Behringer Harvard Opportunity REIT I (BHOR) 10-Q 2008 Q3 Quarterly report

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 the transition period from                 to

Commission File Number: 000-51961

Behringer Harvard Opportunity REIT I, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland	20-1862323
(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) (ZIP Code)

Registrant’s Telephone Number, Including Area Code:  (866) 655-3600

None

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

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

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

Large accelerated filer o Accelerated filer o Non-accelerated filer x Smaller reporting company o

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

As of October 31, 2008, the Registrant had 54,799,037 shares of common stock outstanding.

BEHRINGER HARVARD OPPORTUNITY REIT I, INC.

FORM 10-Q

Quarter Ended September 30, 2008

		Page
	PART I FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007	4
	Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the Year Ended December 31, 2007 and the Nine Months Ended September 30, 2008	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4T.	Controls and Procedures	34
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Submission of Matters to a Vote of Security Holders	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
Signature		38

2

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

Behringer Harvard Opportunity REIT I, Inc.

Consolidated Balance Sheets
(in thousands, except share and per share amounts)

(Unaudited)

	September 30,			December 31,
	2008			2007
Assets
Real estate
Land and improvements, net	$	134,211		$	107,428
Buildings and improvements, net	396,189			287,237
Real estate under development	41,143			75,729
Total real estate	571,543			470,394
Condominium inventory	97,086			75,547
Cash and cash equivalents	43,589			78,498
Restricted cash	5,657			4,731
Accounts receivable, net	11,816			7,736
Prepaid expenses and other assets	5,909			3,493
Leasehold interests, net	36,943			41,543
Investments in unconsolidated joint ventures	64,334			36,445
Furniture, fixtures and equipment, net	13,300			9,173
Deferred financing fees, net	7,270			3,755
Notes receivable	1,943			1,719
Notes receivable from related parties	34,599			7,841
Lease intangibles, net	30,294			27,096
Other intangibles, net	10,107			10,651
Receivables from related parties	2,210			73
Total assets	$	936,600		$	778,695
Liabilities and Stockholders’ Equity
Notes payable	$	424,435		$	243,902
Accounts payable	6,974			9,300
Payables to related parties	1,498			901
Acquired below-market leases, net	18,993			18,851
Distributions payable	1,349			1,373
Accrued liabilities	19,621			21,750
Other liabilities	2,390			1,223
Total liabilities	475,260			297,300
Commitments and contingencies
Minority interest	10,931			15,335
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 shares issued and outstanding	—			—
Common stock, $.0001 par value per share; 350,000,000 shares authorized, 54,691,638 and 54,056,354 shares issued and outstanding at September 30, 2008, and December 31, 2007, respectively	5			5
Additional paid-in capital	487,680			481,521
Accumulated distributions and net loss	(37,828		)	(14,982		)
Accumulated other comprehensive income (loss)	552			(484		)
Total stockholders’ equity	450,409			466,060
Total liabilities and stockholders’ equity	$	936,600		$	778,695

See Notes to Consolidated Financial Statements.

3

Behringer Harvard Opportunity REIT I, Inc.

Consolidated Statements of Operations
(in thousands, except per share amounts)

(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues
Rental revenue	$	15,192		$	7,899		$	41,577		$	19,220
Hotel revenue	2,045			2,602			5,240			3,220
Condominium sales	4,315			—			4,315			—
Total revenues	21,552			10,501			51,132			22,440
Expenses
Property operating expenses	6,880			4,107			18,229			7,490
Cost of condominium sales	4,331			—			4,331			—
Interest expense	4,113			1,759			9,059			4,061
Real estate taxes	1,980			1,023			5,311			2,256
Property management fees	583			268			1,781			546
Asset management fees	1,456			714			3,399			1,509
General and administrative	1,209			307			3,032			1,016
Advertising costs	708			158			1,853			781
Depreciation and amortization	6,783			3,692			18,550			8,040
Total expenses	28,043			12,028			65,545			25,699
Interest income	706			1,366			2,241			2,939
Loss before income taxes, minority interest and equity in losses of unconsolidated joint ventures	(5,785		)	(161		)	(12,172		)	(320		)
Provision for income taxes	(47		)	(46		)	(146		)	(71		)
Equity in losses of unconsolidated joint ventures	(1,987		)	(227		)	(3,518		)	(295		)
Minority interest	2,334			146			5,250			(210		)
Net loss	$	(5,485	)	$	(288	)	$	(10,586	)	$	(896	)
Weighted average shares outstanding:
Basic and diluted	54,611			42,450			54,433			31,154
Loss per share:
Basic and diluted	$	(0.10	)	$	(0.01	)	$	(0.19	)	$	(0.03	)

See Notes to Consolidated Financial Statements.

