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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

 

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

 

**OR**

 

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

 

**For thetransition period from                to                  **

 

**Commission File Number: 333-140887**

 

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

(Exact Name of Registrant as Specified in ItsCharter)

 

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

 

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

(Address of principal executive offices) (ZipCode)

 

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

** **

**None**

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

 

Indicate by check mark whether the Registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.  Yes x   No o

 

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

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

 

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

 

Asof October 31, 2008, Behringer Harvard Opportunity REIT II, Inc. had6,330,426****shares of common stock,$.0001 par value, outstanding.

 

 

 

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

**FORM 10-Q**

**Quarter Ended September 30, 2008**

 

**PART I**

**FINANCIAL INFORMATION**

 
| ** **                          | ** **                                                                                                                                                                                                                                               | **Page**   |
|-------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                |                                                                                                                                                                                                                                                     |       |
| **Item 1.**                         | **Financial Statements (Unaudited).**                                                                                                                                                                                                                    |       |
|                                |                                                                                                                                                                                                                                                     |       |
|                                | Consolidated Balance Sheets as of September 30,  2008 and December 31, 2007                                                                                                                                                                    | 3          |
|                                |                                                                                                                                                                                                                                                     |       |
|                                | Consolidated Statements of Operations for the three  and nine months ended September 30, 2008 and for the three months ended  September 30, 2007 and the period from January 9, 2007 (date of  inception) through September 30, 2007 | 4          |
|                                |                                                                                                                                                                                                                                                     |       |
|                                | Consolidated Statements of Stockholders’ Equity for  the period from January 9, 2007 (date of inception) through  December 31, 2007 and for the nine months ended September 30, 2008                                                 | 5          |
|                                |                                                                                                                                                                                                                                                     |       |
|                                | Consolidated Statements of Cash Flows for the nine  months ended September 30, 2008 and for the period from January 9,  2007 (date of inception) through September 30, 2007                                                               | 6          |
|                                |                                                                                                                                                                                                                                                     |       |
|                                | Notes to Consolidated Financial Statements                                                                                                                                                                                                               | 7          |
|                                |                                                                                                                                                                                                                                                     |       |
| **Item 2.**                         | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations.**                                                                                                                                                         | **15**     |
| ** **                          | ** **                                                                                                                                                                                                                                               | ** ** |
| **Item 3.**                         | **Quantitative  and Qualitative Disclosures About Market Risk.**                                                                                                                                                                                         | **20**     |
| ** **                          | ** **                                                                                                                                                                                                                                               | ** ** |
| **Item 4T.**                        | **Controls and  Procedures.**                                                                                                                                                                                                                            | **20**     |
| ** **                          | ** **                                                                                                                                                                                                                                               | ** ** |
| **PART II  OTHER INFORMATION** |
|                                |                                                                                                                                                                                                                                                     |       |
| **Item 1.**                         | **Legal Proceedings.**                                                                                                                                                                                                                                   | 21         |
|                                |                                                                                                                                                                                                                                                     |       |
| **Item 1A.**                        | **Risk Factors.**                                                                                                                                                                                                                                        | 21         |
|                                |                                                                                                                                                                                                                                                     |       |
| **Item 2.**                         | **Unregistered  Sales of Equity Securities and Use of Proceeds.**                                                                                                                                                                                        | 22         |
|                                |                                                                                                                                                                                                                                                     |       |
| **Item 3.**                         | **Defaults Upon  Senior Securities.**                                                                                                                                                                                                                    | 22         |
|                                |                                                                                                                                                                                                                                                     |       |
| **Item 4.**                         | **Submission of  Matters to a Vote of Security Holders.**                                                                                                                                                                                                | 22         |
|                                |                                                                                                                                                                                                                                                     |       |
| **Item 5.**                         | **Other Information.**                                                                                                                                                                                                                                   | 22         |
|                                |                                                                                                                                                                                                                                                     |       |
| **Item 6.**                         | **Exhibits.**                                                                                                                                                                                                                                            | 23         |
|                                |                                                                                                                                                                                                                                                     |       |
| **Signature**                       |                                                                                                                                                                                                                                                     | 24         |
|                                     |                                                                                                                                                                                                                                                          |            |  |

 

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**PART I**

**FINANCIAL INFORMATION**

**Item 1.              Financial Statements.**

** **

**BehringerHarvard Opportunity REIT II, Inc.**

**ConsolidatedBalance Sheets**

(Unaudited)

 
| ** **                                                                                                                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| **Assets**                                                                                                                                                                                        |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                         |       | $                      | 47,860,832 |                  | $          | 203,040 |   |
| Receivable from related party                                                                                                                                                                     |       | 543,104                |       | —                |       |
| Prepaid expenses and other assets                                                                                                                                                                 |       | 1,237,941              |       | —                |       |
| **Total assets**                                                                                                                                                                                  |       | $                      | 49,641,877 |                  | $          | 203,040 |   |
|                                                                                                                                                                                              |       |                   |       |                  |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                     |       |                   |       |                  |       |
| Payables to related parties                                                                                                                                                                       |       | $                      | 3,999,415  |                  | $          | 300 |   |
| Distributions payable                                                                                                                                                                             |       | 126,916                |       | —                |       |
| Accrued liabilities                                                                                                                                                                               |       | 101,644                |       | 53,375                |       |
| **Total liabilities**                                                                                                                                                                             |       | 4,227,975              |       | 53,675                |       |
|                                                                                                                                                                                              |       |                   |       |                  |       |
| **Commitments and contingencies**                                                                                                                                                                 |       |                   |       |                  |       |
|                                                                                                                                                                                              |       |                   |       |                  |       |
| **Stockholders’ equity**                                                                                                                                                                     |       |                   |       |                  |       |
| Preferred stock, $.0001 par value per  share; 50,000,000 shares authorized, none outstanding                                                                                                      |       | —                 |       | —                |       |
| Convertible stock, $.0001 par value per  share; 1,000 shares authorized, 1,000 outstanding                                                                                                        |       | —                 |       | —                |       |
| Common stock, $.0001 par value per share; 350,000,000  shares authorized, 5,590,210 and 22,471 shares issued and outstanding at  September 30, 2008 and December 31, 2007, respectively |       | 559                    |       | 2                     |       |
| Additional paid-in capital                                                                                                                                                                        |       | 45,989,309             |       | 200,998               |       |
| Cumulative distributions and net loss                                                                                                                                                             |       | (575,966               | )          | (51,635               | )          |
| **Total stockholders’ equity**                                                                                                                                                               |       | 45,413,902             |       | 149,365               |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                               |       | $                      | 49,641,877 |                  | $          | 203,040 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**Consolidated Statements of Operations**

(Unaudited)

 
| ** **                                                 | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                       | ** ** | **For the period from**        | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                 | ** ** | **Three months**            | ** ** | **Three months**            | ** ** | **Nine months**             | ** ** | **January 9, 2007**                 | ** ** |
| ** **                                                 | ** ** | **ended**                        | ** ** | **ended**                        | ** ** | **ended**                        | ** ** | **(date of inception)**             | ** ** |
| ** **                                                 | ** ** | **September 30, 2008** | ** ** | **September 30, 2007** | ** ** | **September 30, 2008** | ** ** | **through September 30, 2007** | ** ** |
|                                                       |       |                             |       |                             |       |                             |       |                                          |       |
| **Revenue**                                                |       | $                                | —     |                             | $          | —                           |       | $                                             | —     |   | $ | — |   |
|                                                       |       |                             |       |                             |       |                             |       |                                          |       |
| **Expenses**                                               |       |                             |       |                             |       |                             |       |                                          |       |
| General and administrative                                 |       | 111,800                          |       | 300                              |       | 398,164                          |       | 300                                           |       |
| **Total expenses**                                         |       | 111,800                          |       | 300                              |       | 398,164                          |       | 300                                           |       |
|                                                       |       |                             |       |                             |       |                             |       |                                          |       |
| Interest income, net                                       |       | 198,423                          |       | —                           |       | 245,461                          |       | —                                        |       |
| **Net income (loss)**                                      |       | $                                | 86,623     |                             | $          | (300                             | )          | $                                             | (152,703   | ) | $ | (300 | ) |
|                                                       |       |                             |       |                             |       |                             |       |                                          |       |
| **Basic and diluted weighted average shares  outstanding** |       | 3,864,388                        |       | 22,471                           |       | 1,626,721                        |       | 22,471                                        |       |
|                                                       |       |                             |       |                             |       |                             |       |                                          |       |
| **Basic and diluted income (loss) per share**              |       | $                                | 0.02       |                             | $          | (0.01                            | )          | $                                             | (0.09      | ) | $ | (0.01 | ) |

 

*See Notes to Consolidated FinancialStatements.*

 

