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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**[MarkOne]**

 

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

 

**Forthe quarterly period ended March 31, 2009**

 

**OR**

 

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

 

**Forthe transition period from                        to**

 

**CommissionFile Number: 000-53195**

 

**BehringerHarvard Multifamily REIT I, Inc.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

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

 

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

(Address ofPrincipal Executive Offices) (ZIP Code)

 

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

 

**None**

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

 

Indicateby check mark whether the Registrant:  (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.   Yes x 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 definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

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

 

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

 

As of May 5, 2009,the Registrant had 25,252,064 shares of common stock outstanding.

 

 

 

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

**Form 10-Q**

**For the Three Months Ended March 31,2009**

 
| ** **                          | ** ** | ** **                                                                                                                                         | **Page**   |
|-------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **PART 1  FINANCIAL INFORMATION**                                                                                                             | ** ** |
| ** **                          | ** ** | ** **                                                                                                                                         | ** ** |
| **Item 1.**                         | ** ** | **Financial Statements (unaudited)**                                                                                                               | ** ** |
| ** **                          | ** ** | ** **                                                                                                                                         | ** ** |
|                                |       | Consolidated  Balance Sheets as of March 31, 2009 and December 31, 2008                                                                  | 3          |
|                                |       |                                                                                                                                               |       |
|                                |       | Consolidated Statements of Operations for the three  months ended March 31, 2009 and 2008                                                     | 4          |
|                                |       |                                                                                                                                               |       |
|                                |       | Consolidated Statements of Stockholders’ Equity for  the year ended December 31, 2008 and for the three months ended  March 31,2009 | 5          |
|                                |       |                                                                                                                                               |       |
|                                |       | Consolidated Statements of Cash Flows for the three  months ended March 31, 2009 and 2008                                                     | 6          |
|                                |       |                                                                                                                                               |       |
|                                |       | Notes to Consolidated Financial Statements                                                                                                         | 7          |
|                                |       |                                                                                                                                               |       |
| **Item 2.**                         | ** ** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                                    | 25         |
| ** **                          | ** ** | ** **                                                                                                                                         |       |
| **Item 3.**                         | ** ** | **Quantitative  and Qualitative Disclosures About Market Risk**                                                                                    | 42         |
| ** **                          | ** ** | ** **                                                                                                                                         |       |
| **Item 4T.**                        | ** ** | **Controls and  Procedures**                                                                                                                       | 43         |
| ** **                          | ** ** | ** **                                                                                                                                         |       |
| **PART II  OTHER INFORMATION** |
|                                |       | ** **                                                                                                                                         |       |
| **Item 1.**                         | ** ** | **Legal Proceedings**                                                                                                                              | 44         |
| ** **                          | ** ** | ** **                                                                                                                                         |       |
| **Item 1A.**                        | ** ** | **Risk Factors**                                                                                                                                   | 44         |
| ** **                          | ** ** | ** **                                                                                                                                         |       |
| **Item 2.**                         | ** ** | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                                                   | 46         |
| ** **                          | ** ** | ** **                                                                                                                                         |       |
| **Item 3.**                         | ** ** | **Defaults  Upon Senior Securities**                                                                                                               | 47         |
| ** **                          | ** ** | ** **                                                                                                                                         |       |
| **Item 4.**                         | ** ** | **Submission  of Matters to a Vote of Security Holders**                                                                                           | 47         |
| ** **                          | ** ** | ** **                                                                                                                                         |       |
| **Item 5.**                         | ** ** | **Other Information**                                                                                                                              | 47         |
| ** **                          | ** ** | ** **                                                                                                                                         |       |
| **Item 6.**                         | ** ** | **Exhibits**                                                                                                                                       | 48         |
| ** **                          | ** ** | ** **                                                                                                                                         |       |
| **Signature**                       |       |                                                                                                                                               | 50         |

 

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**PART I**

**FINANCIALINFORMATION**

 

**Item 1. Financial Statements**

 

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

**Consolidated Balance Sheets**

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

**(Unaudited)**

** **
| ** **                                                                                                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **2009**           | ** ** | **2008**              | ** ** |
|                                                                                                                                                                                               |       |               |       |                  |       |
| **Assets**                                                                                                                                                                                         |       |               |       |                  |       |
| Investments in unconsolidated real estate joint ventures                                                                                                                                           |       | $                  | 96,902     |                  | $          | 96,505 |   |
| Cash and cash equivalents                                                                                                                                                                          |       | 67,460             |       | 23,771                |       |
| Notes receivable                                                                                                                                                                                   |       | 1,614              |       | 1                     |       |
| Receivables from affiliates                                                                                                                                                                        |       | 272                |       | 299                   |       |
| Escrow deposits                                                                                                                                                                                    |       | 405                |       | —                |       |
| Other assets, net                                                                                                                                                                                  |       | 283                |       | 318                   |       |
| **Total assets**                                                                                                                                                                                   |       | $                  | 166,936    |                  | $          | 120,894 |   |
|                                                                                                                                                                                               |       |               |       |                  |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                      |       |               |       |                  |       |
|                                                                                                                                                                                               |       |               |       |                  |       |
| **Liabilities**                                                                                                                                                                                    |       |               |       |                  |       |
| Payables to affiliates                                                                                                                                                                             |       | $                  | 266        |                  | $          | 627 |   |
| Distributions payable                                                                                                                                                                              |       | 1,149              |       | 832                   |       |
| Accrued offering costs payable to affiliates                                                                                                                                                       |       | 8,461              |       | 6,918                 |       |
| Accounts payable and accrued liabilities                                                                                                                                                           |       | 824                |       | 123                   |       |
| **Total liabilities**                                                                                                                                                                              |       | 10,700             |       | 8,500                 |       |
|                                                                                                                                                                                               |       |               |       |                  |       |
| **Commitments and contingencies**                                                                                                                                                                  |       |               |       |                  |       |
|                                                                                                                                                                                               |       |               |       |                  |       |
| **Stockholders’ equity**                                                                                                                                                                      |       |               |       |                  |       |
| Preferred stock, $.0001 par value per share; 125,000,000 shares  authorized, none outstanding                                                                                                      |       | —             |       | —                |       |
| Non-participating, non-voting convertible stock, $.0001 par value per  share; 1,000 shares authorized, 1,000 shares issued and outstanding (see Note  6)                                           |       | —             |       | —                |       |
| Common stock, $.0001 par value per share; 875,000,000 shares  authorized, 20,706,668 and 15,347,792 shares issued and outstanding at  March 31, 2009 and December 31, 2008, respectively |       | 2                  |       | 1                     |       |
| Additional paid-in capital                                                                                                                                                                         |       | 163,852            |       | 117,268               |       |
| Cumulative distributions and net loss                                                                                                                                                              |       | (7,618             | )          | (4,875                | )          |
| **Total stockholders’ equity**                                                                                                                                                                |       | 156,236            |       | 112,394               |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                |       | $                  | 166,936    |                  | $          | 120,894 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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

**Consolidated Statements of Operations**

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

**(Unaudited)**

 
| ** **                                                                      | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                      | ** ** | **March 31,**             | ** ** |
| ** **                                                                      | ** ** | **2009**                       | ** ** | **2008** | ** ** |
|                                                                            |       |                           |       |   |   |
| **Rental revenue**                                                              |       | $                              | —     |   | $ | — |   |
|                                                                            |       |                           |       |   |   |
| **Expenses**                                                                    |       |                           |       |   |   |
| Asset management and other fees                                                 |       | 262                            |       | 175 |   |
| General and administrative                                                      |       | 761                            |       | 296 |   |
| Depreciation and amortization                                                   |       | 14                             |       | 22 |   |
| **Total expenses**                                                              |       | 1,037                          |       | 493 |   |
|                                                                            |       |                           |       |   |   |
| Interest income                                                                 |       | 80                             |       | 425 |   |
| Equity in earnings of investments in unconsolidated real estate joint  ventures |       | 1,095                          |       | 765 |   |
| **Net income**                                                                  |       | $                              | 138        |   | $ | 697 |   |
|                                                                            |       |                           |       |   |   |
| Weighted average number of common shares outstanding                            |       | 17,376                         |       | 14,271 |   |
|                                                                            |       |                           |       |   |   |
| Basic and diluted income per share                                              |       | $                              | 0.01       |   | $ | 0.05 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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

**Consolidated Statements of Stockholders’ Equity**

**(in thousands, expect share amounts)**

**(Unaudited)**

** **
| ** **                                                    | ** ** | **Convertible Stock** | ** ** | **Common Stock** | ** ** | **Additional**     | ** ** | **Cumulative** | ** ** | **Total**   | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|--------------------|------------|----------------|------------|-------------|------------|
| ** **                                                    | ** ** | **Number**            | ** ** | **Par**               | ** ** | **Number**         | ** ** | **Par**        | ** ** | **Paid-in** | ** ** | **Distributions and** | ** ** | **Stockholders’** | ** ** |
| ** **                                                    | ** ** | **of Shares**    | ** ** | **Value**             | ** ** | **of Shares** | ** ** | **Value**      | ** ** | **Capital** | ** ** | **Net Income (Loss)** | ** ** | **Equity** | ** ** |
|                                                          |       |                  |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Balance at  January 1, 2008                                   |       | —                |       | $                     | —     |               | 14,272,919 |           | $          | 1           |       | $ | 114,567 |   | $ | (1,148 | ) | $ | 113,420 |   |
|                                                          |       |                  |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Net income                                                    |       | —                |       | —                |       | —             |       | —         |       | —      |       | 2,630 |   | 2,630 |   |
| Issuance of  convertible stock                                |       | 1,000                 |       | —                |       | —             |       | —         |       | 1           |       | — |   | 1 |   |
| Issuances of  common stock under:                             |       |                  |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Sale of common  stock, net                                    |       | —                |       | —                |       | 1,073,506          |       | —         |       | 2,647       |       | — |   | 2,647 |   |
| Incentive award  plan                                         |       | —                |       | —                |       | —             |       | —         |       | 22          |       | — |   | 22 |   |
| Redemptions of  common stock                                  |       | —                |       | —                |       | (16,667            | )          | —         |       | (140        | )          | — |   | (140 | ) |
| Distributions  declared on common stock                       |       | —                |       | —                |       | —             |       | —         |       | —      |       | (6,357 | ) | (6,357 | ) |
| Stock issued  pursuant to Distribution Reinvestment Plan, net |       | —                |       | —                |       | 18,034             |       | —         |       | 171         |       | — |   | 171 |   |
| Balance at  December 31, 2008                            |       | 1,000                 |       | —                |       | 15,347,792         |       | 1              |       | 117,268     |       | (4,875 | ) | 112,394 |   |
|                                                          |       |                  |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Net income                                                    |       | —                |       | —                |       | —             |       | —         |       | —      |       | 138 |   | 138 |   |
| Issuances of  common stock under:                             |       |                  |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Sale of common  stock, net                                    |       | —                |       | —                |       | 5,339,683          |       | 1              |       | 46,331      |       | — |   | 46,332 |   |
| Redemptions of  common stock                                  |       | —                |       | —                |       | (48,258            | )          | —         |       | (388        | )          | — |   | (388 | ) |
| Distributions  declared on common stock                       |       | —                |       | —                |       | —             |       | —         |       | —      |       | (2,881 | ) | (2,881 | ) |
| Stock issued  pursuant to Distribution Reinvestment Plan, net |       | —                |       | —                |       | 67,451             |       | —         |       | 641         |       | — |   | 641 |   |
| Balance at  March 31, 2009                               |       | 1,000                 |       | $                     | —     |               | 20,706,668 |           | $          | 2           |       | $ | 163,852 |   | $ | (7,618 | ) | $ | 156,236 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**BehringerHarvard Multifamily REIT I, Inc.**

**ConsolidatedStatements of Cash Flows**

**(inthousands)**

**(Unaudited)**

** **
| ** **                                                                         | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**             | ** ** |
| ** **                                                                         | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| **Cash flows from operating activities**                                           |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 138        |   | $ | 697 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                           |       |   |   |
| Equity in earnings of investments in unconsolidated real estate joint  ventures    |       | (1,095                         | )          | (765 | ) |
| Distributions received from unconsolidated real estate joint ventures              |       | 1,302                          |       | 765 |   |
| Depreciation and amortization                                                      |       | 14                             |       | — |   |
| Amortization of deferred financing costs                                           |       | —                         |       | 22 |   |
| Stock-based compensation                                                           |       | —                         |       | 6 |   |
| Changes in operating assets and liabilities:                                       |       |                           |       |   |   |
| Accrued interest on notes receivable                                               |       | (19                            | )          | — |   |
| Accounts payable and other liabilities                                             |       | (30                            | )          | 27 |   |
| Other assets                                                                       |       | 124                            |       | 17 |   |
| Payables to affiliates                                                             |       | 124                            |       | 1 |   |
| Accounts receivables and other receivables                                         |       | —                         |       | 2 |   |
| **Cash provided by operating activities**                                          |       | 558                            |       | 772 |   |
|                                                                               |       |                           |       |   |   |
| **Cash flows from investing activities**                                           |       |                           |       |   |   |
| Return of investments in unconsolidated real estate joint ventures                 |       | 2,797                          |       | 644 |   |
| Issuances of notes receivable                                                      |       | (1,594                         | )          | — |   |
| Investments in unconsolidated real estate joint ventures                           |       | (3,752                         | )          | (5,837 | ) |
| Escrow deposits                                                                    |       | (405                           | )          | — |   |
| Repayments of advances to unconsolidated real estate joint ventures                |       | 129                            |       | — |   |
| Advances to unconsolidated real estate joint ventures                              |       | —                         |       | (150 | ) |
| Prepaid acquisition costs                                                          |       | —                         |       | (71 | ) |
| **Cash used in investing activities**                                              |       | (2,825                         | )          | (5,414 | ) |
|                                                                               |       |                           |       |   |   |
| **Cash flows from financing activities**                                           |       |                           |       |   |   |
| Proceeds from sales of common stock                                                |       | 53,345                         |       | — |   |
| Offering costs                                                                     |       | (5,467                         | )          | — |   |
| Distributions on common stock paid                                                 |       | (1,922                         | )          | (1,279 | ) |
| Redemption of common stock                                                         |       | —                         |       | (50 | ) |
| Change in payables to affiliates                                                   |       | —                         |       | (288 | ) |
| Change in subscriptions for common stock                                           |       | —                         |       | 53 |   |
| Change in subscription cash received                                               |       | —                         |       | (53 | ) |
| **Cash provided by (used in) financing activities**                                |       | 45,956                         |       | (1,617 | ) |
| ** **                                                                         |       |                           |       |   |   |
| Net change in cash and cash equivalents                                            |       | 43,689                         |       | (6,259 | ) |
| Cash and cash equivalents at beginning of period                                   |       | 23,771                         |       | 53,377 |   |
| Cash and cash equivalents at end of period                                         |       | $                              | 67,460     |   | $ | 47,118 |   |

 

***SeeNotes to Consolidated Financial Statements.***

 

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**Behringer HarvardMultifamily REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**1.**                                      Organization and Business

** **

***Organization***

 

Behringer Harvard MultifamilyREIT I, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”)was organized in Maryland on August 4, 2006 and has elected to be taxed,and currently qualifies, as a real estate investment trust (“REIT”) for federalincome tax purposes. As a REIT, we generally are not subject to corporate-levelincome taxes.  To maintain our REITstatus, we are required, among other requirements, to distribute annually atleast 90% of our “REIT taxable income,” as defined by the Internal Revenue Codeof 1986, as amended (the “Code”), to our stockholders.  If we fail to qualify as a REIT in anytaxable year, we would be subject to federal income tax on our taxable incomeat regular corporate tax rates.  As of March 31,2009, we believe we are in compliance with all applicable REIT requirements.

 

We invest in and operatemultifamily communities. These multifamily communities may include conventionalmultifamily assets, such as mid-rise, high-rise, and garden-style properties,and may also include student housing and age-restricted properties, typicallyrequiring residents to be age 55 or older. We intend to make investments inwholly owned investments and through co-investment arrangements with otherparticipants (“Co-Investment Ventures”). Further, we either directly or indirectly may invest in commercial realestate, options to acquire real estate, real estate-related securities,collateralized mortgage-backed securities, mortgage, bridge, mezzanine or otherloans and Section 1031 tenant-in-common interests, or in entities thatmake similar investments.  We completedour first investment in April 2007. As of March 31, 2009, we haveinvestments in ten multifamily communities, nine in various stages ofdevelopment and one operating property, located in seven states, substantiallyall Co-Investment Ventures.

 

We have no employees andare supported by related party service agreements. We are externally managed byour advisor, Behringer Harvard Multifamily Advisors I LP (“Behringer HarvardMultifamily Advisors I”), a Texas limited partnership. Behringer HarvardMultifamily Advisors I is responsible for managing our affairs on a day-to-daybasis and for identifying and making real estate investments on ourbehalf.  Substantially all of ourbusiness is conducted through our operating partnership Behringer HarvardMultifamily OP I LP, a Delaware limited partnership (“Behringer HarvardMultifamily OP I”). Our wholly-owned subsidiary, BHMF, Inc., a Delawarecorporation (“BHMF Inc.”) owns less than 0.1% of Behringer Harvard MultifamilyOP I as its sole general partner. The remaining ownership interest in BehringerHarvard Multifamily OP I is held as a limited partner’s interest by BHMFBusiness Trust, a Maryland business trust.

 

***Offeringsof our Common Stock***

 

On November 22,2006, we commenced a private offering pursuant to Regulation D of theSecurities Act of 1933, as amended (the “Securities Act”) to sell a maximum ofapproximately $400 million of common stock to accredited investors (the “PrivateOffering”).  We terminated the PrivateOffering on December 28, 2007.  Wesold a total of approximately 14.2 million shares of common stock and raised atotal of approximately $127.3 million in gross offering proceeds in the PrivateOffering. Net proceeds after selling commissions, dealer manager fees, andother offering costs were approximately $114.3 million.

 

On September 5,2008, we commenced a public offering (the “Initial Public Offering”) of up to200,000,000 shares of common stock offered at a price of $10.00 per sharepursuant to a Registration Statement on Form S-11 filed under theSecurities Act.   The Initial PublicOffering also covered the registration of up to an additional 50,000,000 sharesof common stock at a price of $9.50 per share pursuant to our distributionreinvestment plan (“DRIP”).  We reservethe right to reallocate shares of our common stock between the primary offeringand our DRIP.  As of March 31, 2009,we sold a total of approximately 6.5 million shares of common stock and raiseda total of approximately $64.9 million in gross offering proceeds in theInitial Public Offering. Net proceeds after selling commissions, dealer managerfees, and other offering costs were approximately $49.8 million.

 

Our common stockis not currently listed on a national securities exchange. However, managementanticipates within four to six years after the termination of our publicoffering to begin the process of either listing the common stock on a nationalsecurities exchange or liquidating our assets, depending on then-prevailingmarket conditions**.**

 

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**2.****                                     ****Interim UnauditedFinancial Information**

 

The accompanyingconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in our AnnualReport on Form 10-K for the year ended December 31, 2008 which wasfiled with the Securities and Exchange Commission (“SEC”) on March 31,2009. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) have been condensedor omitted from this report.

 

The results forthe interim periods shown in this report are not necessarily indicative offuture financial results. The accompanying consolidated balance sheet andconsolidated statement of stockholders’ equity as of March 31, 2009 and consolidatedstatements of operations and cash flows for the periods ended March 31,2009 and 2008 have not been audited by our independent registered publicaccounting firm. In the opinion of management, the accompanying unauditedconsolidated financial statements include all adjustments necessary to presentfairly our consolidated financial position as of March 31, 2009 and December 31,2008 and our consolidated results of operations and cash flows for the periodsended March 31, 2009 and 2008. Such adjustments are of a normal recurringnature.

 

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

 

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

 

The preparation ofconsolidated financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the consolidated financial statements and the reported amounts of revenuesand expenses during the reporting period. These estimates include such items as the purchase price allocation forreal estate acquisitions; impairment of long-lived assets, notes receivablesand equity-method real estate investments; revenue recognition of notereceivable interest income and equity in earnings of investments inunconsolidated real estate joint ventures; depreciation and amortization andallowance for doubtful accounts.  Actualresults could differ from those estimates.

 

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

 

Our consolidatedfinancial statements include our accounts, the accounts of variable interestentities in which we are the primary beneficiary and the accounts of othersubsidiaries over which we have control. All inter-company transactions, balances and profits have beeneliminated in consolidation.  Interestsin entities acquired are evaluated based on Financial Accounting StandardsBoard Interpretation (“FIN”) 46(R), “Consolidation of Variable InterestEntities,” which requires the consolidation of variable interest entities inwhich we are deemed to be the primary beneficiary.  If the interest in the entity is determinedto not be a variable interest entity under FIN 46(R), then the entities areevaluated for consolidation under the American Institute of Certified PublicAccountants’ (“AICPA”) Statement of Position (“SOP”) 78-9, “Accounting forInvestments in Real Estate Ventures,” and by Emerging Issues Task Force (“EITF”)04-5, “Determining Whether a General Partner, or the General Partners as a Group,Controls a Limited Partnership or Similar Entity When the Limited Partners HaveCertain Rights.”