4

Behringer Harvard Opportunity REIT I, Inc.

Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
(in thousands, except share amounts)

(Unaudited)

											Accumulated			Accumulated
	Convertible Stock			Common Stock				Additional			Distributions			Other			Total
	Number of	Par		Number of		Par		Paid-In			and			Comprehensive			Stockholders’
	Shares	Value		Shares		Value		Capital			Net loss			Income (Loss)			Equity
Balance at January 1, 2007	1,000	$	—	18,202,576		$	2	$	159,906		$	(461	)	$	—		$	159,447
Issuance of common stock, net	—	—		35,081,049		3		314,226			—			—			314,229
Redemption of common stock	—	—		(148,951	)	—		(1,366		)	—			—			(1,366		)
Distributions declared on common stock	—	—		—		—		—			(10,665		)	—			(10,665		)
Shares issued pursuant to Distribution
Reinvestment Plan, net	—	—		921,680		—		8,755			—			—			8,755
Comprehensive loss:
Net loss	—	—		—		—		—			(3,856		)	—			(3,856		)
Other comprehensive loss:
Foreign currency translation loss	—	—		—		—		—			—			(121		)	(121		)
Unrealized losses on interest rate derivatives	—	—		—		—		—			—			(363		)	(363		)
Total comprehensive loss																	(4,340		)
Balance at December 31, 2007	1,000	—		54,056,354		5		481,521			(14,982		)	(484		)	466,060
Redemption of common stock	—	—		(342,590	)	—		(3,130		)	—			—			(3,130		)
Distributions declared on common stock	—	—		—		—		—			(12,260		)	—			(12,260		)
Shares issued pursuant to Distribution
Reinvestment Plan, net	—	—		977,874		—		9,289			—			—			9,289
Comprehensive loss:
Net loss	—	—		—		—		—			(10,586		)	—			(10,586		)
Other comprehensive loss:
Foreign currency translation loss	—	—		—		—		—			—			1,505			1,505
Unrealized gains on interest rate derivatives	—	—		—		—		—			—			(469		)	(469		)
Total comprehensive loss																	(9,550		)
Balance at September 30, 2008	1,000	$	—	54,691,638		$	5	$	487,680		$	(37,828	)	$	552		$	450,409

See Notes to Consolidated Financial Statements.

5

Behringer Harvard Opportunity REIT I, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Nine months			Nine months
	ended			ended
	September 30, 2008			September 30, 2007
Cash flows from operating activities:
Net loss	$	(10,586	)	$	(896	)
Adjustments to reconcile net loss to net cash flows (used in) provided by operating activities:
Depreciation and amortization	15,079			6,435
Amortization of deferred financing fees	1,480			987
Minority interest	(5,250		)	210
Equity in losses of unconsolidated joint ventures	3,518			295
Net change in fair value of derivatives	1,110			—
Change in accounts receivable	(4,079		)	(3,843		)
Change in condominium inventory	(20,601		)	(12,739		)
Change in prepaid expenses and other assets	(3,115		)	670
Change in accounts payable	(976		)	3,262
Change in other liabilities	1,169			(541		)
Change in accrued liabilities	3,450			594
Change in payables to related parties	(1,074		)	469
Addition of lease intangibles	(1,771		)	(324		)
Cash used in operating activities	(21,646		)	(5,421		)
Cash flows from investing activities:
Purchases of real estate properties	(47,473		)	(243,171		)
Acquisition of interest in unconsolidated joint ventures	(31,553		)	(22,587		)
Capital expenditures for real estate under development	(28,316		)	(11,587		)
Capital expenditures for real estate under development of consolidated borrowers	(24,823		)	(21,018		)
Additions of property and equipment	(4,796		)	(9,458		)
Change in restricted cash	(925		)	(6,773		)
Investment in notes receivable	(26,983		)	(14,226		)
Distributions from unconsolidated joint venture	696			—
Fees paid to related party for mezzanine loan arrangements	(2,405		)	(553		)
Cash used in investing activities	(166,578		)	(329,373		)
						��
Cash flows from financing activities:
Financing costs	(3,011		)	(1,261		)
Proceeds from notes payable	117,014			54,603
Proceeds from mortgages of consolidated borrowers	23,285			13,652
Net borrowings on senior secured revolving credit facility	58,000			—
Payments on notes payable	(37,673		)	(30		)
Issuance of common stock	—			293,215
Purchase of interest rate cap	—			(154		)
Redemptions of common stock	(3,130		)	(789		)
Offering costs	—			(29,440		)
Distributions	(2,994		)	(1,710		)
Contributions from minority interest holders	1,870			2,004
Distributions to minority interest holders	(829		)	—
Change in subscriptions for common stock	—			637
Change in subscription cash received	—			(638		)
Change in payables to related parties	(328		)	(2,151		)
Cash provided by financing activities	152,204			327,938
Effect of exchange rate changes on cash and cash equivalents	1,111			—
Net change in cash and cash equivalents	(34,909		)	(6,856		)
Cash and cash equivalents at beginning of the period	78,498			54,639
Cash and cash equivalents at end of the period	$	43,589		$	47,783

See Notes to Consolidated Financial Statements.