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

**Consolidated Statements of Stockholders’ Equity**

(Unaudited)

 
| ** **                             | ** ** | **Convertible Stock** | ** ** | **Common Stock** | ** ** | **Additional**     | ** ** | **Cumulative** | ** ** | **Total**   | ** ** |
|----------------------------------------|------------|----------------------------|------------|-----------------------|------------|--------------------|------------|----------------|------------|-------------|------------|
| ** **                             | ** ** | **Number**                 | ** ** | **Par**               | ** ** | **Number**         | ** ** | **Par**        | ** ** | **Paid-in** | ** ** | **Distributions** | ** ** | **Stockholders’** | ** ** |
| ** **                             | ** ** | **of Shares**         | ** ** | **Value**             | ** ** | **of Shares** | ** ** | **Value**      | ** ** | **Capital** | ** ** | **and Net Loss** | ** ** | **Equity** | ** ** |
|                                   |       |                       |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| **Balance at January 9, 2007**    |       | —                     |       | $                     | —     |               | —     |           | $          | —      |       | $ | — |   | $ | — |   | $ | — |   |
| (date of inception)                    |       |                       |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Issuance of convertible stock, net     |       | 1,000                      |       |                  |       |               |       |           |       | 1,000       |       |   |   | 1,000 |   |
| Issuance of common stock, net          |       |                       |       |                  |       | 22,471             |       | 2              |       | 199,998     |       |   |   | 200,000 |   |
| Net loss                               |       |                       |       |                  |       |               |       |           |       |        |       | (51,635 | ) | (51,635 | ) |
| **Balance at December 31, 2007**  |       | 1,000                      |       | —                |       | 22,471             |       | 2              |       | 200,998     |       | (51,635 | ) | 149,365 |   |
|                                   |       |                       |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Issuance of common stock, net          |       |                       |       |                  |       | 5,567,739          |       | 557            |       | 45,788,311  |       |   |   | 45,788,868 |   |
| Distributions declared on common stock |       |                       |       |                  |       |               |       |           |       |        |       | (371,628 | ) | (371,628 | ) |
| Net loss                               |       |                       |       |                  |       |               |       |           |       |        |       | (152,703 | ) | (152,703 | ) |
| **Balance at September 30, 2008** |       | 1,000                      |       | $                     | —     |               | 5,590,210  |           | $          | 559         |       | $ | 45,989,309 |   | $ | (575,966 | ) | $ | 45,413,902 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

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**BehringerHarvard Opportunity REIT II, Inc.**

**ConsolidatedStatements of Cash Flows**

(Unaudited)

 
| ** **                                                                            | ** ** | ** **                       | ** ** | **For the period from**        | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                            | ** ** | **Nine months**             | ** ** | **January 9, 2007**                 | ** ** |
| ** **                                                                            | ** ** | **ended**                        | ** ** | **(date of inception)**             | ** ** |
| ** **                                                                            | ** ** | **September 30, 2008** | ** ** | **through September 30, 2007** | ** ** |
| **Cash flows from operating activities**                                              |       |                             |       |                                          |       |
| Net loss                                                                              |       | $                                | (152,703   | )                                             | $          | (300 | ) |
| Adjustments to reconcile net loss to net  cash flows used in operating activities:    |       |                             |       |                                          |       |
| Change in prepaid expenses and other assets                                           |       | (188,623                         | )          | —                                        |       |
| Change in accrued liabilities                                                         |       | 4,725                            |       | —                                        |       |
| Change in payables to related parties                                                 |       | (481,220                         | )          | 300                                           |       |
| **Cash used in operating activities**                                                 |       | (817,821                         | )          | —                                        |       |
|                                                                                  |       |                             |       |                                          |       |
| **Cash flows from investing activities**                                              |       |                             |       |                                          |       |
| Escrow deposits and pre-acquisition costs on  real estate to be acquired              |       | (1,005,774                       | )          | —                                        |       |
| **Cash used in investing activities**                                                 |       | (1,005,774                       | )          | —                                        |       |
|                                                                                  |       |                             |       |                                          |       |
| **Cash flows from financing activities**                                              |       |                             |       |                                          |       |
| Issuance of common/convertible stock                                                  |       | 55,364,093                       |       | 201,000                                       |       |
| Offering costs                                                                        |       | (5,821,006                       | )          | —                                        |       |
| Distributions                                                                         |       | (61,700                          | )          | —                                        |       |
| **Cash provided by financing activities**                                             |       | 49,481,387                       |       | 201,000                                       |       |
|                                                                                  |       |                             |       |                                          |       |
| Net change in cash and cash equivalents                                               |       | 47,657,792                       |       | 201,000                                       |       |
| Cash and cash equivalents at beginning of  period                                     |       | 203,040                          |       | —                                        |       |
| Cash and cash equivalents at end of period                                            |       | $                                | 47,860,832 |                                          | $          | 201,000 |   |
|                                                                                  |       |                             |       |                                          |       |
| **Non-cash investing activities:**                                                    |       |                             |       |                                          |       |
| Property and equipment additions and  purchases of real estate in accrued liabilities |       | $                                | 43,544     |                                          | $          | — |   |
|                                                                                  |       |                             |       |                                          |       |
| **Non-cash financing activities:**                                                    | * *   | * *                         | * *   | * *                                      | * *   |
| Common stock issued in distribution  reinvestment plan                                |       | $                                | 183,011    |                                          | $          | — |   |
| Accrued dividends payable                                                             |       | $                                | 126,917    |                                          | $          | — |   |
| Offering costs payable to related parties                                             |       | $                                | 3,937,230  |                                          | $          | — |   |

 

*See Notes to Consolidated FinancialStatements.*

 

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** **

**BehringerHarvard Opportunity REIT II, Inc.**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**1.             Business and Organization**

 

***Business***

 

BehringerHarvard Opportunity REIT II, Inc. (which may be referred to as the “Company,”“we,” “us,” or “our”) was organized in Maryland on January 9, 2007 andintends to qualify as a real estate investment trust (“REIT”) for federalincome tax purposes effective for our taxable year ending December 31,2008.  We intend to acquire and operatecommercial real estate and real estate-related assets.  In particular, we will focus generally onacquiring commercial properties with significant possibilities for short-termcapital appreciation, such as those requiring development, redevelopment, orrepositioning, those located in markets and submarkets with high growthpotential, and those available from sellers who are distressed or facetime-sensitive deadlines.  We may acquirea wide variety of commercial properties, including office, industrial, retail,hospitality, recreation and leisure, single-tenant, multifamily, and other realproperties.  These properties may beexisting, income-producing properties, newly constructed properties, orproperties under development or construction and may include multifamilyproperties purchased for conversion into condominiums and single-tenantproperties that may be converted for multifamily use.  Further, we may invest in real estate-relatedsecurities, including securities issued by other real estate companies, eitherfor investment or in change of control transactions completed on a negotiatedbasis or otherwise.  We also mayoriginate or invest in collateralized mortgage-backed securities, mortgage,bridge or mezzanine loans, and Section 1031 tenant-in-common interests(including those issued by affiliates of our advisor), or in entities that makeinvestments similar to the foregoing.  Asof September 30, 2008, we had not acquired any real estate or realestate-related assets.

 

Substantially allof our business will be conducted through Behringer Harvard Opportunity OP IILP, a limited partnership organized in Delaware on January 12, 2007 (“BehringerHarvard Opportunity OP II”).  As of September 30,2008, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation,was the sole general partner of Behringer Harvard Opportunity OP II and owned a0.1% partnership interest in Behringer Harvard Opportunity OP II.  As of September 30, 2008, our wholly-ownedsubsidiary, BHO Business Trust II, a Maryland business trust, was the solelimited partner of Behringer Harvard Opportunity OP II.

 

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

*** ***

***Organization***

 

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

 

Inconnection with our initial capitalization, on January 19, 2007, we issued22,471 shares of our common stock and 1,000 shares of our convertible stock toBehringer Harvard Holdings, LLC (“Behringer Harvard Holdings”), an affiliate ofour advisor.  As of September 30, 2008, we had5,590,210 shares of commons stock outstanding, which includes the 22,471 sharesissued to Behringer Harvard Holdings.  Asof September 30, 2008, we had 1,000 shares of convertible stock issued andoutstanding to Behringer Harvard Holdings.

 

Wecommenced operations on April 1, 2008 upon satisfaction of the conditionsof our escrow agreement in all states except Pennsylvania and our acceptance ofinitial subscriptions of common stock. On September 19, 2008, we satisfied the escrow conditions forPennsylvania.  Upon admission of newstockholders, subscription proceeds are used for payment of dealer manager feesand selling commissions and may be utilized as consideration for investmentsand the payment or reimbursement of offering expenses and operatingexpenses.  Until required for suchpurposes, net offering proceeds are held in short-term, liquid investments.  Through September 30, 2008, we had sold5,567,739 shares in the Offering for gross proceeds of $55.5 million.

 

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

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**2.             Interim Unaudited FinancialInformation**

 

Theaccompanying consolidated financial statements should be read in conjunctionwith the consolidated financial statements and notes thereto included in ourSpecial Financial Report on Form 10-K for the year ended December 31,2007, which was filed with the SEC on March 31, 2008.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”)have been condensed or omitted from this quarterly report pursuant to the rules andregulations of the SEC.

 

Theresults for the interim periods shown in this report are not necessarilyindicative of future financial results. The accompanying consolidated balance sheet and consolidated statementof stockholders’ equity as of September 30, 2008 and consolidatedstatements of operations for the three and nine months ended September 30,2008 and for the three months ended September 30, 2007 and the period fromJanuary 9, 2007 (date of inception) through September 30, 2007 andcash flows for the nine months ended September 30, 2008 and for the periodfrom January 9, 2007 (date of inception) through September 30, 2007have not been audited by our independent registered public accountingfirm.  In the opinion of management, theaccompanying unaudited consolidated financial statements include alladjustments necessary to fairly present our consolidated financial position asof September 30, 2008 and December 31, 2007 and our consolidatedresults of operations and cash flows for the periods ended September 30,2008 and 2007.  Such adjustments are of anormal recurring nature.

