofour performance over the previous period, expectations of performance forfuture periods, including actual and anticipated operating cash flow, changesin market capitalization rates for investments suitable for our portfolio,capital expenditure needs, general financial condition, and other factors thatour board deems relevant.  The board’sdecision will be influenced, in substantial part, by its obligation to ensurethat we maintain our status as a REIT. In light of the pervasive and fundamental disruptions in the globalfinancial and real estate markets, we cannot provide assurance that we will beable to achieve expected cash flows necessary to continue to pay distributionsat any particular level, or at all.  Ifthe current economic conditions continue, our board could determine to reduceour current distribution rate or cease paying distributions in order toconserve cash.

 

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

 

Cashamounts distributed to stockholders during the six months ended June 30,2009 and 2008 were $310,000 and $8,000, respectively.  For the six months ended June 30, 2009,cash flows provided by operating activities was $23,000.  Accordingly, for the six months ended June 30,2009, cash amounts distributed to stockholders exceeded cash flow fromoperating activities by $287,000.  Forthe six months ended June 30, 2008, cash flows used in operatingactivities was $136,000.  Accordingly,none of the cash flows from operating activities exceeded cash amountsdistributed to stockholders for the six months ended June 30, 2008.  All such shortfalls were funded from proceedsfrom our offering.

 

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

 

Thefollowing are the distributions paid and declared for the three and six monthsended June 30, 2009 and 2008.

 
| ** **     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **       | ** ** | **Total**    | ** ** | **Declared**  | ** ** |
|----------------|------------|------------------------|------------|-------------------|------------|------------------|------------|--------------|------------|---------------|------------|
| ** **     | ** ** | **Distributions Paid** | ** ** | **Distributions** | ** ** | **Distribution** | ** ** |
| **2009**       | ** ** | **Cash**               | ** ** | **Reinvested**    | ** ** | **Total**        | ** ** | **Declared** | ** ** | **Per Share** | ** ** |
| Second Quarter |       | $                      | 172        |              | $          | 505              |       | $            | 677        |          | $          | 881 |   | $ | 0.09 |   |
| First Quarter  |       | 138                    |       | 416               |       | 554              |       | 586          |       | 0.07          |       |
| Total          |       | $                      | 310        |              | $          | 921              |       | $            | 1,231      |          | $          | 1,467 |   | $ | 0.16 |   |

 
| ** **     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **       | ** ** | **Total**    | ** ** | **Declared**  | ** ** |
|----------------|------------|------------------------|------------|-------------------|------------|------------------|------------|--------------|------------|---------------|------------|
| ** **     | ** ** | **Distributions Paid** | ** ** | **Distributions** | ** ** | **Distribution** | ** ** |
| **2008**       | ** ** | **Cash**               | ** ** | **Reinvested**    | ** ** | **Total**        | ** ** | **Declared** | ** ** | **Per Share** | ** ** |
| Second Quarter |       | $                      | 8          |              | $          | 25               |       | $            | 33         |          | $          | 74 |   | $ | 0.05 |   |
| First Quarter  |       | —                 |       | —            |       | —           |       | —       |       | —        |       |
| Total          |       | $                      | 8          |              | $          | 25               |       | $            | 33         |          | $          | 74 |   | $ | 0.05 |   |

 

24

----

Tableof Contents

 

Distributionsdeclared per share assumes the share was issued and outstanding each day duringthe period and is based on a declared daily distribution of $0.0008219 pershare per day for the period through May 31, 2009.  As of June 1, 2009, the effective dailyrate was $0.0013699.  Each day during thefirst and second quarters was a record date for distributions.

 

Themarket for institutional quality assets has experienced an increase incapitalization rates which allows us the opportunity to invest in equity anddebt investments at more attractive prices and therefore higher currentyields.  Under the current economicconditions, we expect to be able to capitalize on attractive acquisitionopportunities from distressed owners suffering from a lack of liquidity and thefrozen state of the debt capital markets. We and our advisor believe that the increased distribution rate isreflective of the changes in the market for investments suitable for ourportfolio and one that can be sustained after we complete our offering anddeploy the capital raised from our offering in investments.

 

Overthe long term, we expect that more of our distributions will be paid from cashflow from operatingactivities (except with respect to distributions related to sales of ourassets).  However, operating performancecannot be accurately predicted due to numerous factors, including our abilityto raise and invest capital at favorable yields, the financial performance ofour investments in the current real estate environment, the types and mix ofinvestments in our portfolio and the accounting treatment of our investments inaccordance with our accounting policies.