6

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1.         Business

Organization

Behringer Harvard Opportunity REIT I, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”) was incorporated in November 2004 as a Maryland corporation and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.

We invest in and operate real estate or real estate-related assets on an opportunistic basis.  In particular, we focus on acquiring properties with significant possibilities for short-term capital appreciation, such as those requiring development, redevelopment or repositioning, or those located in markets and submarkets with higher volatility, lower barriers to entry, and high growth potential.  We may acquire a wide variety of properties, including office, industrial, retail, hospitality, recreation and leisure, multifamily, and other properties. We may purchase existing or newly constructed properties or properties under development or construction, including multifamily properties for conversion into condominiums.  Further, we may invest in real estate-related securities, including securities issued by other real estate companies, either for investment or in change of control transactions completed on a negotiated basis or otherwise.  We also may invest in collateralized mortgage-backed securities, mortgage, bridge or mezzanine loans, and Section 1031 tenant-in-common interests, or in entities that make investments similar to the foregoing.

Substantially all of our business is conducted through Behringer Harvard Opportunity OP I, LP, a Texas limited partnership organized in November 2004 (“Behringer Harvard OP I”), or subsidiaries thereof.  Our wholly-owned subsidiary, BHO, Inc., a Delaware corporation, owns less than a 0.1% interest in Behringer Harvard OP I as its sole general partner.  The remaining interest of Behringer Harvard OP I is held as a limited partner’s interest by BHO Business Trust, a Maryland business trust, which is our wholly-owned subsidiary.

We are externally managed and advised by Behringer Harvard Opportunity Advisors I, LLC (“Behringer Opportunity Advisors I”), a Texas limited liability company formed in June 2007.  Behringer Opportunity Advisors I is responsible for managing our day-to-day affairs and for identifying and making acquisitions and investments on our behalf.  Prior to June 30, 2007, we were advised by Behringer Harvard Opportunity Advisors I LP, which was merged into Behringer Opportunity Advisors I solely to reorganize the entity as a limited liability company.

Our common stock is not currently listed on a national exchange.  Unless liquidated earlier, we anticipate causing the shares of common stock to be listed for trading on a national securities exchange or liquidating our real estate portfolio on or before the sixth anniversary of the termination of our offering of common stock to the public on December 28, 2007.  In the event that we do not obtain such listing prior to the sixth anniversary of the termination of our public offering, unless a majority of our board of directors and a majority of our independent directors extend such date, our charter requires us to begin the sale of our properties and liquidation of our assets.

2.         Interim Unaudited Financial Information

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results.  The accompanying consolidated balance sheet and consolidated statement of stockholders’ equity as of September 30, 2008 and consolidated statements of operations and cash flows for the periods ended September 30, 2008 and 2007 have not been audited by our independent registered public accounting firm.  In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial position as of September 30, 2008 and December 31, 2007 and our consolidated results of operations and cash flows for the periods ended September 30, 2008 and 2007.  Such adjustments are of a normal recurring nature.

3.         Summary of Significant Accounting Policies

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the

7

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates include such items as purchase price allocation for real estate acquisitions, impairment of long-lived assets, depreciation and amortization, and allowance for doubtful accounts.  Actual results could differ from those estimates.

Principles of Consolidation and Basis of Presentation

Our consolidated financial statements include our accounts, the accounts of variable interest entities (“VIEs”) in which we are the primary beneficiary, and the accounts of other subsidiaries over which we have control.  All inter-company transactions, balances, and profits have been eliminated in consolidation.  Interests in entities acquired are evaluated based on Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) 46R, “Consolidation of Variable Interest Entities,” which requires the consolidation of VIEs in which we are deemed to be the primary beneficiary.  If the interest in the entity is determined not to be a VIE under FIN 46R, then the entities are evaluated for consolidation under the American Institute of Certified Public Accountants’ Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures,” and Emerging Issues Task Force 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.”