 

***RealEstate and Other Related Intangibles***

 

For acquired realestate properties, we will allocate the purchase price of those properties tothe tangible assets acquired, consisting of land, inclusive of associatedrights, and buildings, any assumed debt, identified intangible assets and assetretirement obligations based on their relative fair values in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 141(R), “BusinessCombinations.” Identified intangible assets consist of the fair value ofabove-market and below-market leases, in-place leases, in-place tenantimprovements, in-place leasing commissions 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.

 

The fair value of anytangible assets that will be acquired, expected to consist of land andbuildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant”value is then allocated to land and buildings. Land values are derived from appraisals, and building values arecalculated as replacement cost less depreciation or estimates of the relativefair value of these 

 

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assets using discountedcash flow analyses or similar methods. The values of buildings are depreciated over the estimated useful livesranging from 25-35 years using the straight-line method.

 

We will determine thevalue of above-market and below-market in-place leases for acquired propertiesbased on the present value (using an interest rate that reflects the risksassociated with the leases acquired) of the difference between (1) thecontractual amounts to be paid pursuant to the in-place leases and (2) estimatesof current market lease rates for the corresponding in-place leases, measuredover a period equal to (a) the remaining non-cancelable lease term forabove-market leases, or (b) the remaining non-cancelable lease term plusany fixed rate renewal options for below market leases. We record thefair value of above-market andbelow-market leases as intangible assets or intangible liabilities,respectively, and amortize them as an adjustment to rental income over theabove determined lease term.

 

The total value ofidentified real estate intangible assets that we may acquire in the future alsoincludes in-place lease values and tenant relationships based on our evaluationof the specific characteristics of each tenant’s lease and our overallrelationship with that respective tenant. The aggregate value of in-place leases acquired and tenant relationshipsis determined by applying a fair value model. The estimates of fair value of in-place leases includes an estimate ofcarrying costs during the expected lease-up periods for the respective unitsconsidering current market conditions. In estimating fair value of in-place leases, we consider items such asreal estate taxes, insurance, leasing commissions, legal, tenant improvementsand other operating expenses to execute similar deals as well as lost rentalrevenue during the expected lease-up period. The estimates of the fair value of tenant relationships also includes anestimate of the likelihood of renewal as determined by management on atenant-by-tenant basis.

 

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

 

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

 

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

 

Prior to the adoption ofSFAS No. 141(R) on January 1, 2009, we allocated the purchaseprice of the real estate property we acquired to the tangible assets acquired,consisting of land, inclusive of associated rights, and buildings, any assumeddebt, identified intangible assets and asset retirement obligations based ontheir relative fair values in accordance with SFAS No. 142, “Goodwill andOther Intangible Assets.”  Upon thecompletion of a business combination, we recorded the tangible assets acquired,consisting of land, inclusive of associated rights, and buildings, any assumeddebt, identified intangible assets and asset retirement obligations based ontheir fair values in accordance with SFAS No. 141, “Business Combinations.”

 

***Impairmentof Long Lived Assets and Investments in Unconsolidated Real Estate JointVentures***

 

Upon the acquisition ofany wholly-owned properties by our Co-Investment Ventures or us, we willmonitor events and changes in circumstances indicating that the carryingamounts 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 including its eventual disposition, to the carrying amount 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.

 

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

 

No impairment chargeshave been recorded during the three months ended March 31, 2009 and 2008.

 

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***Cashand Cash Equivalents***

 

We consider investmentsin bank deposits, money market funds and highly-liquid cash investments withoriginal maturities of three months or less to be cash equivalents.

 

***NotesReceivable***

 

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

 

Inaccounting for notes receivable by our Co-Investment Ventures or us we evaluatewhether the investments are loans, investments in joint ventures oracquisitions of real estate. In applying Exhibit 1 of AICPA PracticeBulletin 1, “AICPA Notice to Practitioners regarding Acquisition, Development,and Construction Arrangements to Acquisition of an Operating Property” and EITF86-21, “Application of the AICPA Notice to Practitioners regarding Acquisition,Development, and Construction Arrangements to Acquisition of an OperatingProperty,” we evaluate whether the loans contain any rights to participate inexpected residual profits, provide sufficient collateral or qualifyingguarantees or include other characteristics of a loan. As a result of ourreview, neither our wholly owned loan nor the loans made through ourCo-Investment Ventures contain a right to participate in expected residualprofits. In addition the project borrowers remain obligated to pay principaland interest due on the loan with sufficient collateral, reserves or qualifyingguarantees to account for the investments as loans.

 

Weassess notes receivable for impairment in accordance with SFAS No.114, “Accountingby Creditors for Impairment of a Loan.” Based on specific circumstances wedetermine whether it is probable that there has been an adverse change in theestimated cash flows of the contractual payments for the notes receivable. Wethen assess whether the impairment is other than temporary. If the impairmentis other than temporary, we recognize an impairment loss equal to thedifference between our or the Co-Investment Venture’s investment in the notereceivable and the present value of the estimated cash flows discounted at thenote receivable’s effective interest rate. Where we have the intent and theability to foreclose on our security interest in the property, we will use thecollateral’s fair value as a basis for the impairment.

 

Thereare judgments involved in determining whether an impairment is other thantemporary. As these types of notes receivable are generally investment specificbased on the particular loan terms and the underlying project characteristics, generally,there is no secondary market to evaluate impairments. Accordingly, we must relyon our subjective judgments and individual weightings of the specific factors.If  notes receivable are consideredimpaired, then judgments and estimates are required to determine the projectedcash flows for the note receivable, considering the borrower’s or if applicablethe guarantor’s financial condition and the consideration and valuation of thesecured property and any other collateral. Changes in these facts or in ourjudgments and assessments of these facts could result in impairment losseswhich could be material to our consolidated financial statement.

 

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

 

We or our Co-InvestmentVentures account for certain investments in unconsolidated real estate jointventures using the equity method of accounting because we exercise significantinfluence over, but do not control, these entities.  These investments are initially recorded atcost and are adjusted for our share of equity in earnings and distributions.  We report our share of income and lossesbased on our economic interests in the entities.

 

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

 

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

 

BehringerHarvard Multifamily Advisors I or its affiliates are obligated to pay all ofour Initial Public Offering and Private Offering organization and offeringcosts and we are required to make reimbursements in accordance with theAdvisory Management Agreement, as amended. Organization expenses are expensed as incurred.  Offering costs are recognized based onestimated amounts probable of reimbursement and are offset against additionalpaid-in capital.

 

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***Redemptionof Common Stock***

 

Weaccount for the possible redemption of our shares under SFAS No.150 “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity” which requires that securities that are convertible for cash at theoption of the holder be classified outside of equity.  In accordance with SFAS No.150, we do not reclassify the shares to be redeemedfrom equity to a liability until such time as the redemption has been formallyapproved.  The portion of theredeemed common stock in excess of the par value is charged to additionalpaid-in capital.

 

***IncomeTaxes***

 

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

 

We have evaluated thecurrent and deferred income tax related to the Texas margin tax and we have nosignificant tax liability or benefit as of March 31, 2009 and December 31,2008. In addition, we recognized no current tax expense for the three monthsended March 31, 2009 and 2008 related to the Texas margin tax.

 

We recognize thefinancial statement benefit of an uncertain tax position only after determiningthat the relevant tax authority would more likely than not sustain the positionfollowing an audit. As of March 31, 2009, we have no significant uncertaintax positions.

 

***StockBased Compensation***

 

We have a stock-basedincentive award plan for our directors and consultants and for employees,directors and consultants of our affiliates, and our advisor and itsaffiliates.  We account for this planunder the modified prospective method of SFAS No. 123(R), “Share-BasedPayment.” In the modified prospective method, compensation cost is recognizedfor all share-based payments granted after the effective date and for allunvested awards granted prior to the effective date. In accordance with SFAS No. 123(R),prior period amounts were not restated. SFAS No. 123(R) also requiresthe tax benefits associated with these share-based payments to be classified asfinancing activities in the Consolidated Statements of Cash Flows, rather thanas operating cash flows as required under previous regulations.

 

We have issued a total of6,000 shares of restricted stock to our independent directors.  These restricted shares are fully vested andhave no exercise price. The fair value of the restricted stock was beingrecognized as compensation expense on a straight-line basis over the requiredservice period. For the three months ended March 31, 2009 and 2008, werecognized stock-based compensation expense of approximately $0 and $6,100,respectively.

 

***Concentrationof Credit Risk***

 

We invest our cash andcash equivalents between several banking institutions and money market accountsin an attempt to minimize exposure to any one of these entities.  As of March 31,2009 and December 31, 2008 we had cash and cash equivalents deposited incertain financial institutions in excess of federally insured levels.  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.

 

***Income per Share***

 

We calculate earnings pershare in accordance with SFAS No. 128, “Earnings Per Share”. Basicearnings per share is calculated by dividing net earnings available to commonshares by the weighted-average common shares outstanding during the period.Diluted earnings per share is calculated similarly, except that it includes thedilutive effect of the assumed exercise of securities, including the effect ofshares issuable under our stock-based incentive plans.

 

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As of March 31, 2009and 2008, 6,000 shares of the restricted stock have been included in the basicand dilutive earnings per share calculation.

 

The Behringer HarvardMultifamily REIT I, Inc. 2006 Amended and Restated Incentive Award Plan (“IncentiveAward Plan”) authorized the grant of non-qualified and incentive stock options,restricted stock awards, restricted stock units, stock appreciation rights,dividend equivalents and other stock-based awards.  A total of 10,000,000 shares have beenauthorized and reserved for issuance under the Incentive Award Plan.  As of March 31, 2009, no options havebeen issued.

 

As of March 31, 2009and December 31, 2008, we had 1,000 shares of convertible stock issued andoutstanding, no shares of preferred stock issued and outstanding, and had nooptions to purchase shares of common stock outstanding.  The convertible stock is not included in thedilutive earnings per share calculation.

 

***Reportable Segments***

 

SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” establishes standardsfor reporting, financial and descriptive information about an enterprise’sreportable segments. Our current business consists of investing in andoperating multifamily communities. Substantially all of our consolidated netincome is from real estate properties that we own through joint ventures, andwe account for each joint venture under the equity method of accounting. Ourchief operating decision maker evaluates operating performance on an individualjoint venture level. However, as each of our joint ventures has similareconomic characteristics in our consolidated financial statements, the Companyis managed on an enterprise-wide basis with one reportable segment.

 

***Fair Value of Financial Instruments***

 

We believe the carrying values of cash and cashequivalents, notes receivable and receivables from affiliates approximate theirfair values.  We had no assets orliabilities measured at fair value on a nonrecurring basis as of March 31,2009.

 

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

 

In April 2009,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)Financial Accounting Standard (“SFAS”) No. 107-1 and Accounting PrinciplesBoard (“APB”) 28-1 “Interim Disclosures about Fair Value of FinancialInstruments.” The FSP amends SFAS No. 107 “Disclosures about Fair Value ofFinancial Instruments” to require an entity to provide disclosures about fairvalue of financial instruments in interim financial information. This FSP is tobe applied prospectively and is effective for interim and annual periods endingafter June 15, 2009 with early adoption permitted for periods ending afterMarch 15, 2009. The company will include the required disclosures in itsquarter ending June 30, 2009.

 

In April 2009, theFASB issued FSP SFAS No. 157-4 “Determining Fair Value When the Volume andLevel of Activity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly.” Based on the guidance, if anentity determines that the level of activity for an asset or liability hassignificantly decreased and that a transaction is not orderly, further analysisof transactions or quoted prices is needed, and a significant adjustment to thetransaction or quoted prices may be necessary to estimate fair value inaccordance with SFAS No. 157 “Fair Value Measurements.” 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. The company will adopt this FSP for its quarter ending June 30,2009. There is no expected material impact on the Consolidated FinancialStatements.

 

In November 2008,the FASB reached a consensus on Emerging Issues Task Force (“EITF”) Issue No. 08-6,“Equity Method Investment Accounting Considerations” (“EITF 08-6”), which wasissued to clarify how the application of equity method accounting will beaffected by SFAS No. 141(R) and SFAS No. 160. EITF 08-6clarifies that an entity shall continue to use the cost accumulation model forits equity method investments. It also confirms past accounting practicesrelated to the treatment of contingent consideration and the use of theimpairment model under Accounting Principles Board (“APB”) Opinion No. 18,“The Equity Method of Accounting for Investments in Common Stock” (“APB No. 18”).Additionally, it requires an equity method investor to account for a shareissuance by an investee as if the investor had sold a proportionate share ofthe investment. EITF 08-6 was effective January 1, 2009, and appliesprospectively.  There is no expectedmaterial impact on the Consolidated Financial Statements.

 

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**5.             Investmentsin Unconsolidated Real Estate Joint Ventures**

** **

Asof March 31, 2009 and December 31, 2008, we had ten investments inunconsolidated real estate joint ventures. All of our investments are BHMP CO-JVs (as defined below). We arenot limited to BHMPCO-JVs and we may choose other joint venture partners or investmentstructures.

 

***BHMPCO-JV***

 

We have entered intoseparate joint ventures with Behringer Harvard Master Partnership I LP (“BehringerHarvard Master Partnership I”) in which we are the manager. The 1% generalpartner of Behringer Harvard Master Partnership I is Behringer HarvardInstitutional GP LP, which is an affiliate of Behringer Harvard MultifamilyAdvisors I, which is indirectly owned by our sponsor, Behringer HarvardHoldings, LLC and the 99% limited partner of Behringer Harvard MasterPartnership I is an unaffiliated social work sector pension fund based in TheNetherlands, Stichting Pensioenfonds Zorg en Welijn (“PGGM”). Substantially allof the capital provided to Behringer Harvard Master Partnership I is from PGGM,unless by its context “PGGM” will be used herein to refer to Behringer HarvardMaster Partnership I. We have no direct financial or other ownership interestin either of these entities.  Eachseparate joint venture with Behringer Harvard Master Partnership I is referredto as a BHMP CO-JV. Currently, our ownership, contribution and distributioninterests are 55% except for our one operating BHMP CO-JV, which has a 64%interest.

 

Untilthe maximum funding commitment from PGGM of $200 million has been placed, tothe extent that investments fit within the BHMP CO-JV investment parameters, weexpect future real estate acquisitions and real estate under developmentactivities will use a joint venture structure with BHMP CO-JV.  The maximum funding commitment from PGGM maybe increased to $300 million.

 

Wehave determined that our BHMP CO-JVs are not variable interest entities underFIN 46(R), and thus have evaluated them for consolidation under SOP 78-9 andEITF 04-5. Each BHMP CO-JV has two partners, and each BHMP CO-JV partnerpossesses equal substantive participating rights to make decisions whichconstitute routine occurrences in each BHMP CO-JV’s ordinary course ofbusiness. These decisions include the requirement to approve initial and annualoperating plans, initial and annual capital expenditures, any sales ordispositions of investments, and any method of refinancing or raising additionaldebt or equity capital. As a result of these equal substantive participatingrights, no single party controls each BHMP CO-JV; accordingly, we account foreach BHMP CO-JV using the equity method of accounting.

 

***BHMP CO-JV Investments in unconsolidated real estate joint ventures***

 

Wehave established each BHMP CO-JV to make investments in only one separateproject or property. Each BHMP CO-JV owns 100% of the voting equity interest inone subsidiary REIT and substantially all business is conducted through itssubsidiary REIT. Each subsidiary REIT has made equity investments and/or notesreceivable to entities that own one real estate project (the “Property Entities”).Each BHMP CO-JV, its respective subsidiary REIT, and its respective PropertyEntity, is an independent investment. The general partner of the PropertyEntities are generally commercial developers and were organized to own,construct, and finance only one particular real estate project.

 

Thefollowing presents the BHMP CO-JVs’ combined balance sheet and incomestatement data.  The operating results ofThe Reserve at Johns Creek Walk Property Entity are consolidated in the BHMPCO-JVs’ combined income statement data. The December 31, 2008 financial presentation has been adjusted toreflect the noncontrolling interest standards as required by SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements - an amendment of ARB No. 51.”  The remaining nine investments are recordedas unconsolidated real estate joint ventures and use the equity method ofaccounting (amounts in thousands):

 

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| ** **                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **Balance sheet data:**                        | ** ** | ** **         | **2009**   | ** **            | **2008**   | ** ** |
| Notes receivable, net (1)                                |       | $                  | 128,958    |                  | $          | 121,527 |   |
| Investments in unconsolidated real estate joint ventures |       | 29,178             |       | 29,895                |       |
| Land and buildings, net                                  |       | 30,584             |       | 30,988                |       |
| Cash and restricted cash                                 |       | 2,419              |       | 7,997                 |       |
| Accounts receivable                                      |       | 42                 |       | 27                    |       |
| Deferred financing costs and other assets, net           |       | 346                |       | 392                   |       |
| Total assets                                             |       | $                  | 191,527    |                  | $          | 190,826 |   |
|                                                     |       |               |       |                  |       |
| Bank loan                                                |       | $                  | 23,000     |                  | $          | 23,000 |   |
| Accrued liabilities                                      |       | 225                |       | 167                   |       |
| Other liabilities                                        |       | 229                |       | 222                   |       |
| Total liabilities                                        |       | 23,454             |       | 23,389                |       |
|                                                     |       |               |       |                  |       |
| Preferred units                                          |       | 242                |       | 229                   |       |
| Behringer Harvard Multifamily REIT I, Inc.          |       | 91,948             |       | 91,598                |       |
| Behringer Harvard Master Partnership I LP                |       | 74,171             |       | 73,826                |       |
| Total members’ equity                               |       | 166,361            |       | 165,653               |       |
| Noncontrolling interest                                  |       | 1,712              |       | 1,784                 |       |
| Total equity                                             |       | 168,073            |       | 167,437               |       |
| Total liabilities and equity                             |       | $                  | 191,527    |                  | $          | 190,826 |   |
|                                                          |            |                    |            |                       |            |  |  |  |

 

| ** **                                                              | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                              | ** ** | **March 31,**                                 | ** ** |
| **Income  statement data:**                                        | ** ** | ** **                                         | **2009**   | ** ** | **2008** | ** ** |
| **Revenues**                                                            |       |                                               |       |   |   |
| Rent                                                                    |       | $                                                  | 738        |   | $ | 708 |   |
| Interest                                                                |       | 3,354                                              |       | 2,105 |   |
|                                                                    |       | 4,092                                              |       | 2,813 |   |
|                                                                    |       |                                               |       |   |   |
| **Expenses**                                                            |       |                                               |       |   |   |
| General and operating                                                   |       | 446                                                |       | 460 |   |
| Real estate taxes                                                       |       | 85                                                 |       | 90 |   |
| Interest expense                                                        |       | 372                                                |       | 376 |   |
| Depreciation and amortization                                           |       | 422                                                |       | 521 |   |
|                                                                    |       | 1,325                                              |       | 1,447 |   |
|                                                                    |       |                                               |       |   |   |
| Equity in loss of unconsolidated real estate joint venture  investments |       | (778                                               | )          | — |   |
| Preferred dividend expense                                              |       | 19                                                 |       | — |   |
| Net income                                                              |       | 1,970                                              |       | 1,366 |   |
| Net loss attributable to noncontrolling interest                        |       | 72                                                 |       | 91 |   |
| **Net income attributable to BHMP CO-JVs**                              |       | $                                                  | 2,042      |   | $ | 1,457 |   |
|                                                                         |            |                                                    |            |  |  |  |  |  |

 

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(1)         Notes receivable balanceinclude loans advanced and accrued interest less deferred commitment fees andother     deferred financing liabilities

 

The Reserve at Johns Creek Walk is an operatingmultifamily community wholly-owned by a single-purpose limited liabilitycompany (the “The Reserve at Johns Creek Walk Property Entity”) and as of March 31,2009 and December 31, 2008 represents the only Property Entity reported ona consolidated basis by the BHMP CO-JV. One of our BHMP CO-JVs owns an 80percent equity interest in The Reserve at Johns Creek Walk Property Entity,with an unaffiliated owner who owns the remaining 20 percent. The 

 

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unaffiliated owner’s 20 percent equity interest ispresented in the BHMP CO-JV’s combined balance sheet data above as noncontrollinginterest.  The Reserve at Johns CreekWalk Property Entity, including its operating receipts lock-box account, servesas collateral for an interest-only bank loan with a principal balance of $23million from an unaffiliated lender (the “Bank Loan”). The Bank Loan of $23million was entered into during August 2007, matures in March 2013,and bears interest at a rate of 6.461%. The lender has no recourse to the BHMPCO-JV or us, only to The Reserve at Johns Creek Walk Property Entity. Breachingthe Bank Loan’s restrictions on encumbrances, sale, transfer, or refinancing ofthe property could constitute an event of default and increase the interestrate by 5%. Uncured events of default can accelerate the loan’s maturitydate.  Management believes no events ofdefault have occurred as of March 31, 2009.