 

**Off-Balance Sheet Arrangements**

 

We have no off-balancesheet arrangements that are reasonably likely to have a current or futurematerial effect on our financial condition, changes in financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources.

 

**Critical Accounting Policies andEstimates**

 

Management’s discussionand analysis of financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States ofAmerica.  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.

 

Below is a discussion ofthe accounting policies that we consider to be critical in that they mayrequire complex judgment in their application or require estimates aboutmatters that are inherently uncertain.

 

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

 

Our consolidatedfinancial statements include our accounts, the accounts of VIE in which we arethe primary beneficiary, and the accounts of other subsidiaries over which wehave control.  All inter-companytransactions, balances and profits have been eliminated in consolidation.

 

There are judgments andestimates involved in determining if an entity in which we have made aninvestment is a VIE and, if so, whether we are the primary beneficiary.  The entity is evaluated to determine if it isa VIE by, among other things, calculating the percentage of equity being riskedcompared to the total equity of the entity. Determining expected future losses involves assumptions of variouspossibilities of the results of future operations of the entity, assigning aprobability to each possibility and using a discount rate to determine the netpresent value of those future losses.  Achange in the judgments, assumptions, and estimates outlined above could resultin consolidating an entity that should not be consolidated or accounting for aninvestment using the equity method that should in fact be consolidated, theeffects of which could be material to our financial statements.

 

***RealEstate***

 

Upon the acquisitionof real estate properties, we recognize the assets acquired, the liabilitiesassumed, and any noncontrolling interest as of the acquisition date, measuredat their fair values.  The acquisitiondate is the date on which we obtain control of the real estate property.  The assets acquired and liabilities assumedmay consist of buildings, any assumed debt, identified intangible assets andasset retirement obligations.  Identifiedintangible assets generally consist of the above-market and below-market leases,in-place leases, in-place tenant improvements and tenant relationships.  Goodwill is recognized as of the acquisitiondate and measured as the aggregate fair value of the consideration transferredand any noncontrolling interests in the acquiree over the fair value ofidentifiable net assets acquired. Likewise, a bargain purchase gain is recognized in current earnings whenthe aggregate fair value of the consideration transferred and anynoncontrolling interests in the acquiree is less than the fair value of theidentifiable net assets acquired. Acquisition-related costs are expensed in the period incurred.

 

25

----

Table ofContents

 

Prior to January 1,2009, we allocated the purchase price of the real estate property we acquiredto the tangible assets acquired, consisting of land, inclusive of associatedrights, and buildings, and identified intangible assets based on their relativefair values.

 

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

 

We determine the fairvalue of assumed debt by calculating the net present value of the schedulednote payments using interest rates for debt with similar terms and remainingmaturities that we believe we could obtain. Any difference between the fair value and stated value of the assumeddebt is recorded as a discount or premium and amortized over the remaining lifeof the loan.

 

The fair value of thetangible assets acquired, consisting of land and buildings, is determined byvaluing the property as if it were vacant, and the “as-if-vacant” value is thenallocated to land and buildings.  Landvalues are derived from appraisals, and building values are calculated asreplacement cost less depreciation or management’s estimates of the relativefair value of these assets using discounted cash flow analyses or similarmethods.  The value of the commercialoffice building is depreciated over the estimated useful life of 25 years usingthe straight-line method.

 

We determine the value ofabove-market and below-market in-place leases for acquired properties based onthe present value (using an interest rate that reflects the risks associatedwith the leases acquired) of the difference between (1) the contractualamounts to be paid pursuant to the in-place leases and (2) management’sestimate of current market lease rates for the corresponding in-place leases,measured over a period equal to (a) the remaining non-cancelable leaseterm for above-market leases, or (b) the remaining non-cancelable leaseterm plus any fixed rate renewal option for below-market leases.  We record the fair value of above-market andbelow-market leases as intangible assets or intangible liabilities,respectively, and amortize them as an adjustment to rental income over theabove determined lease term.