Real Estate and Other Intangible Assets

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

Upon the completion of a business combination, we record the tangible assets acquired, consisting of land and buildings, any assumed debt, identified intangible assets and asset retirement obligations based on their fair values in accordance with SFAS No. 141, “Business Combinations.”  Identified intangible assets consist of the fair value of above-market and below-market leases, in-place leases, in-place tenant improvements, and tenant relationships.  Any amount paid in excess of the fair value of the acquired assets and liabilities is recorded as goodwill.  If the value of the assets and liabilities exceeds the total purchase price, then the resulting negative goodwill is allocated to the tangible and intangible assets acquired.

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

We determine the fair value of assumed debt by calculating the net present value of the scheduled debt payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain.  Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan.

The fair value of any tangible assets acquired, expected to consist of land, land improvements, buildings, building improvements, and furniture, fixtures and equipment, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets.  Land values are derived from appraisals and building values are calculated as replacement cost less depreciation or management’s estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods.  Furniture, fixtures, and equipment values are determined based on current reproduction or replacement cost less depreciation and other estimated allowances based on physical, functional, or economic factors.  The values of the buildings are depreciated over their respective estimated useful lives ranging from 25 years for commercial office property to 39 years for hotel/mixed-use property using the straight-line method.  Land improvements are depreciated over the estimated useful life of 15 years, and furniture, fixtures, and equipment are depreciated over estimated useful lives ranging from five to seven years using the straight-line method.  Our leasehold interest is depreciated over its remaining contractual life, or approximately 101 years.

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

8

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

The total value of identified real estate intangible assets that we may acquire in the future is further allocated to in-place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant.  The aggregate value of in-place leases acquired and tenant relationships is determined by applying a fair value model.  The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease-up periods for the respective spaces considering current market conditions.  In estimating fair value of in-place leases, we consider items such as real estate taxes, insurance and other operating expenses as well as lost rental revenue during the expected lease-up period and carrying costs that would have otherwise been incurred had the leases not been in place, including tenant improvements and commissions.  The estimates of the fair value of tenant relationships also include costs to execute similar leases including leasing commissions, legal costs, and tenant improvements as well as an estimate of the likelihood of renewal as determined by management on a tenant-by-tenant basis.

We amortize the value of in-place leases acquired in the future to expense over the term of the respective leases.  The value of tenant relationship intangibles is amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building.  Should a tenant terminate their lease, the unamortized portion of the in-place lease value and tenant relationship intangibles would be charged to expense.  As of September 30, 2008, the estimated remaining useful lives for acquired lease intangibles range from less than one year to 12 years.

Other intangible assets include the value of identified hotel trade names and in-place property tax abatements.  These fair values are based on management’s estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods.  The value of the trade names is amortized over their respective estimated useful life of 20 years using the straight-line method and the value of the in-place property tax abatement is amortized over its estimated term of 10 years using the straight-line method.

Anticipated amortization expense associated with the acquired lease intangibles and acquired other intangible assets as of September 30, 2008 is as follows (amounts in thousands):

		Lease / Other Intangibles
October 1, 2008 - December 31,	2008	$	488
	2009	1,763
	2010	2,007
	2011	1,477
	2012	1,239

Accumulated depreciation and amortization related to our consolidated investments in real estate assets and intangibles were as follows (amounts in thousands):

										Acquired
	Buildings and			Land and			Lease			Below-Market			Leasehold			Other
As of September 30, 2008	Improvements			Improvements			Intangibles			Leases			Interest			Intangibles
Cost	$	413,351		$	134,422		$	40,249		$	(26,240	)	$	37,252		$	11,339
Less: depreciation and amortization	(17,162		)	(211		)	(9,955		)	7,247			(309		)	(1,232		)
Net	$	396,189		$	134,211		$	30,294		$	(18,993	)	$	36,943		$	10,107

										Acquired
	Buildings and			Land and			Lease			Below-Market			Leasehold			Other
As of December 31, 2007	Improvements			Improvements			Intangibles			Leases			Interest			Intangibles
Cost	$	293,886		$	107,498		$	32,211		$	(22,445	)	$	41,577		$	11,339
Less: depreciation and amortization	(6,649		)	(70		)	(5,115		)	3,594			(34		)	(688		)
Net	$	287,237		$	107,428		$	27,096		$	(18,851	)	$	41,543		$	10,651

9

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Condominium Inventory

Condominium inventory is stated at the lower of cost or fair market value.  In addition to land acquisition costs, land development costs and construction costs, costs include interest and real estate taxes, which are capitalized during the period beginning with the commencement of development and ending with the completion of construction.

For condominium inventory, at each reporting date, management compares the estimated fair value less costs to sell to the carrying value.  An impairment charge is recorded to the extent that the fair value less costs to sell is less than the carrying value.  We determine the estimated fair value of condominiums based on comparable sales in the normal course of business under existing and anticipated market conditions.  This evaluation takes into consideration estimated future selling prices, costs incurred to date, estimated additional future costs, and management’s plans for the property.  There were no impairment charges for the nine months ended September 30, 2008 or 2007.  However, we may experience impairment of our condominium inventory in the future.