 

Thefollowing presents the reconciliation between our member’s equity interest inthe BHMP CO-JVs and our total investments in unconsolidated real estate jointventures (amounts in thousands):

 

| ** **                                               | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Balance of our  member’s equity in the BHMP CO-JVs  |       | $                        | 91,948     |                        | $          | 91,598 |   |
| Other capitalized costs, net of amortization             |       | 4,954                    |       | 4,907                       |       |
| Investments in unconsolidated real estate joint ventures |       | $                        | 96,902     |                        | $          | 96,505 |   |

 

***The BHMP CO-JVs’ notes receivable from and unconsolidated real estatejoint ventures investments in Property Entities***

 

Includedin the BHMP CO-JV combined financial data are loans to and equity investmentsin unconsolidated real estate joint ventures in nine Property Entities invarious stages of development.  All ofthe equity investments are accounted for using the equity method of accountingbecause the BHMP CO-JV exercises significant influence on, but does notcontrol, these entities. Below are the BHMP CO-JVs’ notes receivable from andequity investments in the Property Entities as of March 31, 2009 (pleasenote throughout this quarterly report, that we have changed the project namesas follows: the Tower 55 Hundred project to 55 Hundred, the Fairfield atCameron House project to Cameron House and the Fairfield at Baileys Crossingproject to Baileys Crossing) (amounts in millions):

 

***Wholly Owned Investment – Loans***

*** ***

| **Multifamily Developments** |
|-----------------------------------|

 

| ** **                                     | ** ** | **Our Company Investment Information (1)** | ** **           |
|------------------------------------------------|------------|----------------------------------------------------------------|----------------------|
| **Name of Underlying Property** | ** ** | ** **                                                     | **Maximum  Advance** | ** ** | **Amount  Advanced** | ** ** | **Interest  Rate** | ** ** | **Maturity  Date** | ** ** | **Equity Option** | ** ** |
| Grand Reserve (8)                              |       | $                                                              | 2.2                  |   | $ | 1.6 |   | 10.0 | % | 4/2012 |   | — |   |
|                                                |            |                                                                |                      |  |  |  |  |  |  |  |  |  |  |  |

 

***BHMPCO-JV**********Investments –Loans***

 

| **Multifamily Developments** |
|-----------------------------------|

** **

| ** **                                     | ** ** | ** ** | **BHMP CO-JV Investment Information (1)** | ** ** |
|------------------------------------------------|------------|------------|-------------------------------------------|------------|
| **Name of Underlying Property** | ** ** | ** ** | **Maximum  Advance**                      | ** ** | **Amount  Advanced** | ** ** | **Interest  Rate** | ** ** | **Maturity  Date** | ** ** | **Equity Option** | ** ** |
| Grand Reserve (8)                              |       | $          | 7.5                                       |       | $ | 7.5 |   | 10.0 | % | 4/2012 |   | (2 | ) |
| The Eclipse                                    |       | 8.1        |                                      | 8.1        |   | 9.5 | % | 4/2012 |   | (2 | ) |
| Baileys Crossing                               |       | 22.1       |                                      | 22.1       |   | 9.5 | % | 7/2012 |   | (2 | ) |
| Alexan St. Rose (3)                            |       | 21.0       |                                      | 16.8       |   | 13.0 | % | 12/2013 |   | (2 | ) |
| 55 Hundred                                     |       | 20.0       |                                      | 20.0       |   | 9.5 | % | 10/2012 |   | (2 | ) |
| Satori                                         |       | 14.8       |                                      | 14.8       |   | 10.0 | % | 10/2012 |   | (2 | ) |
| Cameron House                                  |       | 19.3       |                                      | 19.3       |   | 9.5 | % | 12/2012 |   | (2 | ) |
| Alexan Prospect                                |       | 14.8       |                                      | 14.8       |   | 10.0 | % | 4/2013 |   | (2 | ) |
| The Venue                                      |       | 5.8        |                                      | 5.8        |   | 10.0 | % | 6/2013 |   | — |   |
| Total BHMP CO-JV Loans to Developments         |       | $          | 133.4                                     |       | $ | 129.2 |   |   |   |   |   |   |   |

 

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***BHMP CO-JV**********Investments —Equity***

*** ***

| **Multifamily Developments** |
|-----------------------------------|

 
| ** **                                              | ** ** | **BHMP CO-JV Investment Information (1)** | ** **          |
|---------------------------------------------------------|------------|---------------------------------------------------------------|---------------------|
| **Name of Underlying Property**          | ** ** | ** **                                                    | **Carrying Amount** | ** ** | **Property Entity  Ownership (6)** | ** ** | **Preferred Return (7)** | ** ** |
| The Eclipse                                             | ** ** | $                                                             | 2.8                 |   | 50.1 | % | 9.5 | % |
| 55 Hundred (4)                                          | ** ** | 3.5                                                           |                | 50.1 | % | 9.5 | % |
| Alexan St. Rose  (5)                                    | ** ** | 5.2                                                           |                | 60.0 | % | 9.5 | % |
| Satori                                                  | ** ** | 7.5                                                           |                | 50.0 | % | 9.5 | % |
| Alexan Prospect                                         | ** ** | 7.3                                                           |                | 50.1 | % | 9.5 | % |
| The Venue                                               | ** ** | 2.9                                                           |                | 50.1 | % | 9.5 | % |
| Total BHMP CO-JV  Equity Investments in Developments    | ** ** | $                                                             | 29.2                |   |   |   |   |   |
| ** **                                              | ** ** | ** **                                                    |                |   |   |   |   |
| Total BHMP CO-JV  Loans Advanced and Equity Investments | ** ** | $                                                             | 158.4               |   |   |   |   |   |
|                                                         |            |                                                               |                     |  |  |  |  |  |  |

 

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| (1)    |   | We hold a 55% ownership  interest in each BHMP CO-JV and PGGM owns the remaining 45% ownership  interest, except for The Reserve at Johns Creek Walk BHMP CO-JV, in which we  hold a 64% ownership interest in the BHMP CO-JV and PGGM owns the remaining  36%.                                                                                                                                                                                               |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (2)    |   | The BHMP CO-JVs  acquired options to purchase a certain percentage ownership interest in the  Property Entity, or to convert into equity. Options are generally exercisable  for a period ranging from 60-90 days after project completion.                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (3)    |   | The mezzanine loan  investment made to the owner of the Alexan St. Rose project was made in the  form of a senior mezzanine loan and a junior mezzanine loan, but they are  referred to collectively as a single mezzanine loan.                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (4)    |   | BHMP CO-JV has a right  to 50.1% of net proceeds after all other required distributions are made by  the Property Entity. In addition, our contributed capital is entitled to a  preferred return. In order to maintain our share of back end interest (the  residual profit after all other required distributions are made) and maintain  the priority level of our capital, we must contribute 70% if certain capital  is required by the Property Entity. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (5)    |   | BHMP CO-JV has a right  to 60% of net proceeds after all other required distributions are made by the  Property Entity. In addition, our contributed capital is entitled to a  preferred return. In order to maintain the priority level of our capital, we must  contribute 50% if certain capital is required by the Property Entity.                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (6)    |   | Property Entity  ownership refers to the BHMP CO-JV’s back end interest. Additional capital  contributions may have different allocation percentages.                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (7)    |   | Preferred Return refers  to the rate of return on BHMP CO-JV’s invested capital which has a higher  priority than certain other distributions to equity owners.                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (8)    |   | Our note receivable and  the note receivable by the BHMP CO-JV have identical terms and are pari passu.                                                                                                                                                                                                                                                                                                                                                       |

 

Our involvement with eachof the Property Entities began at the time the BHMP CO-JV committed to makingan investment, and our maximum potential loss exposure is limited to the fundedportion of our commitments. The Property Entities also owe amounts under othermortgage loans, bank loans, and other liabilities balances which areobligations of the Property Entities. Neither we nor the BHMP CO-JVs have aprimary or secondary obligation on those obligations of the Property Entities.The following table includes estimated information about the nature and size ofthe activities of the Property Entities including gross leasable area (“GLA”)for retail space as of March 31, 2009 (see Note 7 for amounts of ourunfunded commitments):

 

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***MULTIFAMILY PROPERTY ENTITIES -OPERATING***

 
| **Project Name / Location / Description** | ** ** | ** ** | **Occupancy Rate** | ** ** | **Construction Cost  (millions)** | ** ** |
|--------------------------------------------------------------------|------------|------------|-------------------------|------------|----------------------------------------|------------|
| The Reserve at Johns Creek Walk / Fulton County, Georgia           |       | 89         | %                       | $          | 33.5                                   |       |
| Garden-style multifamily community with 210 rental units           |       |       |                    |       |                                   |
|                                                                    |            |            |                         |            |                                        |            |  |

 

***MULTIFAMILY PROPERTY ENTITIES - DEVELOPMENT***

 
| **Project Name / Location / Description**                                                                                                | ** ** | ** **            | **Estimated Project  Completion Date** | ** ** | **Construction Cost  (millions)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|--------------------------------------------------|------------|----------------------------------------|------------|
| The Eclipse / Houston, Texas                                                                                                                                      |       | 2nd Quarter 2009 |                                             | $          | 35.7                                   |       |
| Low-rise multifamily  community with approximately 330 rental units                                                                                               |       |                  |                                             |       |                                   |
|                                                                                                                                                              |       |                  |                                             |       |                                   |
| Satori / Broward County, Florida                                                                                                                                  |       | 3rd Quarter 2009 |                                             | 98.5       |                                   |
| Mid-rise multifamily community  with approximately 279 rental units and approximately 13,300 square feet of  GLA retail space                                     |       |                  |                                             |       |                                   |
|                                                                                                                                                              |       |                  |                                             |       |                                   |
| 55 Hundred / Arlington County, Virginia                                                                                                                           |       | 3rd Quarter 2009 |                                             | 99.8       |                                   |
| High-rise multifamily  community with approximately 234 rental units and an underground parking  facility and approximately 7,200 square feet of GLA retail space |       |                  |                                             |       |                                   |
|                                                                                                                                                              |       |                  |                                             |       |                                   |
| The Venue / Clark County, Nevada                                                                                                                                  |       | 4th Quarter 2009 |                                             | 29.1       |                                   |
| Garden-style multifamily  community with approximately 168 units                                                                                                  |       |                  |                                             |       |                                   |
|                                                                                                                                                              |       |                  |                                             |       |                                   |
| Baileys Crossing / Fairfax County, Virginia                                                                                                                       |       | 1st Quarter 2010 |                                             | 147.6      |                                   |
| Multi-story (3, 4 and 7)  multifamily community with approximately 414 rental units and an attached  parking structure                                            |       |                  |                                             |       |                                   |
|                                                                                                                                                              |       |                  |                                             |       |                                   |
| Grand Reserve / Dallas, Texas                                                                                                                                     |       | 1st Quarter 2010 |                                             | 38.7       |                                   |
| Townhome multifamily  community with approximately 149 rental units                                                                                               |       |                  |                                             |       |                                   |
|                                                                                                                                                              |       |                  |                                             |       |                                   |
| Cameron House / Silver Spring, Maryland                                                                                                                           |       | 1st Quarter 2010 |                                             | 128.9      |                                   |
| High-rise multifamily  community with approximately 325 rental units and approximately 7,300 square  feet of GLA retail space                                     |       |                  |                                             |       |                                   |
|                                                                                                                                                              |       |                  |                                             |       |                                   |
| Alexan Prospect / Denver, Colorado                                                                                                                                |       | 3rd Quarter 2010 |                                             | 94.8       |                                   |
| Low-rise multifamily  community with approximately 400 units and approximately 4,500 square feet of  GLA retail space                                             |       |                  |                                             |       |                                   |
|                                                                                                                                                              |       |                  |                                             |       |                                   |
| Alexan St. Rose / Henderson, Nevada                                                                                                                               |       | 1st Quarter 2011 |                                             | 70.1       |                                   |
| Garden-style multifamily  community with approximately 430 rental units                                                                                           |       |                  |                                             |       |                                   |
|                                                                                                                                                                   |            |                       |                                                  |            |                                        |            |  |

 

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***Disclosure of summarized financial information of the Property Entities***

 

Certain BHMP CO-JVs have made an equity investment insix Property Entities.  Each BHMP CO-JVand its respective Property Entity are independent investments. These PropertyEntities, except as noted below, are substantially in development projects and****typically have no operational income or loss until theybegin leasing.  The following presentsthe summarized financial information (unaudited) of those unconsolidatedProperty Entities (amounts in millions):

 

| ** **                                       | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Land and construction in progress                |       | $                        | 272.3      |                        | $          | 244.7 |   |
| Cash                                             |       | 0.5                      |       | 0.3                         |       |
| Other assets                                     |       | 0.2                      |       | 0.0                         |       |
| **Total assets**                                 |       | $                        | 273.0      |                        | $          | 245.0 |   |
|                                             |       |                     |       |                        |       |
| Construction loans                               |       | $                        | 132.2      |                        | $          | 109.5 |   |
| BHMP CO-JV notes payable                         |       | 80.3                     |       | 74.0                        |       |
| Accounts payable, interest payable and other     |       | 29.2                     |       | 28.1                        |       |
| Partners’ capital                           |       | 31.3                     |       | 33.4                        |       |
| **Total liabilities and partners’ capital** |       | $                        | 273.0      |                        | $          | 245.0 |   |

 

TheEclipse PropertyEntity began initial leasing activities in October 2008. For the threemonths ended March 31, 2009 and 2008, revenues were approximately $0.3million and $0, respectively, and net loss was approximately $0.8 million and$0, respectively. All other Property Entities operational losses wereimmaterial.

 

Asof March 31, 2009 and December 31, 2008, two unaffiliated commercialproperty companies and their affiliates are developers, partners and guarantorsin six of the Property Entities, representing 33% and 42% of our total assets,respectively (see note 10 for discussion of related subsequent event).

 

**6.****                                      Stockholders’Equity**

 

***Capitalization***

 

As of March 31,2009 and December 31, 2008, we had 20,706,668 and 15,347,792 shares ofcommon stock outstanding, respectively, including 6,000 shares of restrictedstock issued to our independent directors for no cash, and 24,969 shares ownedby Behringer Harvard Holdings, LLC, an affiliate of our advisor, for cash of$200,001.

 

As of March 31,2009 and December 31, 2008, we had 1,000 shares of convertible stock ownedby our advisor issued for cash of $1,000. The convertible stock has no voting rights and, prior to conversion,does not participate in any earnings or distributions.  The convertible stock generally isconvertible into shares of common stock with a value equal to 15% of the amountby which (1) our enterprise value at the time of conversion, including thetotal amount of distributions paid to our stockholders, exceeds (2) thesum of the aggregate capital invested by our stockholders plus a 7% cumulative,non-compounded, annual return on such capital at the time of conversion, on acash-on-cash basis.  The convertiblestock can be converted when the excess value described above is achieved or ourcommon stock is listed on a national securities exchange.  The convertible stock may also be convertedin the event of certain termination of the Advisory Management Agreement.  Management has reviewed the terms of theunderlying convertible stock and determined the fair value under GAAPapproximated the nominal value paid for the shares.

 

As of March 31,2009 and December 31, 2008, we had no shares of preferred stock issued andoutstanding. Our board of directors has no present plans to issue preferredstock, but may do so with terms established at its discretion and at any timein the future without stockholder approval.

 

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***Share Redemption Program***

 

OnSeptember 2, 2008, our board of directors authorized a share redemptionprogram for investors who hold their shares for more than one year.  Thepurchase price for redeemed shares is set forth in the prospectus for ourInitial Public Offering of common stock, as supplemented from time totime.  Our board of directors reserves the right in its sole discretion atany time, and from time to time, to (1) waive the one-year holding periodin the event of the death, disability, need for long-term care, or otherexigent circumstances such as bankruptcy, a mandatory distribution requirementunder a stockholder’s IRA or with respect to shares purchased under or throughour DRIP or automatic purchase plan, (2) reject any request forredemption, (3) change the purchase price for redemptions, or (4) terminate,suspend or amend the share redemption program.  Under the terms of theplan, during any calendar year, we will not redeem in excess of 5% of theweighted average number of shares outstanding during the twelve-monthcalendar-based period immediately prior to the date of redemption.  Inaddition, our board of directors will determine whether we have sufficient cashfrom operations to repurchase shares, and such purchases will generally belimited to proceeds of our DRIP plus 1% of operating cash flow for the previousfiscal year.  We redeemed 48,258 shares of common stock forapproximately $388,000 for the three months ended March 31, 2009.  No shares were redeemed for the three monthsended March 31, 2008.

 

***Distributions***

 

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

 

Distributions, including DRIP, for the three months ended March 31,2009 and for the year ended December 31, 2008 were as follows (amounts inmillions):

 

| ** **     | ** ** | **Distributions** | ** ** |
|----------------|------------|-------------------|------------|
| ** **     | ** ** | **Declared**      | ** ** | **Paid** | ** ** |
| **2009**       |       |              |       |   |   |   |
| First Quarter  |       | $                 | 2.9        |   | $ | 2.5 |   |
|           |       | $                 | 2.9        |   | $ | 2.5 |   |
| **2008**       | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** |
| Fourth Quarter |       | $                 | 2.4        |   | $ | 2.0 |   |
| Third Quarter  |       | 1.3               |       | 1.3 |   |
| Second Quarter |       | 1.3               |       | 1.3 |   |
| First Quarter  |       | 1.3               |       | 1.3 |   |
|           |       | $                 | 6.3        |   | $ | 5.9 |   |

 

**7.             Commitments and Contingencies**

 

In the ordinary course ofbusiness, we and/or Co-Investment Ventures contract with unaffiliatedcommercial property development companies and provide equity and/or loans for aparticular project (our “Project Commitments”).  We generally fund aninitial amount under our Project Commitments at contract inception and fundadditional amounts as construction progresses, typically spanning one to threeyears.  As of March 31, 2009, all ofour Co-Investment Ventures have been BHMP CO-JVs.

 

As of March 31,2009, the BHMP CO-JVs held contracts for equity investments and/or loans with atotal commitment value of approximately $173.0 million and the BHMP CO-JVs havecurrently funded approximately $168.8 million. The BHMP CO-JVs will requireadditional capital from us and Behringer Harvard Master Partnership I in orderto fund the remaining commitments of $4.2 million. The BHMP CO-JVs’ unfundedcommitments for project construction will be generally funded as actual realestate project construction progresses. In addition, we hold the Grand Reserve Loan with a total commitmentvalue of approximately $2.2 million and have currently funded approximately$1.6 million.

 

TheBHMP CO-JVs may become obligated to purchase under contingent sell options tothree Property Entities: Baileys Crossing, Cameron House and the GrandReserve.  The options are generallyexercisable after completion of the development and for a period of three yearsthereafter.  The option price is set byagreement and is either based on the fair value of the project at exercise orthe cost of the project as defined in the respective agreement. The informationin the table below represents our current estimates and actual amounts may bemore or less.  As of March 31, 2009,no sell options are exercisable.

 

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Estimatedfuture payments and timing are as follows, as of March 31, 2009 (amountsin millions):

 
| ** ** | ** ** | **The BHMP CO-JVs’  total unfunded  commitments for  project construction** | ** ** | **The BHMP CO-JVs’  other contingent  obligations under  sell options** | ** ** | **Our estimated  portion of the  BHMP CO-JVs’ unfunded  commitments and  contingent options** | ** ** | **Our unfunded  loan commitment** | ** ** | **Our estimated  total** | ** ** |
|------------|------------|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------|------------|
| 2009       |       | $                                                                                                         | 4.2        |                                                                                                  | $          | —                                                                                                                                |       | $                                           | 2.3        |                          | $          | 0.6 |   | $ | 2.9 |   |
| 2010       |       | —                                                                                                    |       | 63.6                                                                                                  |       | 35.0                                                                                                                                  |       | —                                      |       | 35.0                          |       |
| Total      |       | $                                                                                                         | 4.2        |                                                                                                  | $          | 63.6                                                                                                                                  |       | $                                           | 37.3       |                          | $          | 0.6 |   | $ | 37.9 |   |

 

**8.             RelatedParty Arrangements**

 

Wehave no employees and are supported by related party service agreements.  Our advisor and certain of its affiliatesearn fees and compensation in connection with the acquisition, management andsale of our assets.  We are dependent onBehringer Harvard Multifamily Advisors I, Behringer Securities and Behringer HarvardMultifamily Management Services, LLC (“BHM Management”), an affiliate of ouradvisor for certain services that are essential to us, including the sale ofshares of our common stock, asset acquisition and disposition decisions,property management and leasing services and other general administrativeresponsibilities. In the event that these companies become unable to provide uswith the respective services, we would be required to obtain such services fromother sources.

 

Our advisory management agreement, as it has beenamended and restated (the “Advisory Management Agreement”), has a terminationdate of April 1, 2010 with the option to be renewed by either party for anunlimited number of successive one-year terms. The board of directors has a duty to evaluate the performance of ouradvisor annually before the parties can agree to renew the agreement.