 

**3**.             **Summary of SignificantAccounting Policies**

 

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

 

The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Theseestimates include such items as purchase price allocation for real estate acquisitions,impairment of long-lived assets, depreciation and amortization, and allowancefor doubtful accounts.  Actual resultscould differ from those estimates.

 

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

 

Our consolidatedfinancial statements include our accounts and the accounts of othersubsidiaries over which we have control. All inter-company transactions, balances, and profits have beeneliminated in consolidation.  Interestsin entities acquired will be evaluated based on Financial Accounting StandardsBoard (“FASB”) Interpretation (“FIN”) 46R “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 determinednot to be a variable interest entity under FIN 46R, then the entities will beevaluated for consolidation under the American Institute of Certified PublicAccountants’ Statement of Position 78-9, “Accounting for Investments in RealEstate Ventures,” and by Emerging Issues Task Force 04-5, “Determining Whethera General Partner, or the General Partners as a Group, Controls a LimitedPartnership or Similar Entity When the Limited Partners Have Certain Rights.”

 

***RealEstate***

 

Upon the acquisition ofreal estate properties, we will allocate the purchase price of those propertiesto the tangible assets acquired, consisting of land, inclusive of associatedrights, land improvements, buildings, building improvements, furniture,fixtures and equipment, identified intangible assets, asset retirementobligations, and assumed liabilities based on their relative fair values inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets.” Identified intangible assets will consist of the fair value ofabove-market and below-market leases, in-place leases, in-place tenantimprovements, in-place leasing commissions, and tenant relationships.

 

Upon the completion of abusiness combination, we will record the tangible assets acquired, consistingof land and buildings, any assumed debt, identified intangible assets, andasset retirement obligations based on their fair values in accordance with SFASNo. 141, “Business Combinations.” Identified intangible assets will consist of the fair value of above-marketand below-market leases, in-place leases, in-place tenant improvements,in-place leasing commissions, and tenant relationships.  Any amount paid in excess of the fair valueof the assets and liabilities acquired will be recorded as goodwill.  If the value of the assets and liabilitiesexceed the total purchase price, then the resulting negative goodwill will beallocated to the tangible and intangible assets acquired.

 

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

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

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

 

The fair value of thetangible assets acquired, expected to consist of land, land improvements,buildings, building improvements, and furniture, fixtures and equipment, willbe determined by valuing the property as if it were vacant, and the “as-if-vacant”value will be allocated to the tangible assets. Land values will be derived from appraisals, and building values will becalculated as replacement cost less depreciation or management’s estimates ofthe relative fair value of these assets using discounted cash flow analyses orsimilar methods.  Furniture, fixtures andequipment values will be determined based on current reproduction orreplacement cost less depreciation and other estimated allowances based onphysical, functional, or economic factors. The value of commercial office buildings will be depreciated over theestimated useful life of 25 years using the straight-line method andhotels/mixed-use properties will be depreciated over the estimated useful lifeof 39 years using the straight-line method. Land improvements will be depreciated over the estimated useful life of15 years, and furniture, fixtures and equipment will be depreciated overestimated useful lives ranging from five to seven years using the straight-linemethod.

 

We will determine thevalue of above-market and below-market in-place leases for acquired propertiesbased on the present value (using an interest rate that reflects the risksassociated with the leases acquired) of the difference between (1) thecontractual amounts to be paid pursuant to the in-place leases and (2) management’sestimate of current market lease rates for the corresponding in-place leases,measured over a period equal to (a) the remaining non-cancelable leaseterm for above-market leases, or (b) the remaining non-cancelable leaseterm plus any fixed rate renewal option for below-market leases.  We will record the fair value of above-marketand below-market leases as intangible assets or intangible liabilities,respectively, and amortize them as an adjustment to rental income over the abovedetermined lease term.

 

The total value ofidentified real estate intangible assets acquired will be further allocated toin-place lease values, in-place tenant improvements, in-place leasingcommissions, and tenant relationships based on our evaluation of the specificcharacteristics of each tenant’s lease and our overall relationship with thatrespective tenant.  The aggregate valuefor tenant improvements and leasing commissions will be based on estimates ofthese costs incurred at inception of the acquired leases, amortized through thedate of acquisition.  The aggregate valueof in-place leases acquired and tenant relationships will be determined byapplying a fair value model.  Theestimates of fair value of in-place leases includes an estimate of carryingcosts during the expected lease-up periods for the respective spacesconsidering current market conditions. In estimating the carrying costs that would have otherwise been incurredhad the leases not been in place, we will include such items as real estatetaxes, insurance, and other operating expenses as well as lost rental revenueduring the expected lease-up period based on current market conditions.  The estimates of the fair value of tenantrelationships will also include costs to execute similar leases includingleasing commissions, legal fees, and tenant improvements as well as an estimateof the likelihood of renewal as determined by management on a tenant-by-tenantbasis.

 

We plan to amortize thevalue of in-place leases to expense over the term of the respectiveleases.  The value of tenant relationshipintangibles will be amortized to expense over the initial term and anyanticipated renewal periods, but in no event will the amortization period forintangible assets exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, theunamortized portion of the in-place lease value and tenant relationshipintangibles will be charged to expense.

 

***Impairmentof Long-Lived Assets***

 

For real estate we willwholly-own, management will monitor events and changes in circumstancesindicating that the carrying amounts of the real estate assets may not berecoverable.  When such events or changesin circumstances occur, we will assess potential impairment by comparing estimatedfuture undiscounted operating cash flows expected to be generated over the lifeof the asset, including its eventual disposition, to the carrying amount of theasset.  In the event that the carryingamount exceeds the estimated future undiscounted operating cash flows, we willrecognize an impairment loss to adjust the carrying value of the asset toestimated fair value.

 

For real estate owned byus through an investment in a limited partnership, joint venture,tenant-in-common interest, or other similar investment structure, at eachreporting date, management will compare the estimated fair value of itsinvestment to the carrying value.  Animpairment charge will be recorded to the extent that the fair value of theinvestment is less than the carrying amount and the decline in value is determinedto be other than a temporary decline.

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

***Cashand Cash Equivalents***

 

We consider investmentsin highly-liquid money market funds with original maturities of three months orless to be cash equivalents.  Thecarrying amount of cash and cash equivalents reported on the balance sheetapproximates fair value.

 

***Organizationand Offering Expenses***

 

We reimburse our advisoror its affiliates for any organization and offering expenses incurred on ourbehalf in connection with the primary offering (other than selling commissionsand the dealer manager fee) provided that at no point will we reimburseexpenses that would cause our total organization and offering expenses (otherthan selling commissions and the dealer manager fee) related to our primaryoffering to exceed 1.5% of gross offering proceeds from the primaryoffering.  Organization and offeringexpenses are defined generally as any and all costs and expenses incurred by usin connection with our formation, preparing for the offering, the qualificationand registration of the offering, and the marketing and distribution of ourshares.  Organization and offeringexpenses include, but are not limited to, accounting and legal fees, costs toamend the registration statement and supplement the prospectus, printing,mailing and distribution costs, filing fees, amounts to reimburse our advisoror its affiliates for the salaries of employees, and other costs in connectionwith preparing supplemental sales literature, telecommunication costs, fees ofthe transfer agent, registrars, trustees, escrow holders, depositories andexperts, and fees and costs for employees of our advisor or its affiliates toattend industry conferences.  At eachbalance sheet date, we estimate the total gross public offering proceedsexpected to be received under the public offering and recognize the amount oforganization and offering reimbursement as determined under SFAS No. 5, “Accountingfor Contingencies.”  We record the amountof reimbursement at the lower of (a) 1.5% of the estimated gross public offeringproceeds, or (b) the actual organization and offering costs incurred byour advisor or its affiliates.

 

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

 

***IncomeTaxes***

 

We intend to make anelection to be taxed as a REIT under Sections 856 through 860 of the InternalRevenue Code  of 1986, as amended (the “Code”),commencing with our taxable year ending December 31, 2008.  If we qualify for taxation as a REIT underthe Code, we generally will not be subject to federal corporate income tax tothe extent we distribute our REIT taxable income to our stockholders, as longas we distribute at least 90 percent of our REIT taxable income (which iscomputed without regard to the dividends paid deduction or net capital gain andwhich does not necessarily equal net income as calculated in accordance withGAAP).  REITs are subject to a number ofother organizational and operations requirements.  Even if we qualify for taxation as a REIT, wemay be subject to certain state and local taxes on our income and property, andfederal income and excise taxes on our undistributed income.

 

***Stock-BasedCompensation***

 

We have adopted a stock-basedincentive award plan for our directors and consultants and for employees,directors, and consultants of our affiliates. We account for this plan in accordance with FASB SFAS No. 123R, “Share-Based Payment.”  Awards are granted at the fair market valueon the date of grant with fair value estimated using the Black-Scholes-Mertonoption valuation model, which incorporates assumptions surrounding volatility,dividend yield, the risk-free interest rate, expected life, and the exerciseprice as compared to the underlying stock price on the grant date.  SFAS No. 123R also requires the taxbenefits associated with these share-based payments to be classified asfinancing activities in the Consolidated Statements of Cash Flows, rather thanas operating cash flows.  No stock-basedawards were issued under the plan as of September 30, 2008.