Cash and Cash Equivalents

We consider investments in highly-liquid money market funds with original maturities of three months or less to be cash equivalents.

Restricted Cash

As required by our lenders, restricted cash is held in escrow accounts for real estate taxes and other reserves for our consolidated properties.

Accounts Receivable

Accounts receivable primarily consist of receivables from our hotel operators and tenants related to our other consolidated properties.  The allowance for doubtful accounts was $0.3 million and $0.1 million as of September 30, 2008 and December 31, 2007, respectively.

Prepaid Expenses and Other Assets

Prepaid expenses and other assets include prepaid directors’ and officers’ insurance, prepaid advertising, pre-acquisition costs related to probable purchases of properties, the fair value of certain derivative instruments, as well as inventory, prepaid insurance, and prepaid real estate taxes of our consolidated properties.  Inventory consists of food, beverages, linens, glassware, china, and silverware and is carried at the lower of cost or market value.

Furniture, Fixtures, and Equipment

Furniture, fixtures, and equipment are recorded at cost and are depreciated using the straight-line method over their estimated useful lives of five to seven years.  Maintenance and repairs are charged to operations as incurred while renewals or improvements to such assets are capitalized.  Accumulated depreciation associated with our furniture, fixtures, and equipment was $2.9 million and $1.4 million as of September 30, 2008 and December 31, 2007, respectively.

Impairment of Long-Lived Assets

For real estate we wholly-own, our management monitors events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  When such events or changes in circumstances occur, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition, to the carrying amount of the asset.  In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value.  There were no impairment charges for the nine months ended September 30, 2008 or 2007.

For real estate we own through an investment in a limited partnership, joint venture, or other similar investment structure, at each reporting date, management compares the estimated fair value of our investment to the carrying value.  An impairment charge is recorded to the extent the fair value of our investment is less than the carrying amount and the decline in value is determined to be other than a temporary decline.  There were no impairment charges for the nine months ended September 30, 2008 or 2007.  However, we may experience impairment of our real estate properties in the future.

Notes Receivable

For notes receivable, management reviews the terms and conditions underlying the outstanding notes receivable.  If management determines that it is probable that all amounts due under the terms of the note will not be collected, an

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impairment charge is recorded to the extent that the investment in the note exceeds management’s estimate of the fair value of the collateral securing such note.  There were no impairment charges for the nine months ended September 30, 2008 or 2007.  However, we may experience impairment of our notes receivable in the future.

Deferred Financing Fees

Deferred financing fees are recorded at cost and are amortized to interest income for notes receivable and interest expense for notes payable using a straight-line method that approximates the effective interest method over the life of the related debt.  Accumulated amortization of deferred financing fees was $2.9 million and $1.2 million as of September 30, 2008 and December 31, 2007, respectively.

Derivative Financial Instruments

Our objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate movements or other identified risks and to minimize the variability caused by foreign currency translation risk related to our net investment in foreign real estate.  To accomplish these objectives, we use various types of derivative instruments to manage fluctuations in cash flows resulting from interest rate risk attributable to changes in the benchmark interest rate of LIBOR.  These instruments include LIBOR-based interest rate swaps and caps.  For our net investment in a foreign real estate property, we use foreign currency forward exchange contracts to eliminate the impact of foreign currency exchange movements on our financial position.

We measure our derivative instruments and hedging activities at fair value and record them as an asset or liability, depending on our rights or obligations under the applicable derivative contract.  For derivatives designated as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged items are recorded in earnings.  Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.  For derivatives designated as cash flow hedges, the effective portions of changes in fair value of the derivatives are reported in other comprehensive income (loss) and are subsequently reclassified into earnings when the hedged item affects earnings.  For derivatives designated as net investment hedges, changes in fair value are reported in other comprehensive income (loss) as part of the foreign currency translation gain or loss.  Changes in fair value of derivative instruments not designated as hedges and ineffective portions of hedges are recognized in earnings in the affected period.  We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction.

As of September 30, 2008, we do not have any derivatives designated as fair value hedges, nor are derivatives being used for trading or speculative purposes.

Asset Retirement Obligations

We record the fair value of any conditional asset retirement obligations in accordance with FIN 47, “Accounting for Conditional Asset Retirement Obligations.”  As part of the anticipated renovation and redevelopment of acquired properties, we may incur future costs for the abatement of regulated materials, primarily asbestos-containing materials, as required under environmental regulations.  Our estimate of the fair value of the liabilities is based on future anticipated costs to be incurred for the legal removal or remediation of the regulated materials.