 

The total value ofidentified real estate intangible assets acquired is further allocated toin-place lease values and tenant relationships based on our evaluation of thespecific characteristics of each tenant’s lease and our overall relationshipwith that respective tenant.  Theaggregate value of in-place leases acquired and tenant relationships isdetermined by applying a fair value model. The estimates of fair value of in-place leases include an estimate ofcarrying costs during the expected lease-up periods for the respective spaces,considering current market conditions. In estimating fair value of in-place leases, we consider items such asreal estate taxes, insurance and other operating expenses, as well as lostrental revenue during the expected lease-up period and carrying costs thatwould have otherwise been incurred had the leases not been in place, includingtenant improvements and commissions.  Theestimates of the fair value of tenant relationships also include costs toexecute similar leases, including leasing commissions, legal costs and tenantimprovements as well as an estimate of the likelihood of renewal as determinedby management on a tenant-by-tenant basis.

 

We amortize the value ofin-place leases to expense over the term of the respective leases.  The value of tenant relationship intangiblesis amortized to expense over the initial term and any anticipated renewalperiods, but in no event does the amortization period for intangible assetsexceed 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.

 

***InvestmentImpairments***

 

For real estate we whollyown, we monitor events and changes in circumstances indicating that thecarrying amounts of the real estate assets may not be recoverable.  When such events or changes in circumstancesare present, we assess potential impairment by comparing estimated futureundiscounted operating cash flows expected to be generated over the life of theasset and from its eventual disposition to the carrying value of theasset.  In the event that the carryingamount exceeds the estimated future undiscounted operating cash flows, werecognize an impairment loss to adjust the carrying amount of the asset toestimated fair value.  We considerprojected future undiscounted cash flows, trends, strategic decisions regardingfuture development plans, and other factors in our assessment of whetherimpairment conditions exist.  While webelieve our estimates of future cash flows are reasonable, differentassumptions regarding such factors as market rents, economies, and occupanciescould significantly affect these estimates.

 

In evaluating ourinvestment for impairment, management may use appraisals and makes estimatesand assumptions, including, but not limited to, the projected date ofdisposition of the property, the estimated future cash flows of the propertyduring our ownership, and the projected sale price of the property.  A change in these estimates and assumptionscould result in understating or overstating the book value of our investment,which could be material to our financial statements.  Due to the judgment and assumptions appliedin the estimation process with respect to impairments, it is possible actualresults could differ substantially from those estimated.

 

We believe the carryingvalue of our operating real estate asset is currently recoverable.  However, if market conditions worsen beyondour current expectations, or if changes in our development strategysignificantly affect any key 

 

26

----

Table ofContents

 

assumptions used in ourfair value calculations, we may need to take charges in future periods forimpairments related to existing assets. Any such non-cash charges would have an adverse effect on ourconsolidated financial position and results of operations.

 

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

 

*InterestRate Risk*

 

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

 

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

 

*Evaluationof Disclosure Controls and Procedures*

 

As required by Rule 13a-15(b) andRule 15d-15(b) under the Exchange Act, our management, including ourChief Executive Officer and Chief Financial Officer, evaluated, as of June 30,2009, the effectiveness of our disclosure controls and procedures as defined inExchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective, as of June 30,2009, to provide reasonable assurance that information required to be disclosedby us in this report is recorded, processed, summarized and reported within thetime periods specified by the rules and forms of the Exchange Act and isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosures.

 

We believe, however, thata controls system, no matter how well designed and operated, cannot provideabsolute assurance that the objectives of the controls systems are met, and noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud or error, if any, within a company have been detected.

 

*Changes in Internal Control over Financial Reporting*

 

There has been no changein internal control over financial reporting that occurred during the quarterended June 30, 2009 that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

27

----

Table ofContents

 

**PART II**

 

**OTHER INFORMATION**

 

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

 

We are not a party to,and none of our properties are subject to, any material pending legalproceedings.

 

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

 

There have been nomaterial changes from the risk factors set forth in our Annual Report on Form 10-Kfor the year ended December 31, 2008 and in our Quarterly Report on Form 10-Qfor the quarter ended March 31, 2009.

 

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

 

**Use of Proceeds from RegisteredSecurities**

 

OnJanuary 4, 2008, our Registration Statement on Form S-11 (File No. 333-140887),covering a public offering of up to 125,000,000 shares of common stock, wasdeclared effective under the Securities Act of 1933. The Offering commenced on January 21,2008 and is ongoing.  We expect to sellthe shares offered in our public offering over a three-year period.  Under rules promulgated by the SEC, insome circumstances we may continue the Offering beyond this date.  Our board of directors has the discretion toextend the offering period for the shares offered under the DRP up to the sixthanniversary of the termination of the primary offering.  We may reallocate the shares of common stockbeing offered between the primary offering and the DRP.