 

Effectivethrough March 31, 2009, the Advisory Management Agreement provided wereimburse Behringer Harvard Multifamily Advisors I for all Initial PublicOffering organization and offering costs (the “O&O Reimbursement”) incurredby them in an amount not to exceed 1.5% of our gross Initial PublicOffering.  O&O Reimbursements werepaid at a capped amount of 1.5% of the actual gross proceeds at the time ofeach share sale. Additional amounts that have been incurred by our advisorsthat we believe are probable are accrued. For the three months ended March 31, 2009, we incurred $2.0 millionof O&O Reimbursement. No amounts of O&O Reimbursement were incurred forthe three months ended March 31, 2008. Effective April 1, 2009, the Advisory Management Agreement was amended, such thatwe will pay our advisor the O&O Reimbursement for all Initial PublicOffering organization and offering costs as well as all Private Offeringorganization and offering costs previously advanced by our advisor to theextent not previously reimbursed by us.  Our reimbursements will no longerbe subject to a cap at the time of reimbursement, but will be reimbursed by ouradvisor at the end of the Initial Public Offering to the extent such amountsincurred by us exceed 1.5% of our gross Initial Public Offering.  Further,if the Advisory Management Agreement is terminated or not renewed for reasonsother than a material breach by our advisor, the Advisory Management Agreementwill require our advisor to reimburse the Initial Public Offering organizationand offering costs only to the extent such amounts incurred by us through thetermination date exceed 15% of our gross Initial Public Offering.

 

Behringer HarvardMultifamily Advisors I or its affiliates were obligated to pay all of ourPrivate Offering organization and offering costs. Under the Advisory ManagementAgreement through September 2, 2008, our only obligation for those costswas to pay a fee to Behringer Harvard Multifamily Advisors I under the AdvisoryManagement Agreement.  We incurred thisfee obligation at the rate of 1.5% of the actual gross Private Offeringproceeds (the “O&O Fee”), regardless of whether the actual amount ofPrivate Offering costs incurred by Behringer Harvard Multifamily Advisors I orits affiliates was higher or lower than the O&O Fee. On September 2,2008, the Advisory Management Agreement was amended and our reimbursement wasincreased to now include Private Offering costs incurred by Behringer HarvardMultifamily Advisors I or its affiliates in excess of total amounts due underthe O&O Fee.  The amount of O&OFees recorded was determined as 1.5% of the actual Private Offering proceedsreceived to date; no other amounts were considered by management to be probableof reimbursement.

 

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BehringerSecurities LP (“Behringer Securities”), an affiliate of our advisor, serves asthe dealer manager for the Initial Public Offering and receives commissions ofup to 7% of gross offering proceeds before reallowance of commissions earned byparticipating broker-dealers.  In connection with the Initial PublicOffering, up to 2.5% of gross proceeds before reallowance to participatingbroker-dealers are paid to Behringer Securities as a dealer manager fee; exceptthat no dealer manager fee is paid on purchases made pursuant to ourDRIP.  In the Initial Public Offering, Behringer Securities reallows allof its commissions to participating broker-dealers and reallows a portion ofits dealer manager fee of up to 2.0% of the gross offering proceeds to be paidto such participating broker-dealers; provided, however, that BehringerSecurities may reallow, in the aggregate, no more than 1.5% of gross offeringproceeds for marketing fees and expenses, bona fide training and educationalmeetings and non-itemized, non-invoiced due diligence efforts, and no more than0.5% of gross offering proceeds for bona fide, separately invoiced duediligence expenses incurred as fees, costs and other expenses from thirdparties. For the three months ended March 31, 2009, we soldapproximately 5.3 million shares and therefore Behringer Securities earnedcommissions and dealer manager fees of approximately $3.7 million and $1.3million, respectively. Forthe three months ended March 31, 2008, Behringer Securities did notreceive any commissions or dealer manager fees due to our Initial PublicOffering not commencing until September 5, 2008.  Through March 31, 2009, BehringerSecurities earned commissions and dealer manager fees of approximately $4.4million and $1.6 million, respectively.

 

Forthe three months ended March 31, 2009, Behringer Harvard MultifamilyAdvisors I earned approximately $0.8 million for organization and offeringexpenses, all related to our Initial Public Offering.  For the three months ended March 31,2008, Behringer Harvard Multifamily Advisors I did not receive any organizationand offering expenses.  As of March 31,2009 and December 31, 2008, we estimated our obligation to reimburseoffering expenses in an amount of approximately $8.5 million and $6.9    million, respectively.

 

The following presentsthe components of our sale of common stock, net related to our Initial PublicOffering:

 

| ** **                              | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|
| ** **                              | ** ** | **March 31,**                                 | ** ** |
| **Sale of common stock** | ** ** | ** **                                         | **2009**   | ** ** | **2008** | ** ** |
| Gross proceeds                          |       | $                                                  | 53,345     |   | $ | — |   |
| Less offering costs:                    |       |                                               |       |   |   |
| O&O Reimbursement (1)               |       | (1,996                                             | )          | — |   |
| Dealer manager fees                     |       | (1,332                                             | )          | — |   |
| Selling commissions                     |       | (3,685                                             | )          | — |   |
| Total offering costs                    |       | (7,013                                             | )          | — |   |
| Sale of common stock, net               |       | $                                                  | 46,332     |   | $ | — |   |
|                                         |            |                                                    |            |  |  |  |  |  |

 

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(1) Prior to September 2,2008, the O&O Fee was recognized separately from the O&O Reimbursementand was $1.9 million

 

Includedin general and administrative expense for the three months ended March 31,2009 is approximately $0.3 million for accounting and legal personnel costsincurred on our behalf by our advisor. For the three months ended March 31, 2008, general andadministrative expenses incurred was less than $0.1 million.

 

ThroughSeptember 1, 2008, Behringer Harvard Multifamily Advisors I or itsaffiliates received acquisition and advisory fees of 2.5% of (1) thecontract purchase price paid or allocated in respect of the development,construction or improvement of each asset acquired directly by us, includingany debt attributable to these assets, or (2) when we make an investmentindirectly through another entity, our pro rata share of the gross asset valueof real estate investments held by that entity. Behringer Harvard MultifamilyAdvisors I or its affiliates also received 2.5% of the funds advanced inrespect of a loan or other investment. Behringer Harvard Multifamily Advisors Ior its affiliates reimbursed for all expenses related to the selection andacquisition of assets, whether or not acquired by us. We began acquiring realestate investments in April 2007. Under the Advisory Management Agreementdated September 2, 2008, these rates were reduced to 1.75%. For the threemonths ended March 31, 2009, Behringer Harvard Multifamily Advisors I orits advisors earned acquisition and advisory fees of approximately $0.1million.  For the three months ended March 31,2008, acquisition and advisory fees earned were less than $0.1 million.

 

Ouradvisor or its affiliates will also receive a non-accountable acquisitionexpense reimbursement in the amount of 0.25% of (a) funds advanced inrespect of a loan or other investment, and, (b) the funds paid forpurchasing an asset, including any debt attributable to the asset, plus 0.25%of the funds budgeted for development, construction or improvement in the caseof assets that we 

 

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acquire and intend todevelop, construct or improve. We will also pay third parties, or reimburse theadvisor or its affiliates, for any investment-related expenses due to thirdparties in the case of a completed investment, including, but not limited to,legal fees and expenses, travel and communication expenses, costs ofappraisals, accounting fees and expenses, third-party brokerage or finder’sfees, title insurance, premium expenses and other closing costs; we have noobligation to our advisor unless the acquisition is completed. Our advisor willbe responsible, and we have no obligation, 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 will also beresponsible, and we have no obligation, for paying all of theinvestment-related expenses that we or our advisor incurs that are due to thirdparties with respect to investments we do not make.  For the three months ended March 31,2009 and 2008, Behringer Harvard Multifamily Advisors I earned minimalacquisition expense reimbursement.

 

BehringerHarvard Multifamily Advisors I or its affiliates will receive debt financingfees of 1% of the amount available to us under debt financing which wasoriginated, assumed or refinanced by or for us. It is anticipated that ouradvisor will pay some or all of these fees to third parties with whom itsubcontracts to coordinate financing for us. We began acquiring real estateinvestments in April 2007. Behringer Harvard Multifamily Advisors I havenot earned debt financing fees for the three months ended March 31, 2009and 2008.

 

On September 2, 2008, the Company entered into anAmended and Restated Property Management Agreement (the “Property ManagementAgreement”) with our operating partnership and our property manager, BHMManagement. The Property Management Agreement has a term of two years from theeffective date of the original property management agreement and will terminateon November 21, 2010 with automatic renewal periods of two years. If noparty gives written notice to the other at least thirty days prior to theexpiration date of the agreement that it will terminate, then it willautomatically continue for consecutive two-year periods. The PropertyManagement Agreement also provides that, in the event the Company terminatesits advisory management agreement with the Advisor, the Manager, upon at leastthirty days prior written notice, will have the right to terminate theagreement.

 

Propertymanagement fees are equal to 3.75% of gross revenues.  In the event that we contract directly with anon-affiliated third party property manager in respect of a property, we willpay BHM Management or its affiliates an oversight fee equal to 0.5% of grossrevenues of the property managed.  In noevent will we pay both a property management fee and an oversight fee to BHMManagement with respect to a particular property. We will reimburse the costsand expenses incurred by BHM Management on our behalf, including fees andexpenses of apartment locators and third-party accountants, the wages andsalaries and other employee-related expenses of all on-site employees of BHMManagement and other out-of-pocket expenses that are directly related to themanagement of specific properties.  Forthe three months ended March 31, 2009 and 2008, BHM Management or itsaffiliates earned immaterial property management fees.

 

ThroughSeptember 1, 2008, Behringer Harvard Multifamily Advisors I or itaffiliates received a monthly asset management fee for each asset. This amountwas calculated based upon one-twelfth of 1% of aggregate asset value, asdefined, as of the last day of the preceding month. We began acquiring realestate investments in April 2007. Effective September 2, 2008, thisfee is 0.75% of the higher of the cost of investment or value of theinvestment. For the three months ended March 31, 2009 and 2008, BehringerHarvard Multifamily Advisors I or its affiliates earned asset management feesof approximately $0.3 million and $0.2 million, respectively.

 

BehringerHarvard Multifamily Advisors I or its affiliates are paid a disposition fee ifour advisor provides a substantial amount of services, as determined by ourindependent directors, in connection with the sale of one or moreproperties.  In such an event, we will pay our advisor (1) in thecase of the sale of real property, the lesser of:  (A) one-half ofthe aggregate brokerage commission paid (including the subordinate dispositionfee) or if none is paid, the amount that customarily would be paid, or (B) 3%of the sales price of each property sold, and (2) in the case of the saleof any asset other than real property, 3% of the sales price of suchassets.  This fee shall not be earned or paid unless and until thestockholders have received total distributions in an amount equal to or inexcess of the sum of the aggregate capital contributions by stockholders plus a7% cumulative, non-compounded, annual return on such capitalcontributions.  Subordinated disposition fees that are not payable at thedate of sale because stockholders have not yet received their required minimumdistributions will be deferred and paid at such time as these subordinationconditions have been satisfied.  No disposition fee has been earned as of March 31,2009.

 

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

 

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**For other expenses paid or incurred by the advisor in connection withthe services provided to us that are not covered by a fee, we will reimburseour advisor, subject to the limitation that we will not reimburse our advisorfor any amount by which its operating expenses (including the asset managementfee) at the end of the four preceding fiscal quarters exceeds the greaterof:  (A) 2% of our average invested assets (“AIA”), or (B) 25%of our net income determined without reduction for any additions to reservesfor depreciation, bad debts or other similar non-cash reserves and excludingany gain from the sale of our assets for that period.  Notwithstanding theabove, we may reimburse the advisor for expenses in excess of this limitationif a majority of our independent directors determines that such excess expensesare justified based on unusual and non-recurring factors.   For the trailing twelve months ended March 31,2009, total operating expenses of approximately $3.0 million exceeded 2% of ourAIA (which was approximately $1.9 million) by approximately $1.1 million. Our board of directors, including all of our independent directors, havereviewed this analysis and unanimously determined the excess to be justifiedconsidering the fact that we were in the registration for our Initial PublicOffering of common stock where the expenses incurred as a result of being apublic company for audit and legal services, director and officer liabilityinsurance and fees for board of directors to be disproportionate to the Company’sAIA and net income, as defined above.**

** **

**9.             Supplementaldisclosures of cash flow information**

 

Supplementalcash flow information is summarized below (amounts in thousands):

 

| ** **                                     | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                     | ** ** | **March 31,**                                 | ** ** |
| ** **                                     | ** ** | **2009**                                           | ** ** | **2008** | ** ** |
| Non-cash investing activities:                 |       |                                               |       |   |   |
| Receivable from BHMP CO-JV                     |       | $                                                  | 161        |   | $ | 67 |   |
| Accrued other assets                           |       | $                                                  | 343        |   | $ | 14 |   |
|                                           |       |                                               |       |   |   |
| Non-cash financing activities:                 |       |                                               |       |   |   |
| Accrued offering costs and dealer manager fees |       | $                                                  | 2,230      |   | $ | — |   |
| Distributions payable                          |       | $                                                  | 1,149      |   | $ | 22 |   |
| DRIP distributions                             |       | $                                                  | 641        |   | $ | — |   |
| Redemption payable                             |       | $                                                  | 388        |   | $ | — |   |

 

**10.          Subsequent Events**

 

For the period April 1,2009 through May 5, 2009, we have sold approximately 4.4 million shares ofcommon stock for gross proceeds of approximately $44.0 million.

 

OnMay 13, 2009, our board of directors authorized distributions payable tothe stockholders of record each day during the months of June, July and August 2009. The distributions declared for June, July and August equal a dailyamount of $0.0019178 per share of common stock.  Distributions payable toeach stockholder of record during a month will be paid in cash on or before the16th day of the following month.  A portion of each distribution mayconstitute a return of capital for tax purposes.  If the rate we arepaying for each day in March, April and May were paid each day for a365-day period, it would equal a 7.0% annualized rate based on a purchase priceof $10.00 per share.

 

Subsequentto the quarter ended March 31, 2009, we received the December 31,2008 audited consolidated financial statements of Fairfield Residential, LLCand its affiliates (“Fairfield Residential”), the developer for threemultifamily community developments in which we have invested through theirrespective BHMP CO-JVs (Baileys Crossing, Cameron House and 55 Hundred, or the “FairfieldProjects”).  In the consolidatedfinancial statements, the auditor expressed concern that Fairfield Residentialmight not be able to continue to operate as a going concern through the end of2009.

 

Inaddition to serving as project developer, Fairfield Residential has guaranteedrepayment of each of the development project senior construction loans that are fundingconstruction of the Fairfield Projects, as well as completion of suchdevelopment projects.  Furtherdeterioration in Fairfield Residential’s financial condition may give rise toan event of default under the senior construction loan agreements.  If there is an event of default under asenior construction loan, underour intercreditor agreements with the senior construction lenders or otherwise, weexpect to have an opportunity to (a) cure the default, (b) purchasethe senior construction loan or (c) otherwiseenforce or negotiate a solution acceptable to the senior construction lender.  Any such negotiations

 

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mayrequire us to agree to less desirable investment terms than we currentlyhave.  In addition, such defaults ornegotiations may change our analysis of the accounting for these investments,which could result in the BHMP CO-JVs accounting for the investments as jointventures, or if the BHMP CO-JV is viewed as the primary beneficiary under FIN46(R), to consolidate the investment(s). However, we believe that, even if FairfieldResidential becomes insolvent, we have sufficient collateral, contractualremedies and other creditor rights for us to recover all of our investments inthese development projects.

 

Asof March 31, 2009, management’s assessment related to the FairfieldProjects is that the BHMP CO-JV loan investments are still properly accountedfor as loans and equity accounting is still appropriate for the BHMP CO-JVequity investment in unconsolidated real estate joint ventures.  The continuation of these accounting treatments isdependent on the resolution of the issues described above, and there can be noassurance as new facts and circumstances arise that different accounting wouldnot be required. A change in accounting could affect our recognition of earningsin future periods. As of March 31, 2009, no impairment charges related to ourinvestments with respect to the Fairfield Projects have been recorded and ourcarrying value of investments in the Fairfield Projects is $33.8 million(approximately 20% of our total assets). For the three months ended March 31, 2009, for the FairfieldProjects, the equity in earnings of unconsolidated real estate joint ventureswas $0.8 million and distributions to us from our investments related to theFairfield Projects were $0.9 million.

 

**********

 

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

 

The followingdiscussion and analysis should be read in conjunction with the accompanyingconsolidated financial statements and the notes thereto:

 

**Overview**

 

Wewere incorporated on August 4, 2006 as a Maryland corporation and operateas a real estateinvestment trust (“REIT”) for federal and state income tax purposes. Wemake investments in and operate high-quality multifamily communities. Inparticular, we were organized to invest in and operate high-quality multifamilycommunities that we believe have desirable locations, personalized amenities,and high quality construction. We began acquiring interests in multifamilycommunities in April 2007. As of March 31, 2009, all of ourinvestments have been in high-quality development and operating multifamilycommunities located in the top 50 metropolitan statistical areas (“MSAs”) inthe United States.

 

Our investmentstrategy is designed to provide our stockholders with a diversified portfolioand our management and board of directors have extensive experience ininvesting in numerous types of real estate, loans and other investments toexecute this strategy. We intend to primarily invest in, acquire and operatemultifamily communities, using multiple strategies to acquire investments inhigh quality multifamily communities that produce stabilized rental income. Wewill invest in and acquire a blended portfolio consisting of core, stabilizedincome generating assets, assets that may benefit from enhancement orrepositioning and development assets forstabilization to retain as core assets generatingincome with potential capital appreciation. Further, we may invest incommercial real estate, including office buildings, shopping centers, businessand industrial parks, manufacturing facilities, warehouses and distributionfacilities and motel and hotel properties. We intend to make investments on ourown or indirectly through co-investment arrangements with other participants (“Co-InvestmentVentures”). Directly or through Co-Investment Ventures, we may invest in realestate-related securities, including securities issued by other real estatecompanies, either for investment or in change of control transactions completedon a negotiated basis or otherwise. We also may originate or invest incommercial mortgage-backed securities, mortgage, bridge, mezzanine or otherloans and Section 1031 tenant-in-common interests (including those issuedby programs sponsored by Behringer Harvard Holdings, LLC), or in entities thatmake investments similar to the foregoing. Although we intend to primarilyinvest in real estate assets located in the United States, in the future, wemay make investments in real estate assets located outside the United States.As of March 31, 2009, we have not made any international investments. Wewill not make international investments until one of our independent directorshas at least three years of relevant experience acquiring and managing suchinternational investments.

 

We have entered intoseparate Co-Investment Ventures with Behringer Harvard Master Partnership I LP(“Behringer Harvard Master Partnership I”) in which we are the manager. The 1%general partner of Behringer Harvard Master Partnership I is Behringer HarvardInstitutional GP LP, which is an affiliate of Behringer Harvard MultifamilyAdvisors I, is indirectly owned by our sponsor, Behringer Harvard Holdings, LLCand the 99% limited partner of Behringer Harvard Master Partnership I is anunaffiliated social work sector pension fund based in The Netherlands,Stichting Pensioenfonds Zorg en Welijn (“PGGM”). Each separate joint venturewith Behringer Harvard Master Partnership I is referred to as a BHMPCO-JV.  Substantially all of ourreal estate investments are unconsolidated joint venture investments in BHMP CO-JVs. As of March 31,2009, we have made ten separate investments in multifamily BHMP CO-JVs. Nine of the ten Property Entities are indevelopment and one is an operating property. As of March 31, 2009, the BHMP CO-JVs have made nine mezzanineloans related to the development projects and seven equity investments in Property Entities, with equitypurchase options for all Property Entities. The development properties are located inTexas, Virginia, Florida, Colorado, Nevada, Maryland, and an equity investmentin a Property Entity with oneoperating property located in Georgia.

 

Webelieve our BHMPCO-JV program will allow us to increase the number of our investments,thereby increasing our risk diversification, and providing participation withgreater economic interest in larger or more selective real estate investmentswith greater access to high quality investments. We intend to continue toinvest in BHMP CO-JVs that focus onmultifamily operating communities, to-be-developed multifamily communities ornewly constructed multifamily communities that have not yet stabilized, otherthan residential properties for assisted living, student housing or seniorhousing. However, we are not limited to co-investments with PGGM and may pursueother Co-Investment Ventures if they provide greater diversification orinvestment opportunities. We may also pursue direct investments consistent withour investment policies.

 

Throughour arrangements with PGGM, we have received commitments from them to invest$200 million in approved BHMP CO-JV co-investments. PGGM may increase its commitment to$300 million. Generally PGGM will co-invest at 45% and we will contribute 55%of the investment requirements. We intend to fund our portion from proceeds ofour Initial Public Offering. We have established one BHMP CO-JV to make investments in only oneseparate project or property. Each BHMP CO-JV owns 100% of 

 

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the voting equityinterest in one subsidiary REIT and substantially all business is conductedthrough its subsidiary REIT. Each subsidiary REIT has made equity investmentsand/or notes receivable to entities that own one real estate project (the “PropertyEntities”).  Our strategy is to utilizethese combined funds to invest in Property Entities with other third parties,generally developers investing in multifamily communities. For equityinvestments, the partners to these Property Entities will then be a BHMP CO-JV and the developer partner,although there could be other third-party participants.