Foreign Currency Translation

For our international investments where the functional currency is other than the US dollar, assets and liabilities are translated using period-end exchange rates, while the statement of operations amounts are translated using the average exchange rates for the respective period.  Differences arising from the translation of assets and liabilities in comparison with the translation of the previous periods or from initial recognition during the period are included as a separate component of accumulated other comprehensive income (loss).

We maintain Euro-denominated bank accounts that are translated into U.S. dollars at the current exchange rate at each reporting period.  The resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss) in our consolidated statement of stockholders’ equity.  The cumulative foreign currency translation adjustment was $1.5 million and $0.1 million for the nine months ended September 30, 2008 and the year ended December 31, 2007, respectively.

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Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss), which is reported in the accompanying consolidated statement of stockholders’ equity, consists of gains and losses affecting equity that are excluded from net income (loss) under GAAP.  The components of accumulated other comprehensive income (loss) consist of foreign currency translation gains and losses and unrealized gains and losses on derivatives designated as hedges under SFAS No. 133.

Revenue Recognition

We recognize rental income generated from leases on real estate assets on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any.  Straight-line rental revenue of $3 million was recognized in rental revenues for both the nine months ended September 30, 2008 and 2007.  Hotel revenue is derived from the operations of The Lodge & Spa at Cordillera and consists of guest room, food and beverage, and other revenue, and is recognized as the services are rendered.

Revenues from the sales of condominiums are recognized when sales are closed and title passes to the new owner, the new owner’s initial and continuing investment is adequate to demonstrate a commitment to pay for the condominium, the new owner’s receivable is not subject to future subordination and we do not have a substantial continuing involvement with the new condominium in accordance with SFAS No. 66, “Accounting for Sales of Real Estate.”  Amounts received prior to closing on sales of condominiums are recorded as deposits in our financial statements.

Advertising Costs

Marketing costs, including the costs of model units and their furnishings, incurred in connection with the sale of condominiums are deferred and recorded as costs of sales when revenue is recognized.  Certain prepaid costs are capitalized and expensed over the stated terms of the contract.  All other advertising costs are expensed as incurred.

Income Taxes

We elected to be taxed, and qualified, as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with the year ended December 31, 2006.  We are organized and operate in such a manner as to qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT.  To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subject to federal income tax at the corporate level except for the operations of our wholly-owned taxable REIT subsidiaries.  We have three taxable REIT subsidiaries that own and/or provide management and development services to certain of our investments in real estate and real estate under development.

For the nine months ended September 30, 2008 and 2007, we recognized a current and deferred tax provision of approximately $0.1 million and less than $0.1 million, respectively, related to the Texas margin tax.

Stock-Based Compensation

We have a stock-based incentive award plan for our directors and consultants and for employees, directors, and consultants of our affiliates.  We account for our incentive award plan in accordance with SFAS No. 123R, “Share-Based Payment.”  Awards are granted at the fair market value on the date of grant with fair value estimated using the Black-Scholes-Merton option valuation model, which incorporates assumptions surrounding volatility, dividend yield, the risk-free interest rate, expected life, and the exercise price as compared to the underlying stock price on the grant date.  SFAS No. 123R also requires the tax benefits associated with these share-based payments to be classified as financing activities in the consolidated statement of cash flows, rather than as operating cash flows as required under previous regulations.  For the nine months ended September 30, 2008 and 2007, we had no significant compensation cost related to our incentive award plan.

Concentration of Credit Risk

At September 30, 2008, we had cash and cash equivalents and restricted cash on deposit in financial institutions in excess of federally insured levels.  We regularly monitor the financial stability of the financial institutions and believe that we are not exposed to any significant credit risk.

Minority Interest

We hold a primary beneficiary interest as a lender in two variable interest entities that own real estate properties and thus, we consolidate their accounts with and into our accounts.  Minority interest represents the noncontrolling

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ownership interest’s proportionate share of the equity in our consolidated real estate investments consisting of the 5%, 10%, 10%, 30%, and 20% unaffiliated partners’ share of the equity in Chase Park Plaza, The Lodge & Spa at Cordillera, Rio Salado Business Center, Frisco Square, and Becket House, respectively, as well as 100% of the equity of the two properties we consolidate under FIN 46R as a lender and primary beneficiary.  Income and losses are allocated to minority interest holders based on their ownership percentage.

Reportable Segments

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments.  We have determined that we have one reportable segment, with activities related to the ownership, development and management of real estate assets.  Our income producing properties generated 100% of our consolidated revenues for the nine months ended September 30, 2008 and 2007.  Our chief operating decision maker evaluates operating performance on an individual property level.  Therefore, our properties are aggregated into one reportable segment for the nine months ended September 30, 2008 and 2007.