 

Weare offering a maximum of 100,000,000 shares in our primary offering at anaggregate offering price of up to $1 billion, or $10.00 per share withdiscounts available to certain categories of purchasers.  The 25,000,000 shares offered under the DRPare initially being offered at an aggregate offering price of $237.5 million,or $9.50 per share.  Behringer SecuritiesLP, an affiliate of our advisor, is the dealer manager of the Offering.  As of June 30, 2009, we had sold 10,470,537shares of our common stock, net of the 22,471 shares issued to BehringerHarvard Holdings, on a best efforts basis pursuant to the Offering for grossoffering proceeds of approximately $104.4 million.

 

Fromthe effectiveness of the Offering through June 30, 2009, we incurred thefollowing expenses in connection with the issuance and distribution of theregistered securities pursuant to the Offering:

 
| **Type of Expense**               | ** ** | **Amount** | ** **   |
|-----------------------------------|------------|------------|--------------|
| Other  expenses to affiliates (1) |       | $          |  17,317 |   |
| Other  expenses to non-affiliates |       | —     |         |
|                              |       |       |         |
| Total  expenses                   |       | $          | 17,317       |   |

 

----

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

 

From the effectiveness ofthe Offering through June 30, 2009, the net offering proceeds to us fromthe Offering, including the DRP, after deducting the total expenses incurreddescribed above, were $87.1 million. From the effectiveness of the Offering through June 30, 2009, wehad used $17.3 million of such net proceeds to purchase interests in realestate, net of notes payable.  Of theamount used for the purchase of these investments, $0.9 million was paid toBehringer Opportunity Advisors II, as acquisition and advisory fees andacquisition expense reimbursement.

 

**Recent Shares of UnregisteredSecurities**

 

During the period coveredby this quarterly report, we did not sell any equity securities that were notregistered under the Securities Act of 1933.

 

**Share Redemption Program**

 

Our board of directorshas adopted a share redemption program that permits our stockholders to selltheir shares to us after they have held them for at least one year, subject tosignificant conditions and limitations. The purchase price for the redeemed shares is set forth in theprospectus for the offering of our common stock.  Subject to certain limitations, we will waivethe one-year holding requirement for redemptions sought upon a stockholder’sdeath or qualifying disability or redemptions sought upon a stockholder’sconfinement to a long-term care facility. Our board of directors reserves the right in its sole discretion at anytime, and from time to time, to (1) waive the one-year holding period inthe event of other exigent 

 

28

----

Table ofContents

 

circumstances affecting astockholder such as bankruptcy or a mandatory distribution requirement underthe stockholder’s IRA, (2) reject any request for redemption, (3) changethe purchase price for redemptions, or (4) otherwise amend the terms forthe share redemption program.  Under theterms of the program, we will not redeem in excess of 5% of theweighted-average number of shares outstanding during the twelve-month periodimmediately prior to the date of redemption. In addition, our board of directors will determine at least quarterlywhether we have sufficient cash to repurchase shares, and such purchases willgenerally be limited to proceeds from the DRP plus 1% of operating cash flowfrom the previous fiscal year (to the extent positive).

 

During the quarter ended June 30,2009, we redeemed shares as follows:

 
| **2009** | ** ** | **Total Number of  Shares Redeemed** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly  Announced Plans  or Programs** | ** ** | **Maximum  Number of Shares  That May Be  Purchased Under  the Plans or  Programs** | ** ** |
|----------|------------|--------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| April    |       | —                               |       | $                                 | —     |                                                                                      | —     |                                                                                |       |   |
| May      |       | 24,891                               |       | $                                 | 8.99       |                                                                                      | 24,891     |                                                                                | (1)        |   |
| June     |       | —                               |       | $                                 | —     |                                                                                      | —     |                                                                                |       |   |
|     |       | 24,891                               |       | $                                 | 8.99       |                                                                                      | 24,891     |                                                                                | (1)        |   |

 

----

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

 

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

 

None.