 

***Concentrationof Credit Risk***

 

As of September 30,2008, we had cash on deposit in financial institutions in excess of federallyinsured levels; however, we have not experienced any losses in suchaccounts.  We regularly monitor thefinancial stability of these financial institutions and believe that we are notexposed to any significant credit risk in cash and cash equivalents or restrictedcash.

 

***Earningsper Share***

 

Earnings per share iscalculated based on the weighted average number of common shares outstandingduring each period.   The weightedaverage shares outstanding used to calculate both basic and diluted income(loss) per share were the same for the three and nine months ended September 30,2008 and for the three months ended September 30, 2007 and from the periodfrom January 9, 2007 (date of inception) through September 30, 2007as there were no stock-based awards outstanding.

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**4.             New Accounting Pronouncements**

 

In December 2007,the FASB issued SFAS No. 141(R), “Business Combinations.”  ThisStatement replaces SFAS No. 141, “Business Combinations,” but retains thefundamental requirement that the acquisition method of accounting, or purchasemethod, be used for all business combinations and for an acquirer to beidentified for each business combination.  This Statement is broader inscope than that of SFAS No. 141, which applied only to businesscombinations in which control was obtained by transferring consideration.  SFAS No. 141(R) applies the samemethod of accounting (the acquisition method) to all transactions and otherevents in which one entity obtains control over one or more otherbusinesses.  This Statement also makes certain other modifications to SFASNo. 141, including a broader definition of a business and the requirementthat acquisition related costs are expensed as incurred.  This Statementapplies to business combinations occurring on or after the beginning of thefirst annual reporting period beginning on or after December 15,2008.  Early adoption is notallowed.  The acquisition of real estateproperty has been determined to meet the definition of a business combinationas defined in SFAS No. 141(R). Therefore, beginning January 1, 2009, we will no longer capitalizeacquisition related costs for future acquisitions of real estate properties,but will expense such costs as incurred.

 

**5.             Stockholders’ Equity**

 

***Capitalization***

 

As of September 30,2008, our authorized capital was 350,000,000 shares of common stock, 50,000,000shares of preferred stock, and 1,000 shares of convertible stock.  All shares of such stock have a par value of$.0001 per share.  As of September 30,2008, we had 5,590,210 shares of our common stock issued and outstanding, 1,000shares of convertible stock issued and outstanding, and no shares of preferredstock issued and outstanding.

 

The shares ofconvertible stock will be converted into shares of common stock automaticallyif (1) we have made total distributions on then outstanding shares of ourcommon stock equal to the issue price of those shares plus a 10% cumulative,non-compounded, annual return on the issue price of those outstanding shares,or (2) we list our common stock for trading on a national securitiesexchange if the sum of the prior distributions on then outstanding shares ofthe common stock plus the aggregate market value of the common stock (based onthe 30-day average closing price) meets the same 10% performancethreshold.  In general, the convertiblestock will convert into shares of common stock with a value equal to the lesserof (A) 20% of the excess of our enterprise value plus the aggregate valueof distributions paid to date on then outstanding shares of our common stockover the aggregate issue price of those outstanding shares plus a 10%cumulative, non-compounded, annual return on the issue price of thoseoutstanding shares or (B) 15% of the excess of our enterprise value plusthe aggregate value of distributions paid to date on then outstanding shares ofthe common stock over the aggregate issue price of those outstanding sharesplus a 6% cumulative, non-compounded, annual return on the issue price of thoseoutstanding shares.  At the date of issuance of the shares ofconvertible stock, management determined the fair value under GAAP was lessthan the nominal value paid for the shares; therefore, the difference is notmaterial.

 

 The timing of the conversion of any orall of the convertible stock may be deferred by our board of directors if itdetermines that full conversion may jeopardize our qualification as aREIT.  Any such deferral will in no eventotherwise alter the terms of the convertible stock, and such stock shall beconverted at the earliest date after our board of directors determines thatsuch conversion will not jeopardize our qualification as a REIT.  Our board of directors is authorized to amendour charter, without the approval of the stockholders, to increase theaggregate number of authorized shares of capital stock or the number of sharesof any class or series that we have authority to issue.

 

***ShareRedemption Program***

 

Ourboard of directors has adopted 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 theredeemed shares is set forth in the prospectus for the Offering of our commonstock.  Our board of directors reservesthe right in 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 the program, we will notredeem in excess of 5% of the weighted-average number of shares outstandingduring the twelve-month period immediately prior to the date ofredemption.  In addition, our board ofdirectors will determine at least quarterly whether we have sufficient cash torepurchase shares, and such purchases will generally be limited to proceedsfrom the DRIP plus 1% of operating cash flow for the previous fiscal year (tothe extent positive).  As of September 30,2008, no shares had been redeemed or presented for redemption.

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

***DistributionReinvestment Plan***

 

Wehave adopted the DRIP through which common stockholders may elect to havedistributions otherwise distributable to them invested in additional shares ofour common stock.  We are offering up to25,000,000 shares for sale pursuant to the DRIP at an initial purchase price of$9.50 per share.  The Company mayreallocate the shares of common stock being offered between the primaryoffering and the DRIP.  We may terminatethe DRIP in our discretion at any time upon ten days’ notice to planparticipants.

 

***Distributions***

 

We initiated thepayment of monthly distributions in April 2008 in the amount of a 3%annualized rate of return, based on an investment in our common stock of $10.00per share and calculated on a daily record basis of $0.0008219 per share.  A portion of each distribution is expected toconstitute a return of capital for tax purposes.  Pursuant to the DRIP, stockholders may electto reinvest any cash distribution in additional shares of common stock.  We record all distributions when declared,except that the stock issued through the DRIP is recorded when the shares areactually issued.  Distributions declaredand payable as of September 30, 2008 were approximately $127,000, whichincluded approximately $31,000 of cash distributions payable and approximately$96,000 of DRIP distributions payable.

 

Thefollowing are the distributions declared by quarter for the nine months ended September 30,2008:

 
| **2008**       | ** ** | **Total  Distributions  Declared** | ** ** | **Cash  Declared** | ** ** | **DRIP  Declared** | ** ** |
|----------------|------------|------------------------------------|------------|--------------------|------------|--------------------|------------|
| Second Quarter |       | $                                  | 74,379     |               | $          | 17,636             |       | $ | 56,743 |   |
| Third Quarter  |       | 297,249                            |       | 75,248             |       | 222,001            |       |
|           |       | $                                  | 371,628    |               | $          | 92,884             |       | $ | 278,744 |   |

 

**6.             Incentive Award Plan**

 

The Behringer HarvardOpportunity REIT II, Inc. 2007 Amended and Restated Incentive Award Plan (“IncentiveAward Plan”) was adopted by our board of directors on December 19, 2007and provides for the grant of equity awards to our employees, directors andconsultants, and those of our advisor and its affiliates.  A total of 10,000,000 shares have beenauthorized and reserved for issuance under our Incentive Award Plan.  As of September 30, 2008, no awards hadbeen granted under such plan.

 

**7.             Related Party Transactions**

 

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

 

Behringer Securities LP (“BehringerSecurities”), the dealer-manager and an affiliate of our advisor, receivescommissions of up to 7% of gross offering proceeds.  Behringer Securities reallows 100% of sellingcommissions earned to participating broker-dealers.  In addition, we pay Behringer Securities adealer manager fee of up to 2.5% of gross offering proceeds.  Pursuant to separately negotiated agreements,Behringer Securities may reallow a portion of its dealer manager fee in anaggregate amount up to 2% of gross offering proceeds to broker-dealersparticipating in the Offering; provided, however, that Behringer Securities mayreallow, in the aggregate, no more than 1.5% of gross offering proceeds formarketing fees and expenses, conference fees and non-itemized, non-invoiced duediligence efforts and no more than 0.5% of gross offering proceeds forout-of-pocket and bona fide, separately invoiced due diligence expensesincurred as fees, costs or other expenses from third parties.  Further, in special cases pursuant toseparately negotiated agreements and subject to applicable limitations imposedby the Financial Industry Regulatory Authority, Behringer Securities may use aportion of its dealer manager fee to reimburse certain broker-dealers participatingin the Offering for technology costs and expenses associated with the Offeringand costs and expenses associated with the facilitation of the marketing andownership of our shares by such broker-dealers’ customers.  No selling commissions or dealer manager feewill be paid for sales under the DRIP. For the nine months ended September 30, 2008, BehringerSecurities earned selling commissions and dealer manager fees of $3.7 millionand $1.4 million, respectively, and were recorded as a reduction to additional paid-incapital.

 

We reimburse BehringerOpportunity Advisors II or its affiliates for any organization and offeringexpenses incurred on our behalf in connection with our primary offering (otherthan selling commissions and the dealer manager fee) provided that at no pointwill we reimburse expenses that would cause our total organization and offeringexpenses related to the primary offering (other than selling commissions andthe dealer manager fee) to exceed 1.5% of gross offering proceeds from

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

the primary offering.  Since our inception through September 30, 2008,approximately $4.7 million of organization and offering expenses had beenincurred by Behringer Opportunity Advisors II or its affiliates on ourbehalf.  Of this amount, $0.8 million hadbeen reimbursed by us and $3.9 million of reimbursements payable is included inpayables to affiliates on our balance sheet. Of the $3.9 million of organization and offering expenses reimbursableby us through September 30, 2008, approximately $67,000 had been expensedas organizational costs with the remainder recorded as a reduction ofadditional paid-in capital.  BehringerOpportunity Advisors II or its affiliates determines the amount of organizationand offering expenses owed based on specific invoice identification as well asan allocation of costs to us and other Behringer Harvard programs, based onrespective equity offering results of those entities in offering.