Loss per Share

Loss per share is calculated based on the weighted average number of shares outstanding during each period.  As of September 30, 2008 and 2007, we had options to purchase 54,583 and 39,583 shares of common stock outstanding at a weighted average exercise price of $9.21 and $9.10, respectively.  These options are excluded from the calculation of earnings per share for the nine months ended September 30, 2008 and 2007 because the effect would be anti-dilutive.

4.         New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements.  SFAS No. 157 applies only to fair value measurements that are already required or permitted by other accounting standards.  Our adoption of SFAS No. 157, on January 1, 2008, did not have a material effect on our consolidated results of operations or financial position.

In February 2008, the FASB staff issued Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP SFAS 157-2”). FSP SFAS 157-2 delayed the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  We are currently assessing the effect FSP SFAS No. 157-2 may have on our disclosures in our financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.”  The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates.  A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date.  We adopted this standard effective January 1, 2008 but have not elected the fair value measurement option for any financial assets or liabilities at the present time; however, we may elect to measure future eligible financial assets or liabilities at fair value.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.”  This Statement replaces SFAS No. 141, “Business Combinations,” but retains the fundamental requirement that the acquisition method of accounting, or purchase method, be used for all business combinations and for an acquirer to be identified for each business combination.  This Statement is broader in scope than that of SFAS No. 141, which applied only to business combinations in which control was obtained by transferring consideration.  SFAS No. 141(R) applies the same method of accounting (the acquisition method) to all transactions and other events in which one entity obtains control over one or more other businesses.  This Statement also makes certain other modifications to SFAS No. 141, including a broader definition of a business and the requirement that acquisition related costs are expensed as incurred.  This Statement applies to business combinations occurring on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Early adoption is not allowed.  The acquisition of real estate property has been determined to meet the definition of a business combination as defined in SFAS No. 141(R).  Therefore, beginning January 1, 2009, we will no longer capitalize acquisition related costs for future acquisitions of real estate properties, but will expense such costs as incurred.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An amendment of ARB No. 51.”  This Statement amends Accounting Research Bulletin No. 51 to establish

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accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  Among other requirements, this Statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest.  It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest.  This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Earlier adoption is prohibited.  This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements.  The presentation and disclosure requirements shall be applied retrospectively for all periods presented.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.”  SFAS No. 161 requires entities to provide greater transparency about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for under SFAS 133, and how the instruments and related hedged items affect the financial position, results of operations, and cash flows of the entity.  SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008.  The principal impact to us will be to expand our disclosures regarding derivative instruments.

5.         Assets and Liabilities Measured at Fair Value

On January 1, 2008, we adopted SFAS No. 157, as amended.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access.  Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity’s own assumptions, as there is little, if any, related market activity.  In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Derivative financial instruments

Currently, we use interest rate swaps and caps to manage our interest rate risk and foreign currency exchange forward contracts to manage the impact of foreign currency movements on our financial position for our net investments in foreign real estate joint ventures.  The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative.  This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, implied volatilities, and foreign currency exchange rates.

To comply with the provisions of SFAS No. 157, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s performance risk in the fair value measurements.  Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties.  However, as

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of September 30, 2008, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.  As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The following fair value hierarchy table presents information about our assets and liabilities measured at fair value on a recurring basis as of September 30, 2008 (amounts in thousands):

	Level 1		Level 2		Level 3		Total
Assets
Derivative financial instruments	$	—	$	3,536	$	—	$	3,536
Liabilities
Derivative financial instruments	$	—	$	941	$	—	$	941

Derivative financial instruments classified as assets are included in other assets on the balance sheet while derivative financial instruments classified as liabilities are included in other liabilities.

6.         Acquisitions

Between July 29, 2008 and August 26, 2008, we acquired a 50% interest in a portfolio of 21 properties located in the Czech Republic, Poland, and Slovakia (“Central Europe Portfolio”), through a joint venture (the “Central Europe Joint Venture”).  The purchase price for our 50% interest in these 21 properties was €16.1 million (approximately $25.6 million), excluding closing and acquisition costs.  On October 3, 2008, the Central Europe Joint Venture acquired an additional property in Hungary, bringing the number of properties in the Central Europe Portfolio to 22.  The purchase price for our 50% interest in the Hungarian property was €0.2 million (approximately $0.3 million), excluding closing and acquisition costs.  We used proceeds from our offering of common stock to the public and borrowings from our senior secured revolving credit facility to acquire the Central Europe Portfolio.