 

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

 

TheAnnual Meeting of our stockholders was held on June 24, 2009.  All nominees standing for election asdirectors were elected.  The followingdirectors were elected to hold office for a term expiring at the 2010 AnnualMeeting or until their successors are elected and qualified, with the vote foreach director being reflected below:

 
| ** **            | ** ** | ** **    | ** ** | ** **          | ** ** | ** **    | ** ** | **Votes**           | ** ** |
|-----------------------|------------|---------------|------------|---------------------|------------|---------------|------------|---------------------|------------|
| ** **            | ** ** | ** **    | ** ** | **Votes For as**    | ** ** | ** **    | ** ** | **Withheld as**     | ** ** |
| ** **            | ** ** | **Number of** | ** ** | **a Percentage**    | ** ** | **Number of** | ** ** | **a Percentage**    | ** ** |
| ** **            | ** ** | **Votes**     | ** ** | **of Votes**        | ** ** | **Votes**     | ** ** | **of Votes**        | ** ** |
| **Director  Nominee** | ** ** | **For**       | ** ** | **Eligible****(1)** | ** ** | **Withheld**  | ** ** | **Eligible****(2)** | ** ** |
| Robert M.  Behringer  |       | 4,231,863     |       | 96.18%              |       | 167,901       |       | 3.82%               |       |
| Robert S. Aisner      |       | 4,234,731     |       | 96.25%              |       | 165,033       |       | 3.75%               |       |
| Andreas K. Bremer     |       | 4,237,984     |       | 96.32%              |       | 161,780       |       | 3.68%               |       |
| Jeffrey P. Mayer      |       | 4,236,150     |       | 96.28%              |       | 163,614       |       | 3.72%               |       |
| Cynthia Pharr  Lee    |       | 4,229,762     |       | 96.14%              |       | 170,002       |       | 3.86%               |       |

 

----

(1) Votes for as a percentage of all votes presentin person or by proxy.

(2) Votes withheld as a percentage of all votespresent in person or by proxy.

 

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

 

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

 

None.

 

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

 

The exhibits filed inresponse to Item 601 of Regulation S-K are listed on the Exhibit Indexattached hereto.

 

29

----

Table ofContents

 

**SIGNATURE**

 

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

 

 
|                         | **BEHRINGER  HARVARD OPPORTUNITY REIT II, INC.** |
|------------------------------|--------------------------------------------------|
|                         |                                             |
|                         |                                             |
| Dated: August 14,  2009 | By:                                              | /s/ Gary S. Bresky |
|                         |                                             | Gary S. Bresky |
|                         |                                             | Executive Vice  President and Chief Financial Officer |
|                         |                                             | (Principal Financial  Officer) |

 

30

----

Table ofContents

 

**Index toExhibits**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                |
|-------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1                     |       | Second Articles of Amendment and Restatement as amended by the First  Articles of Amendment and the Second Articles of Amendment (incorporated by  reference to Exhibit 3.1 to Form 10-Q filed on November 14,  2008)                                                                                                                                                                           |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2                     |       | Amended and Restated Bylaws (incorporated by reference to  Exhibit 3.2 to Pre-Effective Amendment No. 3 to the Company’s  Registration Statement on Form S-11, Commission File No. 333-140887)                                                                                                                                                                                        |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1                     |       | Form of Subscription Agreement (included as Exhibit A to  prospectus, incorporated by reference to Exhibit 4.1 to Post-Effective  Amendment No. 7 to the Company’s Registration Statement on  Form S-11, Commission File No. 333-140887)                                                                                                                                    |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2                     |       | Distribution Reinvestment Plan (included as Exhibit B to  prospectus), incorporated by reference to Exhibit 4.2 to Post-Effective  Amendment No. 7 to the Company’s Registration Statement on  Form S-11, Commission File No. 333-140887.                                                                                                                                        |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.3                     |       | Share Redemption Program (incorporated by reference from the  description under “Description of Shares — Share Redemption Program” in the  prospectus), incorporated by reference to Exhibit 4.3 to Post-Effective  Amendment No. 7 to the Company’s Registration Statement on  Form S-11, Commission File No. 333-140887.                                             |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.4                     |       | Form of Escrow Agreement (incorporated by reference to  Exhibit 4.4 to Pre-Effective Amendment No. 2 to the Company’s  Registration Statement on Form S-11, Commission File  No. 333-140887)                                                                                                                                                                                     |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.5                     |       | Statement regarding restrictions on transferability of shares of common  stock (to appear on stock certificate or to be sent upon request and without  charge to stockholders issued shares without certificates) (incorporated by  reference to Exhibit 4.5 to Pre-Effective Amendment No. 3 to the  Company’s Registration Statement on Form S-11, Commission File  No. 333-140887) |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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**                                                                                                                                                                                                                                                                                                                                                                            |

 

----

* Filed herewith

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

 

31

----