 

Our advisor or itsaffiliates will also receive acquisition and advisory fees of 2.5% of the amountpaid and/or budgeted in respect of the purchase, development, construction, orimprovement of each asset we acquire, including any debt attributable to theseassets.

 

Our advisor or itsaffiliates will also receive an acquisition expense reimbursement in the amountof 0.25% of the funds paid for purchasing an asset, including any debtattributable to the asset, plus 0.25% of the funds budgeted for development,construction, or improvement in the case of assets that we acquire and intendto develop, construct, or improve.  Our advisor or its affiliates willalso receive an acquisition expense reimbursement in the amount of 0.25% of thefunds advanced in respect of a loan or other investment.  We will also paythird parties, or reimburse the advisor or its affiliates, for anyinvestment-related expenses due to third parties in the case of a completedinvestment, including, but not limited to, legal fees and expenses, travel andcommunication expenses, costs of appraisals, accounting fees and expenses, third-partybrokerage or finder’s fees, title insurance, premium expenses, and otherclosing costs.  Our advisor or its affiliates will be responsible forpaying all of the expenses it incurs associated with persons employed by theadvisor to the extent dedicated to making investments for us, such as wages andbenefits of the investment personnel.  Our advisor or its affiliates willalso be responsible for paying all of the investment-related expenses that weor our advisor or its affiliates incur that are due to third parties withrespect to investments we do not make.

 

Our advisor or itsaffiliates will also receive debt financing fees of 1% of the amount availableunder any loan or line of credit made available to us.  It is anticipated that our advisor will paysome or all of these fees to third parties with whom it subcontracts tocoordinate financing for us.

 

We will pay our advisoror its affiliates a development fee in an amount that is usual and customaryfor comparable services rendered to similar projects in the geographic marketof the project if such affiliate provides the development services and if amajority of our independent directors determines that such development fee isfair and reasonable and on terms and conditions not less favorable than thoseavailable from unaffiliated third parties.

 

We expect to pay ourproperty manager and affiliate of our advisor, Behringer Harvard Opportunity IIManagement Services, LLC (“BHO Management”), or its affiliates, fees for themanagement and leasing of our properties. Property management fees will be 4.5% of the gross revenues of theproperties managed by BHO Management or its affiliates.  In the event that we contract directly with athird-party property manager in respect of a property, BHO Management or itsaffiliates will receive an oversight fee equal to 0.5% of the gross revenues ofthe property managed.  In no event willBHO Management or its affiliates receive both a property management fee and anoversight fee with respect to any particular property.  In addition to the property management fee oroversight fee, if BHO Management or its affiliates provide leasing serviceswith respect to a property, we will pay BHO Management or its affiliatesleasing fees in an amount equal to the leasing fees charged by unaffiliatedpersons rendering comparable services in the same geographic location of theapplicable property.  Also, if BHOManagement or its affiliates supervise construction work at our properties, wewill pay BHO Management or its affiliates a construction supervision fee equalto an amount not greater than 5% of all hard construction costs incurred inconnection with the construction work. We will reimburse the costs and expenses incurred by BHO Management orits affiliates on its behalf, including the wages and salaries and otheremployee-related expenses of all on-site employees of BHO Management or itsaffiliates, its subcontractors who are engaged in the operation, management,maintenance, or access control of the Company’s properties, including taxes,insurance and benefits relating to such employees, and legal, travel, and otherout-of-pocket expenses that are directly related to the management of specificproperties.  Furthermore, otherthird-party charges, including fees and expenses of third-party accountants,will be reimbursed.

 

We will pay our advisoror its affiliates a monthly asset management fee of one-twelfth of 1.0% of thesum of the higher of the cost or value of each asset.

 

Our advisor or itsaffiliates also will be paid a disposition fee if the advisor or its affiliatesprovide a substantial amount of services, as determined by our independentdirectors, in connection with the sale of one or more assets.  In such

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

event, our advisor or itsaffiliates will receive a disposition fee equal to (1) in the case of thesale of real property, the lesser of: (A) one-half of the aggregatebrokerage commission paid (including the disposition fee) or, if none is paid,the amount that customarily would be paid, or (B) 3% of the sales price ofeach property sold, and (2) in the case of the sale of any asset otherthan real property, 3% of the sales price of such asset.

 

We will reimburseour advisor or its affiliates for all expenses paid or incurred by the advisorin connection with the services provided to us, subject to the limitation thatwe will not reimburse our advisor for any amount by which its operatingexpenses (including the asset management fee) at the end of the four precedingfiscal quarters exceeds the greater of:  (A) 2%of our average invested assets, or (B) 25% of our net income determinedwithout reduction for any additions to reserves for depreciation, bad debts orother similar non-cash reserves and excluding any gain from the sale of ourassets for that period.  Notwithstandingthe above, we may reimburse the advisor for expenses in excess of thislimitation if a majority of our independent directors determines that suchexcess expenses are justified based on unusual and non-recurring factors. Forthe nine months ended September 30, 2008, we incurred and expensed suchcosts for administrative services totaling approximately $101,000.

 

We are dependent onBehringer Securities, Behringer Opportunity Advisors II, and BHO Management forcertain services that are essential to us, including the sale of shares of ourcommon stock, asset acquisition and disposition decisions, property managementand leasing services, and other general administrative responsibilities.  In the event that these companies were unableto provide us with their respective services, we would be required to obtainsuch services from other sources.

 

**8.****                                     ****Subsequent Events**

 

On October 28, 2008,we acquired a multi-tenant office building known as 1875 Lawrence, located inDenver, Colorado (“1875 Lawrence”).  1875Lawrence is a 15-story office building containing approximately 185,000rentable square feet, located on approximately half an acre of land.  The total contract purchase price for 1875Lawrence, exclusive of closing costs, was $34.5 million.  We used proceeds from our offering of commonstock to the public to acquire 1875 Lawrence.

 

*****

 

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

 

The followingdiscussion and analysis should be read in conjunction with our accompanyingfinancial statements and the notes thereto.

 

**Forward-Looking Statements**

 

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

 

Forward-lookingstatements that were true at the time made may ultimately prove to be incorrector false.  We caution investors not toplace undue reliance on forward-looking statements, which reflect ourmanagement’s view only as of the date of this Form 10-Q.  We undertake no obligation to update orrevise forward-looking statements to reflect changed assumptions, theoccurrence of unanticipated events or changes to future operating results.  Factors that could cause actual results todiffer materially from any forward-looking statements made in this Form 10-Qinclude changes in general economic conditions, changes in real estateconditions, construction costs that may exceed estimates, construction delays,increases in interest rates, lease-up costs, inability to obtain new tenantsupon the expiration of existing leases, the potential need to fund tenantimprovements or other capital expenditures out of operating cash flows, and ourinability to realize value for limited partners upon disposition of ourassets.  The forward-looking statementsshould be read in light of the risk factors identified in the “Risk Factors”section of our Registration Statement on Form S-11, as filed with the SEC, therisks identified in Part II, Item 1A of our quarterly report for theperiod ended June 30, 2008, and the risks identified in Part II, Item1A of this quarterly report.

### ** **

### **CautionaryNote**

 

The representations, warranties,and covenants made by us in any agreement filed as an exhibit to this quarterlyreport are made solely for the benefit of the parties to the agreement,including, in some cases, for the purpose of allocating risk among the partiesto the agreement, and should not be deemed to be representations, warranties,or covenants to or with any other parties. Moreover, these representations, warranties or covenants should not berelied upon as accurately describing or reflecting the current state of our affairs.

 

**CriticalAccounting Policies and Estimates**

 

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

 

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

 

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

 

Our consolidatedfinancial statements include our accounts and the accounts of othersubsidiaries over which we have control. All inter-company transactions, balances, and profits have beeneliminated in consolidation.  Interestsin entities acquired will be evaluated for consolidation based on FIN 46R,which requires the consolidation of VIEs in which we are deemed to be theprimary beneficiary.  If the interest inthe entity is determined not to be a VIE under FIN 46R, then the entity will beevaluated for consolidation under the American Institute of Certified PublicAccountants’ Statement of Position 78-9, “Accounting for Investments in RealEstate Ventures,” and by Emerging Issues Task Force 04-5, “Determining Whethera General Partner, or the General Partners as a Group, Controls a LimitedPartnership or Similar Entity When the Limited Partners Have Certain Rights.”