 

EachProperty Entity agreement isunique and heavily negotiated, but we will generally seek the followingprovisions:

 

Fordevelopment stage investments:

 

·                  *CompletionGuarantees* – The developer provides us with a guarantee ofcompletion and costs from a dedicated entity with cash, real estate and/orsecurities.  This entity is typically notthe developer entity or the Property Entity, but what is referred to as “the guarantee entity.”  We believe that this guarantee is animportant mitigant to guarantee completion of developments at budgeted costs.

 

·                  *DeveloperFee Subordination* – We negotiate fee deferrals at variouslevels.  The fees, usually developer feesfor managing the development, are deferred and only received by the developerafter we have recouped certain of our investments, which may include ourmezzanine loan and any accrued and unpaid interest, equity investment andpreferred return.

 

·                  *CostOverrun Protection* – Generally, we will seek to mandate that any costoverruns, including those due to delayed completions, be borne by the developeror other capital partners, which essentially reduces their share of net profitfrom development to the extent of any such overrun.  Because this is a significant compensation tothe developer, the developer is highly motivated to remain on budget.

 

For operating and development stage investments:

 

·                  *EquitySubordination* – We will seek to require the other partners toprovide an equity investment that is subordinate to our investment.  In these instances, some or all of ourreturns will take priority to the other partner equity.

 

·                  *HurdleReturns* – We will seek to receive certain minimum returns before the otherpartners participate in operating cash flow or residual profits from a sale orother capital events. In these instances we may receive a preferred return onour capital investment or require that our capital investment earn a minimumrequired internal rate of return.

 

·                  *JointFunding Protection* – Although our structures do not require that anyof the partners fund capital calls for development or operating deficits, weseek to include higher preferred returns on these types of capitalcontributions. As we may have more incentive to keep the project funded, if theother partners do not contribute pro-rata with us, then these higher preferredreturns, which are generally the first allocation of distributable cash, wouldsignificantly dilute non-contributing partners.

 

Not all of these provisions may be included in each Property Entity agreement, orif our investment is initially a loan, some of these provisions may only beeffective if we elect to make an equity investment. We believe these provisionswill help us achieve our return requirements and help mitigate certain of thereal estate project risks; however, there is no assurance we will achieve thoseobjectives.

 

We believe thateconomic conditions in the major metropolitan markets of the United States willcontinue to provide adequate demand for properly positioned multifamilycommunities; such conditions include an assessment of job and salary growth,lifestyle trends, as well as single-family home pricing and availability ofcredit. Our multifamily asset acquisition strategy concentrates on multifamilycommunities located in the top 50 MSAs across the United States. The****U.S. Census population estimates are usedto determine the largest MSAs. Our top 50 MSA strategy will focus on acquiringproperties and other real estate assets that provide us with broad geographicdiversity. Investments in multifamily communities have benefited from thechanging demographic trends of the last ten years. These trends includecontinued growth in non-traditional households, the echo-boomer generationcoming of age and entering the housing market, low rates of inflation, andincreased immigration. Changes in domestic financial markets can affect thestability and direction of these historical trends and can significantly affectour strategy, both favorably and unfavorably. 

 

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Demand for multifamilycommunities is also affected by changes in credit market liquidity andrepricing of risk affects the cost and availability of financing for purchaseof single family homes.

 

Recently, domesticfinancial and real estate markets have experienced unusual volatility anduncertainty. Liquidity has tightened in most financial markets, includinginvestment grade debt, commercial and construction real estate financing andequity capital markets. Based on projected economic and credit marketconditions for the United States in 2008, as published by prominent real estateand economic advisory firms, we expect the national pace of real estateacquisitions to be slower in 2009 than in recent years.  Multifamily fundamentals are also beginningto exhibit signs of softenening. These include an increase in unemployment andsupply, particularly so-called shadow rental alternatives from unsoldcondominiums and single-family residences. These factors are contributing tolower rental rates, lower occupancy levels and lower valuations in manymultifamily markets. With our strategy of investing in high quality projects infundamentally sound long-term markets, we believe our existing portfolio iswell positioned to perform over the life of the project. However, we mayexperience a decrease in net operating income in the interim, which may affectcertain investment values and cash flow. On the other hand, if multifamilyprices decline and cap rates increase, any new investments we may make maygenerate higher returns and cash flows.

 

 The deterioration of the capital markets hasalso affected the liquidity and pricing of mezzanine loans, currently ourprimary investment type. Spreads on these loans have widened dramatically withlimited secondary markets. We believe this market condition has not materiallyaffected our mezzanine and mortgage portfolio due to our strategy of investingin loans based on the quality of the underlying real estate, the security andcollateral backing the loans, our investment structures (which allow us theoption to convert our loan investments into equity ownership) and our intentand ability to hold these loans to maturity. Further, government-sponsored entities such as ****Fannie Mae and FreddieMac have and**** may continue to provide neededfinancing, refinancing and credit enhancement to the multifamily sector.

 

Weevaluate our note receivables and other real estate investments for impairmentbased on general and market specific factors. See “Critical Accounting Policiesand Estimates” discussed below.

 

As discussed furtherbelow, we expect to meet our short-term liquidity requirements through the netcash raised from our prior private offering, our Initial Public Offering andcash flow from the operations of our current and future investments. Forpurposes of our long-term liquidity requirements, we expect that the net cashfrom our Initial Public Offering and from our current and future investmentswill generate sufficient cash flow to cover operating expenses and our monthlydistribution.

 

We expect to usethe proceeds from our Initial Public Offering to substantially increase thenumber and amount of our investments in operating properties and potentialdevelopment projects.  As of March 31,2009, we sold a total of approximately 6.5 million shares of common stock andraised a total of $64.9 million in gross proceeds in our Initial PublicOffering.  In addition, we commenced thePrivate Offering to accredited investors on November 22, 2006 andterminated that offering on December 28, 2007. We sold a total ofapproximately 14.2 million shares of common stock and raised a total ofapproximately $127.3 million in gross offering proceeds in the PrivateOffering.

 

**PropertyPortfolio**

 

Thefollowing is a summary description of our investments as of March 31, 2009and December 31, 2008 (amounts in millions). The information separates ourwholly owned investments and investments in unconsolidated real estate jointventures.  The increased balance on ourinvestments in unconsolidated real estate joint ventures in the past threemonths is largely due to the advances on existing notes receivable forapproximately $3.2 million and equity in earnings of unconsolidated jointventures of $1.1 million offset by $4.1 million in distributions from the BHMPCO-JVs.

 

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| ** **                                                          | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Wholly Owned Investment**                                         |       |                     |       |                        |       |
| *Loan – Multifamily Development*                               |       |                     |       |                        |       |
| Grand Reserve                                                       |       | $                        | 1.6        |                        | $          | — |   |
|                                                                |       |                     |       |                        |       |
| **Investments in Unconsolidated  Real Estate Joint Ventures**       |       |                     |       |                        |       |
| *Multifamily Operating*                                             |       |                     |       |                        |       |
| The Reserve at Johns Creek Walk                                     |       | $                        | 4.6        |                        | $          | 4.8 |   |
|                                                                |       |                     |       |                        |       |
| *Multifamily Developments*                                          |       |                     |       |                        |       |
| Grand Reserve                                                       |       | 5.1                      |       | 4.3                         |       |
| The Eclipse                                                         |       | 6.5                      |       | 7.0                         |       |
| Alexan St. Rose                                                     |       | 12.6                     |       | 14.4                        |       |
| Baileys Crossing                                                    |       | 12.5                     |       | 12.6                        |       |
| 55 Hundred                                                          |       | 13.8                     |       | 13.9                        |       |
| Cameron House                                                       |       | 10.9                     |       | 10.9                        |       |
| Satori                                                              |       | 13.1                     |       | 13.0                        |       |
| Alexan Prospect                                                     |       | 12.8                     |       | 10.6                        |       |
| The Venue                                                           |       | 5.0                      |       | 5.0                         |       |
| Total – Development                                            |       | 92.3                     |       | 91.7                        |       |
|                                                                |       |                     |       |                        |       |
| **Total Investments in Unconsolidated Real Estate  Joint Ventures** |       | $                        | 96.9       |                        | $          | 96.5 |   |

 

**Critical Accounting Policies andEstimates**

** **

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

 

Management’s discussion and analysis of financialcondition and results of operations is based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of thesefinancial statements requires our management to make judgments, assumptions andestimates that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. Weevaluate these judgments, assumptions and estimates for changes which wouldaffect the reported amounts. These estimates are based on management’shistorical industry experience and on various other judgments and assumptionsthat are believed to be reasonable under the circumstances. Actual results maydiffer from these judgments, assumptions and estimates. Our significantjudgments, assumptions and estimates include the consolidation of variableinterest entities (“VIEs”), the allocation of the purchase price of acquiredproperties and evaluating our real-estate related investments for impairment.

 

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

 

Ourconsolidated financial statements will include our accounts, the accounts ofvariable interest entities (“VIEs”) in which we are the primary beneficiary andthe accounts of other subsidiaries over which we will have control. Allinter-company transactions, balances and profits are eliminated inconsolidation. Interests in entities acquired will be evaluated forconsolidation based on Financial Accounting Standards Board Interpretation (“FIN”)46(R), which requires the consolidation of VIEs in which we are deemed to bethe primary beneficiary. If the interest in the entity is determined to not bea VIE under FIN 46(R), then the entity will be evaluated for consolidationunder the American Institute of Certified Public Accountants’ (“AICPA”)Statement of Position (“SOP”) 78-9, “Accounting for Investments in Real EstateVentures,” and by Emerging Issues Task Force (“EITF”) 04-5, “DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights.”

 

Thereare judgments and estimates involved in determining if an entity in which wewill make an investment will be a VIE and if so, if we will be the primarybeneficiary. The entity will be evaluated to determine if it is a VIE by, amongother things, calculating the percentage of equity being risked compared to thetotal equity of the entity. FIN 46(R) provides some guidelines as to 

 

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what the minimum equityat risk should be, but the percentage can vary depending upon the industry orthe type of operations of the entity and it will be up to our advisor todetermine that minimum percentage as it relates to our business and the factssurrounding each of our acquisitions. In addition, even if the entity’s equityat risk is a very low percentage, our advisor will be required by FIN 46(R) toevaluate the equity at risk compared to the entity’s expected future losses todetermine if there could still in fact be sufficient equity at the entity.Determining expected future losses involves assumptions of variouspossibilities of the results of future operations of the entity, assigning aprobability to each possibility using a discount rate to determine the netpresent value of those future losses and allocation those losses between theequity owners, subordinated lenders or other variable interests. A change inthe judgments, assumptions, allocations and estimates outlined above couldresult in consolidating an entity that should not be consolidated or accountingfor an investment on the equity method that should in fact be consolidated, theeffects of which could be material to our results of operations and financialcondition.

 

*** Notes Receivable***

 

Notesreceivable are reported at their outstanding principal balances net of anyunearned income and unamortized deferred fees and costs. Included in notesreceivable are both mortgage notes receivable and mezzanine notesreceivable.  Loan origination fees andcertain direct origination costs are generally deferred and recognized asadjustments to interest income over the lives of the related loans.

 

Inaccounting for notes receivable by our Co-Investment Ventures or us, there arejudgments related to whether the investments are loans, investments in jointventures or acquisitions of real estate. In applying Exhibit 1 of AICPAPractice Bulletin 1, “AICPA Notice to Practitioners regarding Acquisition,Development, and Construction Arrangements to Acquisition of an OperatingProperty” and EITF 86-21 “Application of the AICPA Notice to Practitionersregarding Acquisition, Development, and Construction Arrangements toAcquisition of an Operating Property,” we evaluate whether the loans containany rights to participate in expected residual profits, the loans providesufficient collateral or qualifying guarantees or include other characteristicsof a loan. As a result of our review, neither our wholly owned loan nor theloans made through our BHMPCO-JVs contain a right to participate in expected residual profits. Inaddition the PropertyEntities or project borrower remain obligated to pay principal and interest dueon the loan with sufficient collateral, reserves or qualifying guarantees toaccount for the investments as loans.

 

Weassess notes receivables for impairment in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 114 “Accounting by Creditors forImpairment of a Loan.” Based on specific circumstances we determine whether itis probable that there has been an adverse change in the estimated cash flowsof the contractual payments for the notes receivable. We then assess whetherthe impairment is other than temporary based on factors including the generalor market-specific economic conditions for the project; the financialconditions of the borrower and guarantors, if any; the degree of any defaultsby the borrower on any of its obligations; the assessment of the underlyingproject’s financial viability and other collateral; the length of time andextent of the condition and our or the Co-Investment Venture’s intent andability to retain its investment in the issuer for a period sufficient to allowfor any anticipated recovery in the market value. If the impairment is otherthan temporary, we recognize an impairment loss equal to the difference betweenour or the Co-Investment Venture’s investment in the loan and the present valueof the estimated cash flows discounted at the loan’s effective interest rate.Where we have the intent and the ability to foreclose on our security interestin the property, we will use the property’s fair value as a basis for theimpairment.

 

Thereare judgments involved in determining whether an impairment is other thantemporary. As these types of loans are generally investment specific based onthe particular loan terms and the underlying project characteristics, there isusually not any secondary market to evaluate impairments. Accordingly, we mustrely on our subjective judgments and individual weightings of the specificfactors. If loans are considered impaired, then judgments and estimates arerequired to determine the projected cash flows for the loan, considering theborrower’s or, if applicable, the guarantor’s financial condition and theconsideration and valuation of the secured property and any other collateral.

 

Changesin these facts or in our judgments and assessments of these facts could resultin impairment losses which could be material to our results of operations andfinancial condition.

 

***Investments in******Real******Estate Joint Ventures***

 

Substantiallyall of our current investments have been made through joint Co-InvestmentVentures. Each Co-Investment Venture is evaluated under FIN 46(R). If theCo-Investment Venture is determined to not be a variable interest entity underFIN 46(R), then the ventures are evaluated for consolidation under the AICPASOP 78-9, “Accounting for Investments in Real Estate Ventures,” and by EITF04-5, “Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited 

 

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Partnership or SimilarEntity When the Limited Partners Have Certain Rights.”

 

As of March 31,2009, all of our Co-Investment Ventures have been and are BHMF CO-JVs.  We are the manager of the BHMF CO-JV’saffairs, but the operation of BHMF CO-JVs are conducted in accordance withoperating plans prepared by us and approved by us and PGGM, the other jointventure member (the “Co-Investment Partner”). In addition, without the consentof both members of the BHMF CO-JV, the manager may not approve or disapprove onbehalf of the BHMF CO-JV certain major decisions affecting the BHMF CO-JV, suchas (i) selling or otherwise disposing of the investment or any otherproperty having a value in excess of $100,000, (ii) selling any additionalinterests in the BHMF CO-JV or its subsidiary REIT (with limited exceptionsrelating to the subsidiary REIT maintaining its status as a real estateinvestment trust or the sale of an interest to the developer of the project), (iii) approvinginitial and annual operating plans and capital expenditures or (iv) incurringor materially modifying any indebtedness or refinancing of the BHMF CO-JV orthe subsidiary REIT.  As a result of theequal substantive participating rights possessed by each partner, no singleparty controls each venture; accordingly, we account for each BHMF CO-JV usingthe equity method of accounting pursuant to SOP 78-9. The equity method ofaccounting requires these investments to be initially recorded at cost andsubsequently increased (decreased) for our share of net income (loss),including eliminations for our share of inter-company transactions, and reducedwhen distributions are received.

 

Eachof the PropertyEntities have different profit sharing interests, some of which have numerousallocation and distribution provisions where certain equity investors receivepreferred interests or deferred participations. In accordance with SOP 78-9, weallocate income and loss for determining our equity in earnings ofunconsolidated joint ventures based on the underlying economic effect orparticipation in the benefit or loss. Although our policy is to use theconcepts of a hypothetical liquidation at book value, judgment is required todetermine which owners are bearing economic benefits or losses, particularly asproperties move from development to operations and guarantees are triggered orremoved. A change in these judgments could result in greater or lesser amountsof equity in earnings.

 

***Investment Impairments***

 

Forreal estate we wholly own or record on a consolidated basis, we will monitorevents and changes in circumstances indicating that the carrying amounts of thereal estate assets may not be recoverable. When such events or changes incircumstances are present, we will assess potential impairment by comparingestimated future undiscounted operating cash flows expected to be generatedover the life of the asset and from its eventual disposition, to the carryingamount of the asset. In the event that the carrying amount exceeds theestimated future undiscounted operating cash flows, we will recognize animpairment loss to adjust the carrying amount of the asset to estimated fairvalue.

 

Forreal estate we may own through an investment in a joint venture, TIC interestor other similar investment structure, at each reporting date we will comparethe estimated fair value of our investment to the carrying value. An impairmentcharge will be recorded to the extent the fair value of our investment is lessthan the carrying amount and the decline in value is determined to be otherthan a temporary decline.

 

Inevaluating our investments for impairment, our advisor will make severaljudgments, assumptions and estimates, including, but not limited to, theprojected date of disposition of our investments in real estate, the estimatedfuture cash flows from our investments in real estate and the projected salesprice of each of our investments in real estate. Recently, domestic financialand real estate markets have experienced unusual volatility and uncertaintywith fewer non-distressed secondary transactions available to base theseestimates and assumptions on. A change in these judgments, assumptions andestimates could result in understating or overstating the book value of ourinvestments which could be material to our financial statements.

 

***Real Estate***

 

For acquired realestate properties, we will allocate the purchase price of those properties tothe tangible assets acquired, consisting of land, inclusive of associatedrights, and buildings, any assumed debt, identified intangible assets and assetretirement obligations based on their relative fair values in accordance withSFAS No. 141(R), “Business Combinations.” Identified intangible assetsconsist of the fair value of above-market and below-market leases, in-placeleases, in-place tenant improvements, in-place leasing commissions and tenantrelationships.  Goodwill is recognized asof the acquisition date and measured as the aggregate fair value of theconsideration transferred and any noncontrolling interests in the acquiree overthe fair value of identifiable net assets acquired.  Likewise, a bargain purchase gain isrecognized in current earnings when the aggregate fair value of the consideration

 

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transferred and anynoncontrolling interests in the acquiree is less than the fair value of the identifiablenet assets acquired.  Acquisition-relatedcosts are expensed in the period incurred.

 

Thefair value of the tangible assets acquired, consisting of land and buildings,will be determined by valuing the property as if it were vacant, and the “as-if-vacant”value will then be allocated to land and buildings. Land values will be derivedfrom appraisals, and building values will be calculated as replacement costless depreciation or our advisor’s estimates of the relative fair value ofthese assets using discounted cash flow analyses or similar methods. The valueof the building will be depreciated over the estimated useful life oftwenty-five years to thirty-five years, using the straight-line method.

 

We will determine the value of above-market andbelow-market in-place leases for acquired properties based on the present value(using an interest rate that reflects the risks associated with the leasesacquired) of the difference between (1) the contractual amounts to be paidpursuant to the in-placeleases and (2) management’s estimate of current market lease rates for thecorresponding in-place leases, measured over a period equal to (a) theremaining non-cancelable lease term for above-market leases, or (b) theremaining non-cancelable lease term plus any fixed rate renewal options forbelow market leases. We record the fair value of above-market and below-marketleases as intangible assets or intangible liabilities, respectively, andamortize them as an adjustment to rental income over the above determined leaseterm.

 

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

 

Wewill amortize the value of in-place leases and in-place tenant improvementsover the initial term of the respective leases. The value of tenantrelationship intangibles will be amortized over the initial term and anyanticipated renewal periods, but in no event exceeding the remainingdepreciable life of the building. If a tenant terminates its lease prior toexpiration of the initial terms, the unamortized portion of the in-place leasevalue and tenant relationship intangibles will be charged to expense.

 

Wewill determine the fair value of assumed debt by calculating the net presentvalue of the scheduled mortgage payments using interest rates for debt withsimilar terms and remaining maturities that our advisor believes we couldobtain. Any difference between the fair value and stated value of the assumeddebt will be recorded as a discount or premium and amortized over the remaininglife of the loan.

 

Prior to the adoption ofSFAS No. 141(R) on January 1, 2009, we allocated the purchaseprice of the real estate property we acquired to the tangible assets acquired,consisting of land, inclusive of associated rights, and buildings, any assumeddebt, identified intangible assets and asset retirement obligations based ontheir relative fair values in accordance with SFAS No. 142, “Goodwill andOther Intangible Assets.”  Upon thecompletion of a business combination, we recorded the tangible assets acquired,consisting of land, inclusive of associated rights, and buildings, any assumeddebt, identified intangible assets and asset retirement obligations based ontheir fair values in accordance with SFAS No. 141, “BusinessCombinations.”