 

There are judgments andestimates involved in determining if an entity in which we have made aninvestment is a VIE and if so, if we are the primary beneficiary.  The entity is evaluated to determine if it isa VIE by, among other things,

 

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calculating thepercentage of equity being risked compared to the total equity of theentity.  FIN 46R provides some guidelinesas to what the minimum equity at risk should be, but the percentage can varydepending upon the industry and/or the type of operations of the entity and itis up to management to determine that minimum percentage as it relates to ourbusiness and the facts surrounding each of our acquisitions.  In addition, even if the entity’s equity atrisk is a very low percentage, we are required by FIN 46R to evaluate theequity at risk compared to the entity’s expected future losses to determine ifthere could still in fact be sufficient equity at the entity.  Determining expected future losses involvesassumptions of various possibilities of the results of future operations of theentity, assigning a probability to each possibility, and using a discount rateto determine the net present value of those future losses.  A change in the judgments, assumptions, andestimates outlined above could result in consolidating an entity that shouldnot be consolidated or accounting for an investment on the equity method thatshould in fact be consolidated, the effects of which could be material to ourfinancial statements.

 

***RealEstate***

 

Upon the acquisition ofreal estate properties, we will allocate the purchase price of those propertiesto the tangible assets acquired, consisting of land, inclusive of associatedrights, land improvements, buildings, building improvements, furniture,fixtures and equipment, identified intangible assets, asset retirementobligations, and assumed liabilities based on their relative fair values inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets.” Identified intangible assets will consist of the fair value ofabove-market and below-market leases, in-place leases, in-place tenantimprovements, in-place leasing commissions, and tenant relationships.

 

Upon the completion of abusiness combination, we will record the tangible assets acquired, consistingof land and buildings, any assumed debt, identified intangible assets, andasset retirement obligations based on their fair values in accordance with SFASNo. 141, “Business Combinations.” Identified intangible assets will consist of the fair value ofabove-market and below-market leases, in-place leases, in-place tenantimprovements, in-place leasing commissions, and tenant relationships.  Any amount paid in excess of the fair valueof the assets and liabilities acquired will be recorded as goodwill.  If the value of the assets and liabilitiesexceed the total purchase price, then the resulting negative goodwill will beallocated to the tangible and intangible assets acquired.

 

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

 

We will determine thefair value of assumed debt by calculating the net present value of thescheduled note payments using interest rates for debt with similar terms andremaining maturities that we believe we could obtain.  Any difference between the fair value and statedvalue of the assumed debt will be recorded as a discount or premium andamortized over the remaining life of the loan.

 

The fair value of thetangible assets acquired, expected to consist of land, land improvements,buildings, building improvements, and furniture, fixtures and equipment, willbe determined by valuing the property as if it were vacant, and the “as-if-vacant”value will be allocated to the tangible assets. Land values will be derived from appraisals, and building values will becalculated as replacement cost less depreciation or management’s estimates ofthe relative fair value of these assets using discounted cash flow analyses orsimilar methods.  Furniture, fixtures andequipment values are determined based on current reproduction or replacementcost less depreciation and other estimated allowances based on physical,functional, or economic factors.  Thevalue of commercial office buildings will be depreciated over the estimateduseful life of 25 years using the straight-line method and hotels/mixed-useproperties will be depreciated over the estimated useful life of 39 years usingthe straight-line method.  Landimprovements will be depreciated over the estimated useful life of 15 years,and furniture, fixtures and equipment will be depreciated over estimated usefullives ranging from five to seven 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) management’sestimate of current market lease rates for the corresponding in-place leases,measured over a period equal to (a) the remaining non-cancelable leaseterm for above-market leases, or (b) the remaining non-cancelable leaseterm plus any fixed rate renewal option for below-market leases.  We will record the fair value of above-marketand below-market leases as intangible assets or intangible liabilities,respectively, and amortize them as an adjustment to rental income over theabove determined lease term.

 

The total value ofidentified real estate intangible assets acquired will be further allocated toin-place lease values, in-place tenant improvements, in-place leasingcommissions, and tenant relationships based on our evaluation of the specificcharacteristics of each tenant’s lease and our overall relationship with thatrespective tenant.  The aggregate valuefor tenant improvements and leasing commissions will be based on estimates ofthese costs incurred at inception of the acquired leases, amortized through thedate of acquisition.  The aggregate valueof in-place leases acquired and tenant relationships will be

 

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determined by applying afair value model.  The estimates of fairvalue of in-place leases includes an estimate of carrying costs during theexpected lease-up periods for the respective spaces considering current marketconditions.  In estimating the carryingcosts that would have otherwise been incurred had the leases not been in place,we will include such items as real estate taxes, insurance and other operatingexpenses as well as lost rental revenue during the expected lease-up periodbased on current market conditions.  Theestimates of the fair value of tenant relationships will also include costs toexecute similar leases including leasing commissions, legal fees, and tenantimprovements as well as an estimate of the likelihood of renewal as determinedby management on a tenant-by-tenant basis.

 

We plan to amortize thevalue of in-place leases to expense over the term of the respectiveleases.  The value of tenant relationshipintangibles will be amortized to expense over the initial term and anyanticipated renewal periods, but in no event will the amortization period forintangible assets exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, theunamortized portion of the in-place lease value and tenant relationshipintangibles will be charged to expense.

 

In allocating thepurchase price of each of our properties, our advisor will make assumptions anduse various estimates, including, but not limited to, the estimated usefullives of the assets, the cost of replacing certain assets, discount rates usedto determine present values, market rental rates per square foot, and the periodrequired to lease the property up to its occupancy at acquisition if it werevacant.  Many of these estimates will beobtained from independent third party appraisals.  However, management is responsible for thesource and use of these estimates.  A changein these estimates and assumptions could result in the various categories ofour real estate assets and/or related intangibles being overstated orunderstated which could result in an overstatement or understatement ofdepreciation and/or amortization expense. These variances could be material to our financial statements.

 

***Impairmentof Long-Lived Assets***

 

For real estate we willwholly-own, management will monitor events and changes in circumstancesindicating that the carrying amounts of the real estate assets may not berecoverable.  When such events or changesin circumstances occur, we will assess potential impairment by comparingestimated future undiscounted operating cash flows expected to be generated overthe life of the asset, including its eventual disposition, to the carryingamount of the asset.  In the event thatthe carrying amount exceeds the estimated future undiscounted operating cashflows, we will recognize an impairment loss to adjust the carrying value of theasset to estimated fair value.

 

For real estate owned byus through an investment in a limited partnership, joint venture,tenant-in-common interest, or other similar investment structure, at eachreporting date management will compare the estimated fair value of its investmentto the carrying value.  An impairmentcharge will be recorded to the extent that the fair value of the investment isless than the carrying amount and the decline in value is determined to beother than a temporary decline.

 

In evaluating ourinvestments for impairment, management will make several estimates andassumptions, including, but not limited to, the projected date of dispositionof the properties, the estimated future cash flows of the properties during ourownership and the projected sales price of each of the properties.  A change in these estimates and assumptionscould result in understating or overstating the book value of our investmentswhich could be material to our financial statements.

 

**Overview**

 

Wewere formed primarily to acquire and operate commercial real estate and realestate-related assets.  In particular, wewill focus generally on acquiring commercial properties with significantpossibilities for short-term capital appreciation, such as those requiringdevelopment, redevelopment or repositioning, those located in markets andsubmarkets with high growth potential, and those available from sellers who aredistressed or face time-sensitive deadlines. We may acquire a wide variety of commercial properties, includingoffice, industrial, retail, hospitality, recreation and leisure, single-tenant,multifamily, and other real properties. These properties may be existing, income-producing properties, newlyconstructed properties or properties under development or construction, and mayinclude multifamily properties purchased for conversion into condominiums andsingle-tenant properties that may be converted for multifamily use.  Further, we may invest in real estate-relatedsecurities, including securities issued by other real estate companies, eitherfor investment or in change of control transactions completed on a negotiatedbasis or otherwise.  We also mayoriginate or invest in collateralized mortgage-backed securities, mortgage,bridge or mezzanine loans, and Section 1031 tenant-in-common interests(including those issued by affiliates of our advisor), or in entities that makeinvestments similar to the foregoing.  Wehad not acquired any real estate or real estate-related assets as of September 30,2008.

 

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

 

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

 

**Resultsof Operations**

 

We commenced operationson April 1, 2008 upon receipt and acceptance of subscriptions for aminimum of $2 million of shares of common stock pursuant to the Offering.  We had no operations for the period beginningJanuary 9, 2007 (date of inception) through September 30, 2007.  As of September 30, 2008, we had notacquired any real estate or real estate-related assets.

 

*Three months ended September 30, 2008 ascompared to the three months ended September 30, 2007*

 

*General &Administrative Expenses.* General and administrative expensesfor the period totaled $111,800.  Generaland administrative expenses were comprised of auditing fees, legal fees, boardof directors’ fees, organization costs paid to Behringer Opportunity AdvisorsII, and other administrative expenses. We expect general and administrative expenses to increase as we beginacquiring properties.

 

*InterestIncome.* Interestincome of $198,423 represents interest income on funds on deposit, net of bankfees. We began accepting investors on April 1, 2008.  Upon admission of new stockholders,subscription proceeds are used for payment of dealer manager fees and sellingcommissions and may be utilized as consideration for investments and thepayment or reimbursement of offering expenses and operating expenses.  Until required for such purposes, netoffering proceeds are held in short-term, liquid investments and earn interestincome.  We expect interest income to increaseas we continue to accept new investors.