 

Inallocating the purchase price of each of our properties, our advisor will makeassumptions and use various estimates, including, but not limited to, theestimated useful lives of the assets, the cost of replacing certain assets,discount rates used to determine present values, market rental rates per squarefoot and the period required to lease the property up to its occupancy atacquisition if it were vacant. Many of these estimates will be obtained fromindependent third party appraisals. However, our advisor will be responsiblefor the source and use of these estimates. A change in these estimates andassumptions could result in the various categories of our real estate assets orrelated intangibles being overstated or understated which could result in anoverstatement or understatement of depreciation or amortization expense. Thesevariances could be material to our results of operations and financialcondition.

 

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** **

**Results of Operations**

** **

Forthe three months ended March 31, 2009, we are reporting net income of $0.1million, compared to a net income of $0.7 million for the three months ended March 31,2008.  The decrease in net income isprimarily due to our 2009 results incurring additional costs in general andadministrative expenses as a result of our larger portfolio as well as areduction in interest income due to lower interest rates on our cashequivalents. These decreases are partially offset by an increase in our equityin earnings in unconsolidated real estate joint ventures as a result ofadditional investments made after March 31, 2008.

 

Forthe three months ended March 31, 2009 and 2008, our primary investmentshave been mezzanine and mortgage development loans in Property Entities, substantiallyall BHMP CO-JVs.  As of March 31, 2009, we and our BHMP CO-JVs have madeinvestments in nine properties under development and one operating multifamilycommunity. As of March 31, 2008, we and our BHMP CO-JVs had madeinvestments in seven properties under development and one operating multifamilyapartment community.

 

Accordingly,our results for the three months ended March 31, 2009 are not directlycomparable to the three months ended March 31, 2008, where our results of operations for eachperiod presented reflect significant increases in all categories. This willlikely be the case until we substantially invest the proceeds from the InitialPublic Offering.

 

***The three months ended March 31, 2009 ascompared the three months ended March 31, 2008***

 

*Asset Management Fee and otherfees.*Assetmanagement fees for the three months ended March 31, 2009 and 2008 wereapproximately $0.3 million and $0.2 million, respectively. These fees arebased on the amount of our real estate investment and the time period inplace.  Accordingly, the increase is dueto the timing and funded amounts of our investments for 2009 compared to 2008.We expect continued increases in these fees as a result of owning and acquiringadditional real estate investments.

 

*Generaland Administrative Expense*. General and administrative expenses for the threemonths ended March 31, 2009 and 2008 were approximately $0.8 million and$0.3 million respectively, and included corporate general and administrativeexpenses incurred and reimbursable, as well as compensation of our board ofdirectors, auditing and tax fees, and legal fees. The significant increases inthe three months ended March 31, 2009 as compared to the three monthsended March 31, 2008 included corporate legal and accountingreimbursements to our Advisor for $0.3 million, outside audit and legal feesfor $0.1 million, and other miscellaneous expenses for $0.1 million.  We expect further increases as a result ofowning and acquiring additional joint venture interests and other real estateinvestments.

 

*InterestIncome.*Interestincome for the three months ended March 31, 2009 and 2008 wasapproximately $0.1 million and $0.4 million, respectively, and primarilyincluded interest earned on our cash. Although we had higher average investmentbalances for the three months ended March 31, 2009 as compared to the sameperiod in 2008, our average interest rate for 2009 was approximately 0.5%compared to approximately 3.2% for the same period in 2008 due to market ratedeclines in short-term interest rates. Our interest income on bank deposits is a function of the timing andmagnitude of our acquisition activity, which we expect to increase.  For the three months ended March 31,2009 and 2008, interest income on direct, wholly owned investments, primarilymezzanine loans, has not been significant.

 

*Equity inEarnings of Investments in Unconsolidated Real Estate Joint Ventures.*Equity in earnings of joint ventureinvestments for the three months ended March 31, 2009 and 2008 wasapproximately $1.1 million and $0.8 million, respectively, and included ourshare in earnings from our unconsolidated joint venture investments. These netearnings increased due to the increased funding of investments and theacquisition of two joint venture investments. During the twelve monthsended March 31, 2009, we made $34.4 million of new investments in BHMPCO-JVs.  Of this amount, approximately $26.0 million related toloan investments in Property Entities and approximately $8.4 million related toequity investments in Property Entities. A breakdown of ourapproximate equity earnings by type of underlying investments for the threemonths ended March 31, 2009 and 2008 are as follows (amounts in millions):

 

| ** **         | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|--------------------|------------|--------------------------------------------------------------------|------------|
| ** **         | ** ** | **2009**                                                           | ** ** | **2008** | ** ** |
| Loan investments   |       | $                                                                  | 1.7        |   | $ | 1.0 |   |
| Equity investments |       | (0.6                                                               | )          | (0.2 | ) |
| Total              |       | $                                                                  | 1.1        |   | $ | 0.8 |   |

 

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Earningsfrom underlying loan investments increased due to investments in Property Entities for the GrandReserve, Baileys Crossing, and Cameron House. Our weighted-average interestrate on the underlying loan investments was approximately 10.1% as of March 31,2009 and 9.7% as of March 31, 2008. Equity in earnings from underlyingequity investments was a loss for both periods and was primarily related to theone Property Entity that was anoperating property, The Reserve at Johns Creek Walk. A loss was recognized dueto interest expense and depreciation exceeding net operating income for theproject.  The occupancy of the Reserve atJohns Creek Walk at March 31, 2009 and 2008 is 89% and 91%,respectively.  The loss from underlyingequity investments for the three months ended March 31, 2009 alsoincreased as a portion of The Eclipse multifamily community was placed inservice, where interest expense and depreciation exceeded the unstabilized netoperating income.  Although theseunderlying equity investments produced a loss in equity in earnings, theReserve at Johns Creek Walk provided cash distributions to us of approximately$43,000 and the loss in equity in earnings for the Eclipse had no affect on ourcash flow as the operating deficit was included in the development budget andwas covered by construction loan draws.

 

Wewould expect our equity in earnings related to underlying loan investments toincrease until the PropertyEntities have completed the project development, when, if the mezzanine loansare converted to equity investments, our equity investments will increase.However, we anticipate equity investments to report less earnings due todepreciation and interest expense exceeding net operating income for the Property Entity during theinitial period of operations. Accordingly, as the proportion of our equityinvestments increases, we expect our net earnings in unconsolidated real estatejoint ventures to decline for an interim period and they may even reflect a netloss. During the remainder of 2009, we expect three investments to transitionfrom their development phase to non-stabilized operations.  These include our investments in Satori, 55Hundred, and The Venue.  During theperiod until stabilization for these investments, we expect interest anddepreciation expense to exceed net operating income until we reach stabilizedoccupancy.  For the three months ended March 31,2009, these investments reported equity in earnings of $0.5 million. Even ifunderlying loan investments are not converted to equity interests, our earningsin unconsolidated real estate joint ventures may decline due to restrictions onrecording interest income, either due to deferral of interest or consolidation.See “Critical Accounting Policies and Estimates” discussed above.

 

Wereview our investments for impairments in accordance with our accountingpolicies. For the three months ended March 31, 2009 and 2008 we have notrecorded any impairment losses. However, this conclusion could change in futureperiods based in changes in certain factors, primarily:

 

·                  Status of guarantor’s financial position. Ifmarket prices continue to decline, parties that provided us guarantees may nothave the assets or net worth as previously reported. Guarantors may also faceliquidity issues as their financings become due. If our analysis was dependenton a guarantor’s ability to perform, our judgments could change based on newdevelopments. As of March 31, 2009, each of our development Property Entities are dependent uponthe guarantor’s financial position.

 

·                  Project specific performance. All of our loanand equity investments in Property Entities are dependent on the level 3 assumptions(management derived market assumptions) included in our SFAS No. 157 fairvalue determinations. These assumptions particularly include projected rents,occupancy and terminal cap rates. If general and specific market conditionscontinue to deteriorate, changes in these assumptions will affect our fairvalue determinations.

 

·                  Workouts. In structuring the BHMP CO-JVs investment in Property Entities, some of ourinvestments contain provisions that provide us with priority or preferentialreturns. If the underlying projects are affected by market conditions, whichmay not directly affect our returns, but do affect the other partners, theother partners may request workouts or other changes to the deal structures.Although we may not be contractually forced to accept these changes, therecould be other factors that would cause us to accept certain modifications orenter into workouts. Based on the consequences of theses changes, ourassessment of our investment could change.

 

Wereview for these and similar events in the preparation of our consolidatedfinancial statements.  Subsequent to thequarter ended March 31, 2009, we received the December 31, 2008audited consolidated financial statements of Fairfield Residential, LLC and itsaffiliates (“Fairfield Residential”), the developer for three multifamilycommunity developments in which we have invested through their respective BHMP CO-JVs(Baileys Crossing, Cameron House and 55 Hundred, or the “Fairfield Projects”).  In the consolidated financial statements, theauditor expressed concern that Fairfield Residential might not be able tocontinue to operate as a going concern through the end of 2009.

 

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Inaddition to serving as project developer, Fairfield Residential has guaranteedrepayment of each of the development project senior construction loans that are fundingconstruction of the Fairfield Projects, as well as completion of suchdevelopment projects.  Furtherdeterioration in Fairfield Residential’s financial condition may give rise toan event of default under the senior construction loan agreements.  If there is an event of default under asenior construction loan, underour intercreditor agreements with the senior construction lenders or otherwise, weexpect to have an opportunity to (a) cure the default, (b) purchasethe senior construction loan or (c) otherwiseenforce or negotiate a solution acceptable to the senior construction lender.  Any such negotiations may require us to agreeto less desirable investment terms than we currently have.  In addition, such defaults or negotiationsmay change our analysis of the accounting for these investments, which couldresult in the BHMP CO-JVs accounting for the investments as joint ventures, orif the BHMP CO-JV is viewed as the primary beneficiary under FIN 46(R), toconsolidate the investment(s). However, we believe that, even if FairfieldResidential becomes insolvent, we have sufficient collateral, contractualremedies and other creditor rights for us to recover all of our investments in thesedevelopment projects.

 

Asof March 31, 2009, management’s assessment related to the FairfieldProjects is that the BHMP CO-JV loan investments are still properly accountedfor as loans and equity accounting is still appropriate for the BHMP CO-JVequity investment in unconsolidated real estate joint ventures.  The continuation of these accounting treatments isdependent on the resolution of the issues described above, and there can be noassurance as new facts and circumstances arise that different accounting wouldnot be required. A change in accounting could affect our recognition ofearnings in future periods. As of March 31, 2009, no impairment charges related to ourinvestments with respect to the Fairfield Projects have been recorded and our carryingvalue of investments in the Fairfield Projects is $33.8 million (approximately20% of our total assets).  For the threemonths ended March 31, 2009, for the Fairfield Projects, the equity inearnings of unconsolidated real estate joint ventures was $0.8 million anddistributions to us from our investments related to the Fairfield Projects were$0.9 million.

 

**CashFlow Analysis**

 

Cashand cash equivalents increased for the three months ended March 31, 2009as compared to the three months ended March 31, 2008 by approximately$43.7 million primarily due to our Initial Public Offering which commenced in September 2008.

 

*The three months ended March 31,2009 as compared to the three months ended March 31, 2008*

 

As of March 31,2009, we made BHMP CO-JV investments in ten multifamily communities, nine invarious stages of development and one operating multifamily community. We beganto receive proceeds from our Initial Public Offering in October 2008. Wehave made investments in two additional BHMF CO-JVs subsequent to March 31,2008.  As a result, our cash flows for the three months ended March 31,2009 reflect significant differences from the cash flows for three months endedMarch 31, 2008.

 

Cash flows provided byoperating activities for the three months ended March 31, 2009 and 2008were $0.6 million and $0.8 million, respectively. The three monthsended March 31, 2009 recognized less net income as compared to the sameperiod in 2008, but benefited from increased operating liabilities.  Distributions received from our BHMP CO-JV investments increased forthe three months ended March 31, 2009, primarily from interest incomereceived from increased mezzanine investments.

 

Cash flows used ininvesting activities for the three months ended March 31, 2009 and 2008 were$2.8 million and $5.4 million, respectively.  Our primary investing activity is investmentacquisitions or fundings, which are largely dependent on our capital raises.Our investments in unconsolidated real estate joint ventures decreased due tofulfilling our mezzanine funding obligations for eight of our nine BHMP CO-JVsinvestments in 2008.  As our InitialPublic Offering continues into 2009, we would expect our new acquisitions toincrease.  Also providing a source ofinvesting cash flow for the three months ended March 31, 2009 were BHMPCO-JV distributions, which were in excess of the equity earnings inunconsolidated joint ventures. These are presented as an investing activity andnot cash flows from operating activity. Included in the return of investments in unconsolidated real estatejoint venture for the three months ended March 31, 2009, was $2.0 millionrelated to an excess contribution to the Alexan St. Rose BHMP CO-JV funded in2008 and returned during 2009.

 

Cashflow provided by (used in) financing activities for the three months ended March 31,2009 was $46.0 million and ($1.6) million, respectively.  Financing activities increased due to ourInitial Public Offering commencing in September 2008. As our InitialPublic Offering continues into 2009, we would expect proceeds from the sale ofcommon stock to increase. For the three months ended March 31, 2009,distributions were higher due to higher distribution rates and increased commonstock outstanding as compared to the same period in 2008.  There was no capital raise for the threemonths ended March 31, 2008. As our board of directors has increased thedistribution rate from an effective annual rate of 6.5% to 7.0% in March 2009,we would expect the amount of distributions to increase significantly. Asdiscussed above, we expect to fund increased distributions from earnings on theincreased 

 

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amountof investments and to the extent necessary from the proceeds of our InitialPublic Offering. Offering costs paid were significantly higher for the threemonths ended March 31, 2009, because offering costs paid are a factor ofour common stock sales and our advisor incurs greater costs in the initialphases of our offering.

 

The Company and BehringerHarvard Multifamily Advisors I amended the Advisory Management Agreement,effective April 1, 2009.  Under theamended Advisory Management Agreement, we will reimburse our advisor for allInitial Public Offering organization and offering costs as well as all PrivateOffering organization and offering costs previously advanced by our advisor tothe extent not previously reimbursed by us. Our reimbursements will no longer be subject to a cap at the time ofreimbursement, but will be reimbursed by our advisor at the end of the InitialPublic Offering to the extent such amounts incurred by us exceed 1.5% of ourgross Public Offering.  Accordingly, weexpect payments of offering costs to increase in 2009.

 

**In accordance with the Statement of Policy Regarding Real EstateInvestment Trusts published by the North American Securities AdministratorsAssociation, also known as the NASAA REIT Guidelines, our charter requires thatwe monitor our expenses on a trailing twelve month basis.  Our charterdefines the following terms and requires that our Total Operating Expenses (“TOE”)are deemed to be excessive if at the end of any quarter they exceed for theprior trailing twelve month period the greater of 2% of our Average InvestedAssets (“AIA”) or 25% of our Net Income (“NI”).  For the trailing twelvemonths ended March 31, 2009, TOE of approximately $3.0 million exceeded 2%of our AIA (which was approximately $1.9 million) by approximately $1.1million.  Our board of directors, including all of our independentdirectors, have reviewed this analysis and unanimously determined the excess tobe justified considering the fact that we were in the registration for our initialpublic offering of common stock from December 31, 2007 through September 2,2008 and our rate of investments thereafter caused the expenses incurred as aresult of being a public company for audit and legal services, director andofficer liability insurance and fees for board of directors members inconnection with service on the board of directors and its committees to bedisproportionate to the Company’s AIA and NI.**

** **

**Liquidityand Capital Resources**

** **

***General***

** **

Ourprincipal demands for funds will continue to be for making investments inmultifamily communities, on our own or through joint ventures and for thepayment of operating expenses and distributions. Generally, cash needs foritems other than our investments are expected to be met from operations, and cashneeds for our investments are expected to be met from the net proceeds from ourInitial Public Offering and other offerings of our securities as well asmortgages secured by our real estate investments.  However, there may be a delay between thesale of our shares, making investments in real estate and loans and the receiptof income from such investments, which could result in a delay in the benefitsto our stockholders of returns generated from our operations.  During this period, we may decide to temporarilyinvest any uninvested proceeds in investments that could lower returns ratherthan our targeted investments in real estate-related assets.  These lower returns may affect our ability tomake distributions or the amount actually disbursed.

 

Ifreal estate financing is not available on terms and conditions we findacceptable, we may not be able to obtain financing for investments. Recently, domestic and international financial markets have experienced unusualvolatility and uncertainty.  If this volatility and uncertainty persists,our ability to borrow monies to finance the purchase of, or other activitiesrelated to, real estate assets will be significantly impacted.  If we areunable to borrow monies on terms and conditions that we find acceptable, welikely will have to reduce the number of properties we can purchase, and thereturn on the properties we do purchase likely will be lower.  Inaddition, we may find it difficult, costly or impossible to refinanceindebtedness that is maturing.  If interest rates are higher when theproperties are refinanced, we may not be able to finance the properties and ourincome could be reduced.

 

***Short Term Liquidity***

 

Ourprimary indicator of short-term liquidity is our cash and cash equivalents. Asof March 31, 2009, our cash and cash equivalents balance was $67.5million, compared to $23.8 million as of December 31, 2008. On a dailybasis, cash is affected by our net raise from our Initial Public Offering.Since September 5, 2008, we sold approximately 6.5 million shares of ourcommon stock with gross proceeds of approximately $64.9 million.  Although there can be no assurance, we expectour sales of shares of common stock in our Initial Public Offering to increasein 2009. For the three months ended March 31, 2009, we received grossproceeds (including our distribution reinvestment plan (“DRIP”) ofapproximately $54.0 million.  We alsoexpect our operating cash flows to increase when additional investments areadded to our portfolio.

 

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Ourcash and cash equivalents are invested in bank demand deposits, bank moneymarket accounts and a high grade money market fund.  We manage our credit exposure by diversifyingour investments over several financial institutions and investing at amountswithin federally insured levels. Information on our cash and cash equivalents as of March 31, 2009and December 31, 2008 are as follows (dollar amounts in thousands):

 

| ** **                            | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Number of**           | ** ** | ** **                      | ** ** | **Number of** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Accounts**                 | ** ** | **Amount**                      | ** ** | **Accounts** | ** ** | **Amount** | ** ** |
| Commercial bank demand deposits:      |       |                         |       |                            |       |   |   |   |   |
| Within federally insured limits       |       | 1                            |       | $                               | 250        |   | 1 |   | $ | 250 |   |
| In excess of federally insured limits |       | 1                            |       | 2,727                           |       | 1 |   | 398 |   |
|                                  |       |                         |       |                            |       |   |   |   |   |
| Commercial bank money markets:        |       |                         |       |                            |       |   |   |   |   |
| Within federally insured limits       |       | 15                           |       | 3,750                           |       | 13 |   | 3,250 |   |
| In excess of federally insured limits |       | 3                            |       | 5,949                           |       | 8 |   | 4,136 |   |
|                                  |       |                         |       |                            |       |   |   |   |   |
| Money market reserves fund: (1)       |       | 1                            |       | 54,784                          |       | 1 |   | 15,737 |   |
|                                  |       |                         |       | $                               | 67,460     |   |   |   | $ | 23,771 |   |

 

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(1)          The money market reservesfund invests in high-quality, short-term debt securities including, bankobligations such as certificates of deposit and time deposits issued by domesticor foreign banks, commercial paper, and corporate bonds.  These securities may have fixed, floating orvariable rates of interest.

 

Ourprimary operating expenditures are payments for asset management and generaland administrative expenses.  We currentlymeet these obligations from cash flow from operating activities.  As the amount of our real estate investmentsincreases, we would expect these expenses to also increase.  Depending on the timing and magnitude, we mayevaluate other short term financing options, including working capital andacquisition credit facilities.

 

***Long-Term Liquidity, Acquisition and******Property Entity******DebtFinancing***

 

Ourprimary source for acquisitions is the funds from our Initial Public Offering.This is an offering of up to $2 billion in gross proceeds exclusive of ourDRIP. Total offering expenses are expected to be approximately 11% of the grossproceeds, netting approximately 89% that is generally available for newinvestment, before funding of distributions and other operations as discussedabove. Through March 31, 2009, we have raised gross proceeds ofapproximately $64.9 million and paid related offering costs of approximately$15.1 million.

 

Weintend to supplement these and future Initial Public Offering proceeds withcapital from our Co-Investment program. As of March 31, 2009, our onlyCo-Investment arrangements are with PGGM and the BHMP CO-JVs. PGGM has committed toinvest up to $200 million in the BHMP CO-JVs, but may increase theircommitment to $300 million at any time prior to November 9, 2011.Generally PGGM and its general partner will own 45% of each BHMP CO-JV and we will own theremaining 55%.

 

ThroughMarch 31, 2009, we and PGGM have contributed approximately $96.3 millionand $76.5 million, respectively, to the BHMP CO-JVs for acquisition ofinvestments, primarily mezzanine construction loans and equity investments inmultifamily communities. PGGM’s contribution as of March 31, 2009, istheir funding towards a remaining contractual commitment of approximately $8.8million. For us to realize the commitment, we would generally be expected tocontribute approximately $9.0 million. We anticipate raising this capital andcapital for future BHMP CO-JVs from our continuing proceeds of our InitialPublic Offering. There is no assurance that we will be able to raise sufficientcapital to meet these requirements and consequently, all or portions of thePGGM commitment may not be available to us.

 

InPGGM’s quarterly report for the first quarter of 2009, PGGM reported a 4.5%loss on its investments as a result of the current global recession.  This loss resulted in a cover ratio (i.e.assets divided by liabilities) of 89% at the end of the first quarter, comparedwith a cover ratio of 92% at the end of the fourth quarter of 2008.  It is our understanding that negativeperformance by PGGM, including deficits in its cover ratio, could cause theDutch central bank to intervene in its investment decisions, including thosewith respect to our co-investments. Regardless of these developments, through March 31, 2009, PGGM hashonored all of its obligations to contribute capital described below, and PGGMhas given us no reason to question its intention to continue to honor itsobligations in the future.

 

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Foreach equity investment made by the BHMP CO-JV in a Property Entity, we will alsoevaluate the use of existing or new property debt. Based on current market conditionsand our investment and borrowing policies, we would expect to utilize Property Entity debt financingfor 50 to 75% of acquisition or construction requirements. This Property Entity debt is not anobligation or contingency of the BHMP CO-JVs or of us but does allow usto increase our access to capital. As of March 31, 2009, the Property Entities****hadapproximately $156.4 million of borrowings (exclusive of BHMP CO-JV debt),which are summarized as follows (amounts in millions):

 
| ** **                                              | ** ** | **Amount** | ** ** | **Interest Rates** | ** **       | **Maturity Dates**                          | ** **                                    |
|---------------------------------------------------------|------------|------------|------------|--------------------|------------------|---------------------------------------------|-----------------------------------------------|
| Construction financing - variable interest rates        |       | $          | 62.1       |               | 3.70%  (average) |                                        | October 2011  through December 2012 |   |
| Construction financing - fixed or capped interest rates |       | 71.3       |       | 6.35%  to 7.0%     |             | April 2010  through November 2010 |                                          |
| Permanent mortgage                                      |       | 23.0       |       | 6.46%              |             | March 2013                             |                                          |
| Total                                                   |       | $          | 156.4      |               |             |                                        |                                          |   |

 

Wewould expect that the PropertyEntities would refinance these borrowings prior to their respective maturitydates. There is no assurance that at those times market terms would allowfinancings at comparable interest rates or leverage levels. We would anticipatethat for some of these properties, lower leverage levels may be necessary,which may require additional contributions from the BHMP CO-JVs. To the best of ourknowledge, all of the PropertyEntities are compliant with each of their borrowings. See the followingsections below on Off-Balance Sheet Arrangements and Contractual Obligationsfor further discussion of our Project Commitments.

 

Otherpotential future sources of capital may include proceeds from secure orunsecured financings, arrangements with other Co-Investment partners, proceedsfrom the sale of our investments, if and when they are sold, and undistributedcash flow from operating activities.

 

**Distributions**

 

Distributions are authorized at the discretion of ourboard of directors based on its analysis of our performance over the****previous period, expectations ofperformance for future periods, including actual and anticipated operating cashflow, changes in market capitalizationrates for investments suitable for our portfolio,****capital expenditure needs, general financial conditionand other factors that our board deems relevant.  The board’s decision will be influenced, insubstantial part, by its obligation to ensure that we maintain our status as aREIT.  In light of the pervasive andfundamental disruptions in****theglobal financial and real estate markets, we cannot provide assurance that wewill be able to achieve expected cash flows necessary****to continue to pay distributions at any particular level, orat all.  If the current economicconditions continue, our board could determine to reduce our currentdistribution rate or cease paying distributions in****order to conserve cash.

 

Until proceeds from our offerings are fully investedand generating sufficient operating cash flow to fully fund the payment ofdistributions to stockholders, we have and will continue to pay some or all ofour distributions from sources other than operating cash flow.  We may, for example, generate cash to paydistributions from financing activities, components of which may includeproceeds from our offerings and borrowings (including borrowings secured by ourassets) in anticipation of future operating cash flow.  In addition, from time to time, our advisorand its affiliates may agree to waive or defer all,****or a portion, of the acquisition, asset management or otherfees or incentives due to them, pay general administrative expenses orotherwise supplement investor returns in order to increase the amount of cash****thatwe have available to pay distributions to our stockholders.

 

The distributions paid inthe three months ended March 31, 2009 and 2008 were approximately $1.9million and $1.3 million, respectively. For the three months ended March 31, 2009 and 2008, cash flow fromoperating activities was approximately $0.6 million and $0.8 million;respectively.  Accordingly, cash amountsdistributed to stockholders exceeded cash flow from operating activities by$1.3 million and $0.5 million, respectively, which difference was funded fromproceeds from our offerings.

 

The amount by which ourdistributions paid exceeded cash flow from operating activities has increaseddue a higher distribution rate (as discussed below) and increased proceedsraised from our Initial Public Offering, particularly for the three monthsended March 31, 2009.  SinceMarch 2009, our board of directors increased our distribution rate from anannual effective rate of 6.5% to 7.0%. The yield is calculated assuming a stockholder paid $10.00 for eachshare of stock that he or she owns.  Forthe three months ended March 31, 2008, we had an annual effectivedistribution rate of 4% (which was based on the most recent sales price of shares in ourprivate offering, which closed in December 2007, which was $9.25 pershare).

 

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Distributions for the three months ended March 31,2009 and for the year ended December 31, 2008 were as follows (inmillions, except per share amounts):

 
| ** **    | ** ** | **Distributions Paid** | ** ** | ** ** | ** **                            | ** ** | ** ** |
|---------------|------------|------------------------|------------|------------|---------------------------------------|------------|------------|
| **2009**      | ** ** | ** **             | **Cash**   | ** ** | **Distributions  Reinvested  (DRIP)** | ** ** | **Total**  | ** ** | **Total  Distributions  Declared** | ** ** | **Declared  Distributions  Per Share** | ** ** |
| First Quarter |       | $                      | 1.9        |       | $                                     | 0.6        |       | $ | 2.5 |   | $ | 2.9 |   | $ | 0.165 |   |
|          |       | $                      |  1.9  |       | $                                     | 0.6        |       | $ | 2.5 |   | $ | 2.9 |   | $ | 0.165 |   |
|               |            |                        |            |            |                                       |            |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **     | ** ** | **Distributions Paid** | ** ** | ** ** | ** **                            | ** ** | ** ** |
|----------------|------------|------------------------|------------|------------|---------------------------------------|------------|------------|
| **2008**       | ** ** | ** **             | **Cash**   | ** ** | **Distributions  Reinvested  (DRIP)** | ** ** | **Total**  | ** ** | **Total  Distributions  Declared** | ** ** | **Declared  Distributions  Per Share** | ** ** |
| Fourth Quarter |       | $                      | 1.8        |       | $                                     | 0.2        |       | $ | 2.0 |   | $ | 2.4 |   | $ | 0.164 |   |
| Third Quarter  |       | 1.3                    |       | —     |                                  | 1.3        |       | 1.3 |   | 0.093 |   |
| Second Quarter |       | 1.3                    |       | —     |                                  | 1.3        |       | 1.3 |   | 0.092 |   |
| First Quarter  |       | 1.3                    |       | —     |                                  | 1.3        |       | 1.3 |   | 0.092 |   |
|           |       | $                      |  5.7  |       | $                                     | 0.2        |       | $ | 5.9 |   | $ | 6.3 |   | $ | 0.441 |   |
|                |            |                        |            |            |                                       |            |            |  |  |  |  |  |  |  |  |  |  |

 

Over the long term, we expect that more of ourdistributions (except with respect to distributions related to sales of ourassets) will be paid from cash flow from operating activities, includingdistributions from our unconsolidated real estate joint ventures in excess ofreported earnings, and operations.  However, operating performance cannotbe accurately predicted due to numerous factors, including our ability to raiseand invest capital at favorable yields, the financial performance of ourinvestments 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.  As a result, futuredistributions declared and paid may continue to exceed cash flow from operatingactivities.

 

**Off-BalanceSheet Arrangements**

 

Our only BHMP CO-JV borrowing as of December 31,2008 that meets the requirement of a consolidated BHMP CO-JV borrowingis the debt at The Reserve at Johns Creek Walk. The Reserve at Johns Creek Walk is an operating apartment communitywholly owned by a single-purpose limited liability company (the “The Reserve atJohns Creek Walk Property Entity”). The Reserve at Johns Creek Walk PropertyEntity, including its operating receipts lock-box account, serves as collateralfor an interest-only bank loan with a principal balance of $23 million from anunaffiliated lender (the “Bank Loan”). The Bank Loan of $23 million was enteredinto during August 2007, matures in March 2013, and bears interest ata rate of 6.461%. The lender has no recourse to the BHMP CO-JV or us, only toThe Reserve at Johns Creek Walk Property Entity. Breaching the Bank Loan’srestrictions on encumbrances, sale, transfer, or refinancing of the propertycould constitute an event of default and increase the interest rate by 5%;uncured events of default can accelerate the loan’s maturity date.  No events of default have occurred as of March 31,2009. One of our BHMPCO-JVs owns an 80 percent equity interest in The Reserve atJohns Creek Walk Property Entity, with the remaining 20 percent owned by theunaffiliated previous owner.

 

The investments in real estate and loans owned by us andour BHMP CO-JVswere entered into with unaffiliated developers and previous owners who owninterests in the underlying real estate and development projects.  These unaffiliated parties and theiraffiliates have provided us with collateral interests in the properties,development projects, improvements, project owning entities and/or financialand performance guarantees of the developer and certain of its affiliates.  These Project Entities have also obtainedadditional financing that is senior to our investments, both our loans andequity investments. The senior loans are collateralized by the development andimprovements and further secured with repayment and completion guarantees fromthe unaffiliated developer or their affiliates. We have no contractualobligation on these senior level financings obtained by the unaffiliateddeveloper, which includes land loans, construction loans, and ground leases.  These senior level financings have rates andterms that are different from our investment rates and terms.  In addition, financial institutions behindthese loans have independent unfunded obligations under the 

 

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loan terms.  Seediscussion above and Note 5 to our consolidated financial statements forinformation regarding borrowings for unconsolidated Property Entities.

 

We have no otheroff-balance sheet arrangements that are reasonably likely to have a current orfuture material effect on our financial condition, changes in financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources.

 

**ContractualObligations**

 

As of March 31,2009, all of our Co-Investment Ventures have been BHMP CO-JVs and in theordinary course of business, we and/or BHMP CO-JVs contract with unaffiliatedcommercial property development companies and provide equity and/or loans for aparticular project (our “Project Commitments”).  We generally fund aninitial amount under our Project Commitments at contract inception and fundadditional amounts as construction progresses, typically spanning one to threeyears.

 

As of March 31,2009, the BHMP CO-JVs held contracts for equity investments and/or loans with atotal commitment value of approximately $173.0 million and the BHMP CO-JVs havecurrently funded approximately $168.8 million. The BHMP CO-JVs will requireadditional capital from us and Behringer Harvard Master Partnership I in orderto fund the remaining commitments of $4.2 million. The BHMP CO-JVs’ unfundedcommitments for project construction will be generally funded as actual realestate project construction progresses. In addition, we hold the Grand Reserve Loan with a total commitmentvalue of approximately $2.2 million and have currently funded approximately$1.6 million.

 

TheBHMP CO-JVs may become obligated to purchase under contingent sell options to threeProperty Entities: Baileys Crossing, Cameron House and the Grand Reserve.  The options are generally exercisable aftercompletion of the development and for a period of three years thereafter.  The option price is set by agreement and iseither based on the fair value of the project at exercise or the cost of theproject as defined in the respective agreement. The information in the tablebelow represents our current estimates and actual amounts may be more orless.  As of March 31, 2009, no selloptions are exercisable.

 

Estimatedfuture payments and timing are as follows, as of March 31, 2009 (amountsin millions):

** **
| ** ** | ** ** | **The BHMP CO-  JVs’  total unfunded  commitments for   project  construction** | ** ** | **The BHMP CO-  JVs’  other contingent  obligations under  sell options** | ** ** | **Our estimated  portion of the  BHMP CO-  JVs’ unfunded  commitments and  contingent options** | ** ** | **Our unfunded  loan commitment** | ** ** | **Our estimated  total** | ** ** |
|------------|------------|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------|------------|
| 2009       |       | $                                                                                              | 4.2        |                                                                                               | $          | —                                                                                                                             |       | $                                      | 2.3        |                          | $          | 0.6 |   | $ | 2.9 |   |
| 2010       |       | —                                                                                         |       | 63.6                                                                                               |       | 35.0                                                                                                                               |       | —                                 |       | 35.0                          |       |
| Total      |       | $                                                                                              | 4.2        |                                                                                               | $          | 63.6                                                                                                                               |       | $                                      | 37.3       |                          | $          | 0.6 |   | $ | 37.9 |   |

 

OnSeptember 2, 2008, our board of directors authorized a share redemptionprogram for investors who hold their shares for more than one year.  Thepurchase price for redeemed shares is set forth in the prospectus for ourInitial Public Offering of common stock, as supplemented from time totime.  Our board of directors reserves the right in its sole discretion atany time, and from time to time, to (1) waive the one-year holding periodin the event of the death, disability, need for long-term care, or otherexigent circumstances such as bankruptcy, a mandatory distribution requirementunder a stockholder’s IRA or with respect to shares purchased under or throughour DRIP or automatic purchase plan, (2) reject any request forredemption, (3) change the purchase price for redemptions, or (4) terminate,suspend or amend the share redemption program.  Under the terms of theplan, during any calendar year, we will not redeem in excess of 5% of theweighted average number of shares outstanding during the twelve-monthcalendar-based period immediately prior to the date of redemption.  Inaddition, our board of directors will determine whether we have sufficient cashfrom operations to repurchase shares, and such purchases will generally belimited to proceeds of our DRIP plus 1% of operating cash flow for the previousfiscal year.  For the three months ended March 31,2009, we redeemed48,258 shares of common stock for approximately $388,000.

 

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**Fundsfrom Operations**

 

Funds fromoperations (“FFO”) is a non-GAAP financial measure that is widely recognized asa measure of REIT operating performance. We use FFO as defined by the National Association of Real EstateInvestment Trusts to be net income (loss), computed in accordance with GAAPexcluding extraordinary items, as defined by GAAP, and gains (or losses) fromsales of property, plus depreciation and amortization on real estate assets,and after adjustments for unconsolidated partnerships, joint ventures andsubsidiaries.  We believe that FFO ishelpful to our investors and our management as a measure of operatingperformance because it excludes depreciation and amortization, gains and lossesfrom property dispositions, and extraordinary items, and as a result, whencompared year to year, reflects the impact on operations from trends inoccupancy rates, rental rates, operating costs, development activities, generaland administrative expenses, and interest costs, which are not immediatelyapparent from net income.  Historicalcost accounting for real estate assets in accordance with GAAP implicitlyassumes that the value of real estate diminishes predictably over time.  Since real estate values have historicallyrisen or fallen with market conditions, many industry investors and analystshave considered the presentation of operating results for real estate companiesthat use historical cost accounting alone to be insufficient.  As a result, our management believes that theuse of FFO, together with the required GAAP presentations, provide a morecomplete understanding of our performance. Factors that impact FFO include start-up costs, fixed costs, delay inbuying assets, lower yields on cash held in accounts, income from portfolioproperties and other portfolio assets, interest rates on acquisition financingand operating expenses.  In addition, FFOwill be affected by the types of investments in our and/or our Co-InvestmentVentures’ portfolio, which include but are not limited to equity and mezzanine,mortgage and bridge loan investments in existing operating properties andproperties in various stages of development, mezzanine, mortgage and bridgeloans and the accounting treatment of the investments in accordance with ouraccounting policies.  FFO should not beconsidered as an alternative to net income (loss), as an indication of ourliquidity, nor is it indicative of funds available to fund our cash needs,including our ability to make distributions.

 

For the three months ended March 31, 2009, FFOand FFO per share has been impacted by the increase in net proceeds realizedfrom our existing offering of shares, particularly in the three months ended March 31,2009. For the three months ended March 31, 2009, we sold 5.3 millionshares of our common stock, increasing our outstanding shares by 35%.  The proceeds from this issuance weretemporarily invested in short-term cash equivalents until they could be investedin multifamily communities.  Due to lowerinterest rates on cash equivalent investments, interest earnings wereminimal.  We expect to invest theseproceeds in higher earning multifamily communities investments consistent withour investment policy to identify high-quality investments.  We believe this will add value to ourstockholders over our longer term investment horizon, even if this results inless current period earnings.

 

The followingsection presents our calculation of FFO and provides additional informationrelated to our FFO (in thousands, expect per share amounts):

 
| ** **                                | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                       | ** ** | **2008** | ** ** |
| Net Income                                |       | $                                              | 138        |   | $ | 697 |   |
|                                      |       |                                           |       |   |   |
| Real Estate Depreciation and Amortization |       | 361                                            |       | 281 |   |
|                                      |       |                                           |       |   |   |
| Funds from Operation (FFO)                |       | $                                              | 499        |   | $ | 978 |   |
|                                      |       |                                           |       |   |   |
| GAAP weighted average common shares       |       | 17,376                                         |       | 14,271 |   |
|                                      |       |                                           |       |   |   |
| FFO per share                             |       | $                                              | 0.03       |   | $ | 0.07 |   |

 

·                  The real estate depreciation and amortization amountincludes our consolidated real estate depreciation and amortization and ourshare of Co-Investment depreciation and amortization which is included inearnings of unconsolidated real estate joint venture investments.  For the three months ended March 31,2009 and 2008, respectively, two and one of our BHMP CO-JVs recognizedepreciation and amortization, respectively.

 

Our Co-InvestmentVentures recognize certain non-cash items as income or expense or deferrecognition of certain cash items which affect our share in equity in earningsin unconsolidated real estate joint ventures. For the three months ended March 31,2009 and 2008, our total distributions from our unconsolidated real estatejoint ventures exceeded the amount of equity in earnings less real estatedepreciation and amortization in the amount of $2.6 million and $0.4 million,respectively.

 

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Provided below isadditional information related to the FFO calculation and related discussionwhich may be helpful in assessing our operating results.

 

·                  Included in the return of investments inunconsolidated real estate joint venture for the three months ended March 31,2009, was $2.0 million related to an excess contribution to the Alexan St. RoseBHMP CO-JV funded in 2008 and returned during 2009;

 

·                  Accrued interest income on loans with deferred interest payment termswas approximately $132,000 and $45,000 for the three months ended March 31,2009 and 2008, respectively;

 

·                  Amortization of intangible lease assets was approximately $47,000 and$98,000 for the for the three months ended March 31, 2009 and 2008,respectively;

 

·                  Loan fee income collected and deferred wasapproximately $0.3 million and $0.6 million for the three months ended March 31,2009 and 2008, respectively;

 

·                  Amortized loan fee income was approximately $86,000 and $51,000 for thethree months ended March 31, 2009 and 2008, respectively; and

 

·                  Amortization of deferred financing andother costs was approximately $33,000 and $30,000 for the three months ended March 31,2009 and 2008, respectively.

 

**As noted above, we believe FFO is helpful to investors and ourmanagement as a measure of operating performance.  FFO is not indicativeof our cash available to fund distributions since other uses of cash, such ascapital expenditures and principal payment of debt related to investments in**unconsolidated realestate joint ventures,are not deducted when calculating FFO.

** **

**Recently Announced AccountingPronouncements**

** **

In April 2009,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)Financial Accounting Standard (“SFAS”) No. 107-1 and Accounting PrinciplesBoard (“APB”) 28-1 “Interim Disclosures about Fair Value of FinancialInstruments.” The FSP amends SFAS No. 107 “Disclosures about Fair Value ofFinancial Instruments” to require an entity to provide disclosures about fairvalue of financial instruments in interim financial information. This FSP is tobe applied prospectively and is effective for interim and annual periods endingafter June 15, 2009 with early adoption permitted for periods ending afterMarch 15, 2009. The company will include the required disclosures in itsquarter ending June 30, 2009.

 

In April 2009, FASBissued FSP SFAS No. 157-4 “Determining Fair Value When the Volume andLevel of Activity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly.” Based on the guidance, if anentity determines that the level of activity for an asset or liability hassignificantly decreased and that a transaction is not orderly, further analysisof transactions or quoted prices is needed, and a significant adjustment to thetransaction or quoted prices may be necessary to estimate fair value inaccordance with SFAS No. 157 “Fair Value Measurements.” 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. The company will adopt this FSP for its quarter ending June 30,2009. There is no expected material impact on the Consolidated FinancialStatements.