 

*Nine months ended September 30, 2008 ascompared to the period from January 9, 2007 (date of inception) through September 30,2007*

 

*General &Administrative Expenses.* General and administrative expensesfor the period totaled $398,164.  Generaland administrative expenses were comprised of auditing fees, legal fees, boardof directors’ fees, organization costs paid to Behringer Opportunity AdvisorsII, and other administrative expenses. We expect general and administrative expenses to continue to increase aswe begin acquiring properties.

 

*InterestIncome.* Interestincome of $245,461 represents interest income on funds on deposit, net of bankfees.  Upon admission of newstockholders, subscription proceeds are used for payment of dealer manager feesand selling commissions and may be utilized as consideration for investmentsand the payment or reimbursement of offering expenses and operatingexpenses.  Until required for suchpurposes, net offering proceeds are held in short-term, liquid investments andearn interest income.  We expect interestincome to increase as we continue to accept new investors.

 

**Cash Flow Analysis**

 

Cash used in operatingactivities for the nine months ended September 30, 2008 was $817,821, andwas comprised primarily of the net loss of $152,703, changes in prepaid expensesand other assets of $188,623, and changes in payables to related parties forgeneral and administrative costs of $481,220. There was no cash flow from operations for the period from January 9,2007 (date of inception) through September 30, 2007.

 

Cash used in investingactivities for the nine months ended September 30, 2008 was $1,005,774consisted of escrow deposits and pre-acquisition costs on 1875 Lawrence, anoffice building acquired on October 28, 2008.  See Note 8 – Subsequent Events, in the Notesto the Consolidated Financial Statements in this Form 10-Q.  There was no cash flow from investingactivities for the period from January 9, 2007 (date of inception) throughSeptember 30, 2007.

 

Cash provided byfinancing activities for the nine months ended September 30, 2008 was$49,481,387 and was comprised primarily of the issuance of common stock, net ofoffering costs, of $49,543,087.  Cashprovided by financing activities for the period from January 9, 2007 (dateof inception) through September 30, 2007 was $201,000 and consisted ofproceeds from the issuance of common and convertible stock.

 

**TotalOperating Expenses**

 

In accordance with the Statement of Policy RegardingReal Estate Investment 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 September 30, 2008, TOE of $0.5 million exceeded 2% of ourAIA (we did not have any AIA at September 30, 2008 and had incurred an NIloss of $0.2 million) by $0.5 million.  Our Board of Directors, includingall of our independent directors, have reviewed this analysis and unanimouslydetermined the excess to be justified because the

 

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Company was in itsdevelopment stage through April 1, 2008 when the Company accepted itsfirst investors under its initial public offering and did not acquire its firstreal estate or real estate-related asset until October 28, 2008, whichcaused the expenses it incurred in connection with its organization and as aresult of being a public company for audit and legal services, director andofficer liability insurance, and fees and expenses for board members inconnection with service on the board and its committees to be disproportionateto the Company’s AIA and its NI.

 

**Liquidityand Capital Resources**

 

Our principal demands forfunds will be for the acquisition of real estate and real estate-relatedassets, for the payment of operating expenses and distributions, and for thepayment of interest on any outstanding indebtedness we may incur.  Generally, we expect to meet cash needs foritems other than acquisitions from our cash flow from operations, and we expectto meet cash needs for acquisitions from the net proceeds of the Offering andfrom financings.

 

Distributions will beauthorized at the discretion of our board of directors, based on its analysisof our earnings, cash flow, anticipated cash flow, capital expenditurerequirements and general financial condition.  The board’s discretion willbe influenced, in substantial part, by its obligation to cause us to complywith the REIT requirements.   Until wegenerate sufficient cash flow from operations to fully fund the payment ofdistributions, we have and will continue to pay some or all of ourdistributions from other sources. We may generate cash to pay distributionsfrom financing activities, components of which may include borrowings(including borrowings secured by our assets) in anticipation of futureoperating cash flow and proceeds of the Offering.  In addition, fromtime to time, our advisor and its affiliates may agree to waive or defer all,or a portion, of the acquisition, asset management or other fees or otherincentives due to them, enter into lease agreements for unleased space, paygeneral administrative expenses or otherwise supplement investor returns inorder to increase the amount of cash available to make distributions to ourstockholders.

 

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

 

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

 

Recently, the U.S. creditmarkets and the sub-prime residential mortgage market have experienced severedislocations and liquidity disruptions. Sub-prime mortgage loans haveexperienced increasing rates of delinquency, foreclosure and loss. These andother related events have had a significant impact on the capital marketsassociated not only with sub-prime mortgage-backed securities, asset-backedsecurities and collateralized debt obligations, but also with the U.S. housing,credit and financial markets as a whole. Consequently, there is greater uncertainty regarding our ability toaccess the credit market in order to attract financing on reasonable terms. Ourability to borrow funds to finance future acquisitions could be adverselyaffected by our inability to secure permanent financing on reasonable terms, ifat all.

 

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

 

**Distributions**

 

The distributionsdeclared during the nine months ended September 30, 2008 were $371,628.  We owned no real estate or realestate-related assets during this period, and as a result did not generate anycash flow from operations.  Cash amountsfor distribution were funded primarily with offering proceeds.  There were no distributions declared or paidduring 2007.

 

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Distributions as of September 30,2008 were as follows:

 
| ** **     | ** ** | **Distributions** | ** ** |
|----------------|------------|-------------------|------------|
| **2008**       | ** ** | **Declared**      | ** ** | **Paid** | ** ** |
| Second Quarter |       | $                 | 74,379     |   | $ | 32,456 |   |
| Third Quarter  |       | 297,249           |       | 212,255 |   |
|           |       | $                 | 371,628    |   | $ | 244,711 |   |

 

Over the long-term, weexpect that a greater percentage of our distributions will be paid from cashflow from operations (except with respect to distributions related to sales ofour assets).  However, operating performance cannot be accuratelypredicted due to numerous factors, including our ability to raise and investcapital at favorable yields, the financial performance of our investments in thecurrent real estate environment, the types and mix of investments in ourportfolio, and the accounting treatment of our investments in accordance withour accounting policies.  As a result, future distributions declared andpaid may continue to exceed cash flow from operations.

 

**Off-Balance Sheet Arrangements**

 

We have no off-balancesheet arrangements that are reasonably likely to have a current or futureeffect on our financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capitalresources.

 

**Item 3.        Quantitativeand Qualitative Disclosures About Market Risk.**

 

We will be exposed tointerest rate changes primarily as a result of long-term debt used to acquireproperties and make loans and other permitted investments. Our interest raterisk management objectives will be to limit the impact of interest rate changeson earnings and cash flows and to lower overall borrowing costs. To achievethese objectives, we expect to borrow primarily at fixed rates or variablerates with the lowest margins available and, in some cases, with the ability toconvert 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. Since wehave not yet incurred any debt as of September 30, 2008, we currently havelimited exposure to interest rate risk. As of September 30, 2008, a 1% increase or decrease in interestrates would have no effect on our interest expense as we had no outstandingdebt as of that date.

 

**Item 4T.      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 September 30, 2008, 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, as of September 30, 2008, wereeffective for the purpose of ensuring that information required to be disclosedby us in this report is recorded, processed, summarized and reported within thetime periods specified by the rules and forms of the Exchange Act and isaccumulated and communicated to management, including the Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosures.

 

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

 

There have been nochanges in internal control over financial reporting that occurred during thequarter ended September 30, 2008 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II**

**OTHERINFORMATION**

 

**Item 1.        LegalProceedings.**

 

We arenot a party to any material pending legal proceedings.

 

**Item 1A.     RiskFactors.**

 

Thefollowing risk factors update the risk factors contained in the “Risk Factors”section set forth in our Registration Statement on Form S-11 and in ourquarterly report on Form 10-Q for the period ended June 30, 2008.

 

**Risks Related to Our Business inGeneral**

 

*Yourinvestment may be subject to additional risks if we make internationalinvestments.*

 

Weexpect to purchase real estate assets located outside the United States and maymake or purchase mortgage, bridge, mezzanine or other loans or participationsin mortgage, bridge, mezzanine or other loans made by a borrower locatedoutside the United States or secured by property located outside the UnitedStates.  These investments may beaffected by factors peculiar to the laws of the jurisdiction in which theborrower or the property is located. These laws may expose us to risks that are different from and inaddition to those commonly found in the United States.  Foreign investments could be subject to thefollowing risks:

 

·                  governmental laws, rules andpolicies including laws relating to the foreign ownership of real property ormortgages and laws relating to the ability of foreign persons or corporationsto remove profits earned from activities within the country to the person’s orcorporation’s country of origin;

 

·                  variations in currency exchange rates;

 

·                  adverse market conditions caused byinflation or other changes in national or local economic conditions;

 

·                  changes in relative interest rates;

 

·                  changes in the availability, cost andterms of mortgage funds resulting from varying national economic policies;

 

·                  changes in real estate and other taxrates, the tax treatment of transaction structures and other changes inoperating expenses in a particular country where we have an investment;

 

·                  lack of uniform accounting standards(including availability of information in accordance with U.S. generallyaccepted accounting principles);

 

·                  changes in land use and zoning laws;

 

·                  more stringent environmental laws orchanges in such laws;

 

·                  changes in the social stability or otherpolitical, economic or diplomatic developments in or affecting a country wherewe have an investment;

 

·                  we, our sponsor and its affiliates haverelatively less experience with respect to investing in real property or otherinvestments outside the United States as compared to domestic investments; and

 

·                  legal and logistical barriers toenforcing our contractual rights.

 

Any of these risks couldhave an adverse effect on our business, results of operations and ability topay distributions to our stockholders.

 

*The failure of any bank in which we deposit our funds could reduce theamount of cash we have available to pay distributions and make additionalinvestments.*

 

We have diversified ourcash and cash equivalents between several banking institutions in an attempt tominimize exposure to any one of these entities. However, the Federal Deposit Insurance Corporation, or “FDIC,” onlyinsures amounts up to $250,000 per depositor per insured bank.  At September 30, 2008, we had cash andcash equivalents and restricted cash deposited in certain financialinstitutions in excess of federally insured levels.  If any of the banking institutions in whichwe have deposited funds ultimately fails, we may lose our deposits over$250,000.  The loss of our deposits couldreduce the amount of cash we have available to distribute or invest and couldresult in a decline in the value of your investment.

 

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### ***Future financing could beimpacted by negative capital market conditions.***

### *** ***

Recently, the U.S. credit markets and the sub-primeresidential mortgage market have experienced severe dislocations and liquiditydisruptions. Sub-prime mortgage loans have experienced increasing rates ofdelinquency, foreclosure and loss. These and other related events have had asignificant impact on the capital markets associated not only with sub-prime mortgage-backedsecurities, asset-backed securities and collateralized debt obligations, butalso with the U.S. housing, credit and financial markets as a whole.  Consequently, there is greater uncertaintyregarding our ability to access the credit market in order to attract financingon reasonable terms. Our ability to borrow funds to finance future acquisitionscould be adversely affected by our inability to secure permanent financing onreasonable terms, if at all.

 

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

 

**Use of Proceeds from RegisteredSecurities**

 

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

 

We areoffering a maximum of 100,000,000 shares in our primary offering at anaggregate offering price of up to $1.0 billion, or $10.00 per share withdiscounts available to certain categories of purchasers.  The 25,000,000 shares offered under the DRIPare initially being offered at an aggregate offering price of $237.5 million,or $9.50 per share.  Behringer SecuritiesLP, an affiliate of our advisor, is the dealer manager of our offering.  As of September 30, 2008, we had sold5,567,739 shares of our common stock, net of the 22,471 shares issued toBehringer Harvard Holdings, LLC, on a best efforts basis pursuant to theOffering for gross offering proceeds of approximately $55.5 million.

 

From the commencement ofthe Offering through September 30, 2008, we incurred the followingexpenses in connection with the issuance and distribution of the registeredsecurities pursuant to the Offering:

 
| **Type of Expense**    | ** ** | **Amount** | ** ** |
|----------------------------------|------------|------------|------------|
| Other expenses to affiliates (1) |       | $          | 9,758,236  |   |
|                                  |            |            |            |  |

 

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(1) “Other expensesto affiliates” includes commissions and dealer manager fees paid to BehringerSecurities, our affiliate, which reallowed all or a portion of the commissionsand fees to soliciting dealers.

 

From the commencement ofthe Offering through September 30, 2008, the net proceeds to us from theOffering after deducting the total expenses incurred and described above, were$45.8 million.  We had not used any suchnet offering proceeds as of September 30, 2008 to purchase real estate orreal estate-related assets.

 

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

 

**Item 3.        DefaultsUpon Senior Securities.**

 

None.

 

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

 

None.

 

**Item 5.        OtherInformation.**

 

On March 27, 2008,our board of directors and sole stockholder approved an amendment to ourcharter  (the “Second Charter Amendment”),with the condition that the amendment would not be filed with the MarylandState Department of Assessments and Taxation (the “SDAT”) until such time thatthe board of directors, including a majority of the independent directors,determined after consultation with counsel that the Second Charter Amendmentwould not materially adversely affect us due to the impact of the SecondCharter Amendment on (1) the effectiveness of our registration statementwith the states relating to our best efforts public offering of common stock, (2) ourability to renew such registration statement or (3) our ability toregister a follow-on offering with the states.

 

On November 11,2008, our board of directors, including a majority of our independentdirectors, made the above determination, and the Second Charter Amendmentbecame effective upon its filing with the SDAT on November 12, 2008.

 

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As previously disclosedin our Current Report on Form 8-K dated April 1, 2008, the SecondCharter Amendment amends provisions of our charter relating to shares of ouroutstanding convertible stock. Generally, our convertible stock converts into shares of common stock onone of two events.  First, it willconvert if we have paid distributions to common stockholders such thataggregate distributions are equal to 100% of the price at which we sold ouroutstanding shares of common stock plus an amount sufficient to produce a 10%cumulative, non-compounded, annual return at that price.  Alternatively, the convertible stock willconvert if we list our shares of common stock on a national securities exchangeand, on the 31st trading day after listing, the value of the company based onthe average trading price of the shares of common stock since the listing, plusprior distributions, combine to meet the same 10% return threshold for ourcommon stockholders.  Each of these twoevents is a “Triggering Event.”

 

                The Second Charter Amendment changes how theconversion of convertible stock is calculated if the Advisory ManagementAgreement with our advisor expires without renewal or is terminated (other thanbecause of a material breach by our advisor). Currently, the number of shares of common stock into which theconvertible stock converts is calculated at the time the Advisory ManagementAgreement terminates.  If, at that time,our enterprise value plus prior distributions is not sufficient to meet theabove-described 10% return threshold, then the convertible stock would be of novalue.  Although the conversion ratio isset at the time the Advisory Management Agreement terminates, the actualconversion will not occur until a Triggering Event occurs.

 

Asamended, following the termination of the Advisory Management Agreement, thenumber of shares of common stock into which the convertible stock would convertwould be determined on a Triggering Event instead of at the time the AdvisoryManagement Agreement terminates.  If itis determined that the convertible stock is convertible into shares of commonstock, the actual number of shares of common stock to be received uponconversion would be reduced from that provided in our charter so that theholder of the convertible stock would only be entitled to a prorated portion ofcommon stock based on the percentage of time that we were advised by BehringerOpportunity Advisors II.

 

**Item 6.        Exhibits.**

 

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

 

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** **

**SIGNATURE**

 

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

 

 
|                           | **BEHRINGER  HARVARD OPPORTUNITY REIT II, INC.** |
|--------------------------------|--------------------------------------------------|
|                           |                                             |   |
|                           |                                             |   |
| Dated: November 14,  2008 | By:                                              | /s/ Gary S. Bresky |
|                           |                                             | Gary S. Bresky |
|                           |                                             | Executive Vice  President and Chief Financial Officer |
|                           |                                             | (Principal Financial  Officer) |

 

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**Index toExhibits**

** **
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                            |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.1*                |       | Second Articles of Amendment and Restatement as amended by the First  Articles of Amendment and the Second Articles of Amendment                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.2                 |       | Amended and Restated Bylaws (previously filed and incorporated by  reference to Exhibit 3.2 to Pre-Effective Amendment No. 3 to the Company’s  Registration Statement on Form S-11, Commission File No. 333-140887)                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.1                 |       | Form of Subscription Agreement (included as Exhibit B to prospectus)                                                                                                                                                                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.2                 |       | Distribution Reinvestment Plan (included as Exhibit C to prospectus)                                                                                                                                                                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.3                 |       | Share Redemption Program (previously filed and incorporated by  reference from the description under “Description of Shares – Share  Redemption Program” in the prospectus)                                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.4                 |       | Form of Escrow Agreement (previously filed and incorporated by  reference to Exhibit 4.4 to Pre-Effective Amendment No. 2 to the Company’s  Registration Statement on Form S-11, Commission File No. 333-140887)                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.5                 |       | Statement regarding restrictions on transferability of shares of common  stock (to appear on stock certificate or to be sent upon request and without  charge to stockholders issued shares without certificates) (previously filed  and incorporated by reference to Exhibit 4.5 to Pre-Effective Amendment No. 3  to the Company's Registration Statement on Form S-11, Commission File No.  333-140887) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1                |       | First Amendment to Advisory Management Agreement by and between  Behringer Harvard Opportunity REIT II, Inc. and Behringer Harvard Opportunity  Advisors II LP dated August 13, 2008 (previously filed and incorporated by  reference to Form 8-K filed on August 14, 2008)                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2                |       | Amended and Restated Property Management and Leasing Agreement by and  among Behringer Harvard Opportunity REIT II, Inc., Behringer Harvard  Opportunity OP II LP and Behringer Harvard Opportunity II Management  Services, LLC dated August 13, 2008 (previously filed and incorporated by  reference to Form 8-K filed on August 14, 2008)                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3                |       | Real Estate Purchase and Sale Agreement by and between Harvard Property  Trust, LLC, as buyer, and Principal Life Insurance Company, as seller, dated  September 19, 2008 (previously filed and incorporated by reference to Form  8-K filed on November 3, 2008)                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.4                |       | Assignment and Assumption of Real Estate Purchase and Sale Agreement by  and between Harvard Property Trust, LLC, as assignor, and Behringer Harvard  Opportunity OP II LP, as assignee, dated September 22, 2008 (previously filed  and incorporated by reference to Form 8-K filed on November 3, 2008)                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.1*               |       | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.2*               |       | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 32.1*               |       | Section 1350  Certifications**                                                                                                                                                                                                                                                                                                                                                                             |

** **

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* Filed herewith

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

 

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