 

In November 2008,the FASB reached a consensus on Emerging Issues Task Force (“EITF”) Issue No. 08-6,“Equity Method Investment Accounting Considerations” (“EITF 08-6”), which wasissued to clarify how the application of equity method accounting will beaffected by SFAS No. 141(R) and SFAS No. 160. EITF 08-6clarifies that an entity shall continue to use the cost accumulation model forits equity method investments. It also confirms past accounting practicesrelated to the treatment of contingent consideration and the use of theimpairment model under Accounting Principles Board (“APB”) Opinion No. 18,“The Equity Method of Accounting for Investments in Common Stock” (“APB No. 18”).Additionally, it requires an equity method investor to account for a shareissuance by an investee as if the investor had sold a proportionate share ofthe investment. This Issue was effective January 1, 2009, and appliesprospectively.  There is no expectedmaterial impact on the Consolidated Financial Statements.

 

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** **

**Inflation**

** **

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

 

**REITTax Election**

** **

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

 

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

 

We are exposed tointerest rate changes as a result of long-term debt used by the PropertyEntities.  Our interest rate riskmanagement objectives are primarily to limit the impact of interest ratechanges on earnings and cash flows and to lower overall borrowing costs. Toachieve these objectives, borrowings are done primarily at fixed rates orvariable rates with the lowest margins available and in some cases, the abilityto convert variable rates to fixed rates. With regard to variable rate financing,we will assess interest rate cash flow risk by continually identifying andmonitoring changes in interest rate exposures that may adversely impactexpected future cash flows and by evaluating hedging opportunities.

 

Asof March 31, 2009,we did not have any outstanding debt. Our BHMP CO-JVs had investments inProperty Entities with funded aggregate senior debt (which consists of thirdparty first mortgages and construction loans) of approximately $156.4 million and BHMP CO-JV mezzanine andmortgage debt of $80.3 million. Of the third-party Property Entity debt,approximately $94.3 million was at fixed rate and $62.1 million was at variableinterest rates with a weighted average of 3.7%. Included in the fixed rate aretwo Property Entity construction loans totaling $71.3 million which are subjectto interest rate hedges which effectively cap the interest rate exposure atinterest rates ranging from 6.35% to 7.0%.

 

Asof March 31, 2009, we have only one note receivable with a carrying valueof approximately $1.6 million and a fixed interest rate of 10%.  Our BHMP CO-JVs had notes receivable from Property Entities ofapproximately $129.2 million with a weighted average coupon of 10.1%, all ofwhich were at fixed rates.

 

Asof March 31, 2009 wealso had approximately $67.5 million of bank deposits and money marketaccounts. During 2008, the interest rates on these accounts significantlydecreased and as of March 31, 2009 had a weighted average interest rate of 0.43%. Given thatcurrent interest rate levels were are at historically low levels, we do notbelieve interest rates could significantly decrease further; however, ifinterest rates were to increase, we could earn a higher return on our cash andcash equivalents.

 

We do not have anyforeign operations and thus we are not exposed to foreign currency fluctuationsas of March 31, 2009.

 

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**Item4(T).  Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures*

 

As required by Rule 13a-15(b) andRule 15d-15(b) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”), our management, including our Chief Executive Officer andChief Financial Officer, evaluated, as of March 31, 2009, theeffectiveness of our disclosure controls and procedures as defined in ExchangeAct Rule 13a-15(e) and Rule 15d-15(e).  Based on that evaluation,our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of March 31, 2009,and provide reasonable assurance that information required to be disclosed byus 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 management, including the Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosures.

 

We believe,however, that a controls system, no matter how well designed and operated,cannot provide absolute assurance that the objectives of the controls systemare met, and no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud or error, if any, within a company havebeen detected.

 

*Changesin Internal Control over Financial Reporting*

 

There have been nochanges in internal control over financial reporting during the quarter ended March 31,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II**

**OTHER INFORMATION**

 

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

 

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

 

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

 

Thefollow risk factor update the risk factors contained in Item 1A. set forth ourAnnual Report on Form 10K, filed with the Securities Exchange Commissionon March 31, 2009.

 

***Our reliance on common developers/guarantors may materiallyadversely affect our investments should a developer/guarantor become unable tomeet its obligations to us.  As of March 31, 2009, our interests inthree loans on three separate development projects with a commondeveloper/guarantor totaled approximately 20% of our total assets.  The developer/guarantor has been issued a “goingconcern” qualification in respect of its 2008 audited consolidated financialstatements.***

 

We have made andmay continue to make investments in multifamily development projects with commondevelopers/guarantors, which increases our risks should a developer/guarantorbecome unable to meet its obligations to the senior construction lender, to usor to the other investors in these projects.   As of March 31, 2009, FairfieldResidential, LLC and its affiliates (“Fairfield Residential”) served as acommon developer/guarantor for three multifamily community developments inwhich we have invested   (BaileysCrossing, Cameron House and 55 Hundred, or the “Fairfield Projects”).  Our investments in these developments havebeen mezzanine loans and an equity investment. Our portion of these investments (which we have made through jointventures) was collectively $33.8 million (20% of our total assets) as of March 31,2009.  Because our equity or lendingpositions are subordinate to senior construction loans with respect to each ofthese development projects, a default by Fairfield Residential on itsobligations to the senior construction lender, to us or to the other investorsin the development project could result in a partial or total loss of the valueof our investment in such development project.

 

Subsequent to thequarter ended March 31, 2009, we received the December 31, 2008audited consolidated financial statements of Fairfield Residential.  In the consolidated financial statements, theauditor expressed concern that Fairfield Residential might not be able tocontinue to operate as a going concern through the end of 2009.  Because Fairfield Residential has guaranteedrepayment of each of the senior construction loans that are fundingconstruction of the Fairfield Projects, as well as completion ofsuch projects,further deterioration in Fairfield Residential’s financial condition may giverise to an event of default under the senior construction loan agreements.  If there is an event of default under asenior construction loan, under our intercreditor agreements with the seniorconstruction lenders or otherwise, we expect to have an opportunity to (a) curethe default, (b) purchase the senior construction loan or (c) otherwisenegotiate a solution acceptable to the senior construction lender.  If we are unable to reach such a solution,the senior construction lender may declare the loan due and foreclose on theunderlying property.  If the senior constructionlenders foreclose on the Fairfield Projects, we may lose the entire value ofour loan and equity investments in these development projects.  Even if we are able to prevent foreclosure,such negotiations may require us to agree to less desirable investment termsthan we currently have.  Further, anylosses on the development project caused by refinancing and engaging a newdeveloper and delays in construction will be absorbed first by the equityinvestors (of which we are one with respect to the 55 Hundred project) and thenby us as mezzanine lender, before any losses are absorbed by the seniorconstruction lender.

 

***If PGGM does nothonor its commitments, our portfolio may not be as diverse and our investmentsmay suffer.***

 

Under arrangements managed by a subsidiary of oursponsor, we have entered into, and it is intended that we will continue toenter into, joint venture investments with PGGM in to-be-developed multifamilycommunities or newly constructed multifamily communities that have not yet reachedstabilization.  As of March 31,2009, we have made joint venture investments with PGGM in all of the propertiesand development projects in which we have invested.  PGGM has committed to our sponsor to investup to $200 million in such joint ventures (with approximately $85.2 millioncommitted to currently existing properties and projects) and PGGM has recentlyindicated that it expects to increase its commitment to invest with us to $300million.  As such, we expect asubstantial portion of our future investments will be made through such jointventures.  We expect this investmentstrategy to increase the number of investments we make and the diversificationof our investment portfolio.  However, ifPGGM does not honor its current 

 

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commitment to invest up to $200 million in such jointventures, or does not increase its commitment to $300 million or more, ourportfolio will not consist of as many investments or be as diverse as itotherwise would.

 

In addition, under the joint venture arrangements intowhich we have entered, and expect to continue to enter, with PGGM, we may incertain situations call for capital contributions to be made by PGGM.  This has typically been the case in thedevelopment projects in which we have co-invested with PGGM; as the developmentprogresses, it is generally required that both we and PGGM contributeadditional capital to the project.  IfPGGM were unwilling or unable to contribute this capital when required, theproject and our investment therein could suffer due to lack of funding ordelays in funding.  In addition, wecould, through our interest in the joint venture with PGGM, be in breach of ourobligations to the other parties investing in the development project unless wewere to fund PGGM’s portion on its behalf or obtain alternative sources offunding.  If we were to fund PGGM’sportion on its behalf, we would have less capital to invest in other assets andthe diversification of our portfolio would suffer.  If we were unable to fund the portion of anyproject that PGGM is expected to, but does not, fund in accordance with the jointventure agreement, the joint venture may be unable to meet its fundingobligations to the project and the value of our interest in the project may bereduced or eliminated.

 

PGGM is a Dutch pension fund subject to supervisionand regulation by the Dutch central bank. In its quarterly report for the first quarter of 2009, PGGM reported a4.5% loss on its investments as a result of the current global recession.  This loss resulted in a cover ratio(i.e.assets divided by liabilities) of 89% at the end of the first quarter,compared with a cover ratio of 92% at the end of the fourth quarter of2008.  It is our understanding thatnegative performance by PGGM, including deficits in its cover ratio, couldcause the Dutch central bank to intervene in its investment decisions,including those with respect to our co-investments.

 

***Theprior performance information as of December 31, 2008 with respect to thenonpublic real estate investment programs sponsored by affiliates of ouradvisor is unaudited and may change when the respective audits are complete.***

 

The prior performance information as ofDecember 31, 2008 with respect to the nonpublic programs sponsored byaffiliates of our advisor is unaudited. This information appears in the Prior Performance Tables contained inour Form 8-K filed with the SEC on May 8, 2009.  The auditors for these programs are currentlyauditing that financial information.  Wehave no reason to believe the final audited financial information will differmaterially from that appearing in the Form 8-K.  However, the tight credit market anddepressed real estate markets the U.S. economy is currently experiencing haveled many other real estate companies to record significant losses and recognizeimpairment in value of assets.  Wetherefore can provide no assurance that the auditors will not propose materialadjustments to the prior performance information as part of their auditingprocedures.  Because of the increasedchances of material adjustments to the prior performance figures, prospectiveinvestors should be more cautious than usual when considering the unaudited2008 prior performance information for these nonpublic programs.  Such prior performance information should notbe relied upon as an indicator of our performance.

 

***We have invested in development projects that rely on senior financingsand, as a result, may be adversely impacted by the failure of a financialinstitution to honor its lending obligations.***

 

Through our BHMPCO-JVs, we have made subordinate debt and equity investments in certainProperty Entities that are developing high quality multifamilycommunities.  These Property Entitiesusually borrow money at the senior loan level from a chartered financialinstitution and at the mezzanine loan level from our BHMP CO-JVs to finance thedevelopment activities.  As a result ofthe recent and continuing economic slowdown and financial market disruptions,certain financial institutions have become insolvent or been served with ceaseand desist orders or other administrative actions by federal bank regulators,such as the FDIC or Office of Thrift Supervision (“OTS”), due to a lack ofrequired capital.  While not presently anissue with the senior lenders financing the projects in which we have invested,some of these senior lenders may become insolvent, enter into receivership orotherwise become unable to fulfill their respective financial obligations tothe Property Entities that are developing the multifamily communities in whichwe have invested.  Should a senior lenderfail to meet its funding obligations, the development project could suffer fromsignificant delays and additional expenses, which could adversely impact ourinvestment in such project.  As we andour affiliates are not parties to the senior loans, we will be unable to takedirect action against these senior lenders to compel them to honor theirfinancial obligations.  Furthermore, if asenior lender becomes insolvent or enters into receivership, or if otherregulatory action is taken against it, we may not be able to enforce our rightsunder the applicable intercreditor agreement to cure defaults by the borrowerunder the senior loan or to purchase the senior loan in the event of default bythe borrower.

 

In addition,completion guarantees provided to our BHMP CO-JVs by developers in connectionwith our mezzanine loans for certain projects may be suspended if the seniorlender stops funding the senior loan, provided that thedeveloper is using commercially reasonable and diligent efforts tocause the senior lender to make the proceeds available or obtain proceeds froma refinancing of the senior loan.  However, obtaining a refinancing in thecurrent economic environment may be difficult or impossible.

 

The financialinstitution that holds the senior loan on the Grand Reserve projectrecently received a cease and desist order from the OTS ordering thefinancial institution to strengthen its required capital ratio.  The total amount of the Grand Reserve seniorloan is approximately $29.0 million.  Asof March 31, 2009 the financial institution had funded approximately $9.4million and approximately $19.6 million remains to be funded.  As of March 31, 2009, our carryingamount in our investments for the Grand Reserve is approximately $6.7 million.

 

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**Item 2.****                                ****Unregistered Sales ofEquity Securities and Use of Proceeds.**

 

**Use ofProceeds from Registered Securities**

 

Pursuant to aRegistration Statement on Form S-11 (SEC Registration No. 333-148414)filed under the Securities Act and declared effective by the SEC on September 2,2008, we are offering for sale to the public on a “best efforts” basis (1) amaximum of 200,000,000 shares of our common stock at a price of $10.00 per shareand (2) up to 50,000,000 additional shares pursuant to a distributionreinvestment plan pursuant to which our stockholders could elect to have theirdistributions reinvested in additional shares of our common stock at a price ofup to $9.50 per share, for a total aggregate offering price of approximately$2.5 billion. As of March 31, 2009, we hadsold approximately 6.5 million shares of our commonstock on a best efforts basis pursuant to the Initial Public Offering foraggregate gross offering proceeds of approximately $64.9 million.

 

The above-statednumber of shares sold and the gross offering proceeds received from such salesdoes not include 24,969 shares of common stock purchased by Behringer HarvardHoldings, LLC in a private placement in 2006 or the 14.2 million shares fromour Private Offering.

 

**ShareRedemption Program**

 

Ourboard of directors authorized a share redemption program that permits ourstockholders to sell their shares to us in limited circumstances after theyhave held them for at least one year, subject to certain conditions andlimitations.  The purchase price for the redeemed shares is set forth inthe prospectus for the Initial Public Offering of our common stock, assupplemented from time to time.  Our board of directors reserves the rightin its sole discretion at any time, and from time to time, to (1) waivethe one-year holding period in the event of other exigent circumstancesaffecting a stockholder such as bankruptcy or a mandatory distributionrequirement under the stockholder’s IRA, (2) reject any request forredemption, (3) change the purchase price for redemptions, or (4) otherwiseamend the terms for the share redemption program.  Under the terms of theprogram, we will not redeem in excess of 5% of the weighted-average number ofshares outstanding during the twelve-month period immediately prior to the dateof redemption.  In addition, our board of directors will determine atleast quarterly whether we have sufficient cash to repurchase shares, and suchpurchases will generally be limited to proceeds from the DRIP plus 1% ofoperating cash flow for the previous fiscal year.  The provisions of the share redemptionprogram in no way limit our ability to repurchase shares from stockholders byany other legally available means for any reason that our board of directors,in its discretion, deems to be in our best interest.

 

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During the three monthsended March 31, 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** | ** ** |
|----------|------------|------------|--------------------------------------|------------|-----------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| January  |       | —     |                                 | $          | —                            |       | —                                                                                       |       | (1                                                                                     | )          |
| February |       | 48,258     |                                 | 8.03       |                              | 48,258     |                                                                                         | (1         | )                                                                                      |
| March    |       | —     |                                 | —     |                              | —     |                                                                                         | (1         | )                                                                                      |
|     |       | 48,258     |                                 | $          | 8.03                              |       | 48,258                                                                                       |       |                                                                                   |       |

 

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(1)         A description of the maximum number ofshares that may be purchased under our redemption program is included in thenarrative preceding this table.

 

**Item 3.****                                ****Defaults Upon SeniorSecurities.**

 

None.

 

**Item 4.****                                ****Submission of Matters toa Vote of Security Holders.**

 

None.

 

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

 

None.

 

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

** **
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                |
|---------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                                                                                                                           |
| 3.1                       |       | Articles  of Restatement, incorporated by reference to Exhibit 3.1.2 to  Form 8-K filed on September 8, 2008                                                                                                                                                                                                    |
| 3.2                       |       | Third  Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to  the Company’s Form 10-Q filed on November 14, 2008                                                                                                                                                                        |
| 4.1                       |       | Form of  Subscription Agreement, incorporated by reference to Exhibit B to the  Company’s Post-Effective Amendment No. 1 to its Registration Statement  on Form S-11 filed on March 6, 2009, Commission File  No. 333-148414                                                                |
| 4.2                       |       | Distribution  Reinvestment Plan, incorporated by reference to Exhibit C to the  Company’s Post-Effective Amendment No .1 to its Registration Statement on  Form S-11 filed on March 6, 2009, Commission File  No. 333-148414                                                                          |
| 4.3                       |       | Automatic  Purchase Plan, incorporated by reference to Exhibit D to the Company’s  Post-Effective Amendment No. 1 to its Registration Statement on  Form S-11 filed on March 6, 2009, Commission File  No. 333-148414                                                                            |
| 4.4                       |       | Share  Redemption Program, incorporated by reference from the description under  “Description of Shares—Share Redemption Program” in the Company’s  Post-Effective Amendment No. 1 to its Registration Statement on  Form S-11 filed on March 6, 2009, Commission File  No. 333-148414 |
| 4.5                       |       | Statement  regarding Restrictions on Transferability of Shares of Common Stock,  incorporated by reference to Exhibit 4.5 to the Company’s Registration  Statement on Form S-11/A filed on May 9, 2008                                                                                                     |
| 10.1                      |       | Second  Amended and Restated Advisory Management Agreement, dated April 1, 2009  incorporated by reference to Exhibit 10.1 to the Company’s  Post-Effective Amendment No. 3 to its Registration Statement on  Form S-11 filed on May 8, 2009, Commission File No. 333-148414                |
| 10.2                      |       | Amended  and Restated Property Agreement, incorporated by reference to  Exhibit 10.2 to the Company’s Form 10-Q filed on November 14,  2008                                                                                                                                                                |
| 10.3                      |       | Incentive  Award Plan, incorporated by reference to Exhibit 10.3 to the Company’s  Registration Statement on Form S-11/A filed on May 9, 2008,  Commission File No. 333-148414                                                                                                                        |
| 10.4                      |       | Service  Mark Agreement, incorporated by reference to Exhibit 10.4 to the  Company’s Form 10-Q filed on November 14, 2008                                                                                                                                                                                  |
| 10.5                      |       | Senior  and Junior Mezzanine Promissory Notes by and between SW 131 St. Rose  Mezzanine Borrower LLC as borrower and Behringer Harvard St. Rose REIT, LLC  as lender dated December 31, 2008                                                                                                                              |
| 10.6                      |       | Senior  and Junior Mezzanine Loan Agreements by and between SW 131 St. Rose Mezzanine  Borrower LLC as borrower and Behringer Harvard St. Rose REIT, LLC as lender  dated December 31, 2008                                                                                                                               |
| 10.7                      |       | Senior  and Junior Mezzanine Deeds of Trust, Assignments of Rents and Leases,  Security Agreements, Fixture Filings and Financing Statements by and between  SW 132 St. Rose Senior Borrower LLC as grantor and Behringer Harvard St. Rose  REIT, LLC as lender dated December 31, 2008                                   |
| 10.8                      |       | Mezzanine  Guaranty Agreement by and between CFP Residential, L.P., Kenneth J. Valach,  Bruce Hart and J. Ronald Terwilliger collectively as guarantor and Behringer  St. Rose REIT, LLC as lender dated December 31, 2008                                                                                                |
| 10.9                      |       | Intercreditor  and Subordination Agreement by and between Bank of America, N.A. on behalf of  senior construction lenders and land loan lender and Behringer Harvard St.  Rose REIT, LLC as subordinate lender dated December 31, 2008                                                                                    |
| 10.10                     |       | Sale,  Purchase and Escrow Agreement between Verandah Owner Limited Partnership as  seller and Harvard Property Trust as purchaser dated January 26, 2009                                                                                                                                                                 |
| 10.11                     |       | Assignment  and Assumption of Sale, Purchase and Escrow Agreement by and between Harvard  Property Trust, LLC as assignor and Behringer Harvard Multifamily OP I LP as  assignee dated January 28, 2009                                                                                                                   |
| 10.12                     |       | First  Amendment to Sale, Purchase and Escrow Agreement by and between Verandah  Owner Limited Partnership as seller and Behringer Harvard Multifamily OP I LP  as purchaser dated February 20, 2009                                                                                                                      |
| 21.1                      |       | Subsidiaries  of the Company (incorporated by reference to Exhibit 21.1 to the  Company’s Post-Effective Amendment No.1 to its Registration Statement on  Form S-11 filed on March 6, 2009, Commission File  No. 333-148414)                                                                          |
| 31.1*                     |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                      |
| 31.2*                     |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                      |
| 32.1*                     |       | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002**                                                                                                                                                         |

 

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* Filed herewith

 

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** 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.  Such certifications will not be deemedincorporated by reference into any filing under the Securities Act or theExchange Act, except to the extent that the registrant specifically incorporatesit by reference.

 

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**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 MULTIFAMILY  REIT I, INC.** |
|---------------------------|-------------------------------------------------|
| ** **                |
| ** **                |
| Dated: May 15,  2009 | /s/ Gary S. Bresky                              |
|                      | Gary S. Bresky                                  |
|                      | Chief Financial Officer                         |
|                      | (Principal Financial  Officer)                  |
|                           |                                                 |  |

 

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