7.         Real Estate Investments

As of September 30, 2008, we wholly-owned eleven properties and consolidated five properties through investments in joint ventures.  In addition, we are the mezzanine lender for two multi-family properties that we consolidate under FIN 46R, one under development and the other fully operational as of September 30, 2008.  In addition, we have noncontrolling, unconsolidated ownership interests in four properties and one investment in a joint venture consisting of 21 properties that are accounted for using the equity method.  Capital contributions, distributions, and profits and losses of these properties are allocated in accordance with the terms of the applicable partnership agreement.  The following table presents certain information about our unconsolidated properties as of September 30, 2008 and December 31, 2007 (amounts in thousands):

			Carrying Value of Investment
	Ownership Interest		September 30, 2008		December 31, 2007
Royal Island	31	%	$	23,485	$	22,801
Royal Island - Rock House	16	%	624		—
GrandMarc at Westberry Place	50	%	7,029		7,765
GrandMarc at the Corner	50	%	5,103		5,879
Central Europe Joint Venture	50	%	28,093		—
Total			$	64,334	$	36,445

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Our investments in unconsolidated joint ventures as of September 30, 2008 and December 31, 2007 consisted of our proportionate share of the combined assets and liabilities of our investment properties as follows (amounts in thousands):

	September 30,		December 31,
	2008		2007
Real estate assets, net	$	366,376	$	167,188
Cash and cash equivalents	34,912		1,985
Other assets	19,319		3,290
Total assets	$	420,607	$	172,463
Notes payable	$	243,067	$	75,838
Other liabilities	28,837		4,536
Total liabilities	271,904		80,374
Equity	148,703		92,089
Total liabilities and equity	$	420,607	$	172,463

For the three and nine months ended September 30, 2008, we recognized $2 million and $3.5 million, respectively, of equity in losses as compared to losses of $0.2 million and $0.3 million for the three and nine months ended September 30, 2007, respectively.  Our equity in losses from these investments is our proportionate share of the combined losses of our unconsolidated joint ventures for the three and nine months ended September 30, 2008 and 2007 as follows (amounts in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Revenue	$	4,662		$	174		$	8,977		$	174
Operating expenses:
Operating expenses	2,031			(44		)	4,358			178
Property taxes	216			664			659			664
Total operating expenses	2,247			620			5,017			842
Operating income (loss)	2,415			(446		)	3,960			(668		)
Non-operating expenses:
Depreciation and amortization	2,111			40			4,245			45
Interest and other, net	4,582			186			7,504			186
Total non-operating expenses	6,693			226			11,749			231
Net loss	$	(4,278	)	$	(672	)	$	(7,789	)	$	(899	)
Company’s share of net loss	$	(1,987	)	$	(227	)	$	(3,518	)	$	(295	)

8.         Variable Interest Entities

In 2006, we agreed to provide secured mezzanine financing with an aggregate principal amount of up to $22.7 million to unaffiliated third-party entities that own apartment communities under development (the “Alexan Voss” in Houston, Texas and “Alexan Black Mountain” in Henderson, Nevada properties, respectively).  These entities also have secured construction loans with third-party lenders, with an aggregate principal amount of up to $68.6 million.  Our mezzanine loans are subordinate to the construction loans.  In addition, we have entered into option agreements allowing us to purchase the ownership interests in Alexan Voss and Alexan Black Mountain after each project’s substantial completion.  Alexan Black Mountain is fully operational as of September 30, 2008; however, the notice to exercise our option to purchase an ownership interest in the property has not yet been provided as prescribed in the option agreement.

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Based on our evaluation, we have determined that these entities meet the criteria of variable interest entities under FIN 46R and that we are the primary beneficiary of these variable interest entities.  Therefore, we have consolidated the entities, including the related real estate assets and third-party construction financing.  As of September 30, 2008, there was $90.2 million of real estate-related assets and real estate under development related to Alexan Voss and Alexan Black Mountain, which collateralizes the outstanding principal balance of the construction and mezzanine loans of $85.5 million.  The third-party construction lenders have no recourse to the general credit of us as the primary beneficiary, but their loans are guaranteed by the owners of the variable interest entities.  As of September 30, 2008, the outstanding principal balance under our mezzanine loans was $22.7 million, which is eliminated, along with accrued interest and loan origination fees, upon consolidation.

In May 2007, for an initial cash investment of $20 million, we acquired an approximate 31% equity interest as a limited partner in the development and construction of a resort hotel, spa, golf course, marina, and residences on three islands located in the Commonwealth of The Bahamas (“Royal Island”).  In December 2007, we committed up to $40 million as a bridge loan to the Royal Island entity for the continuing construction and development of the property, of which $34.6 million was outstanding to us at September 30, 2008.  Based on our evaluation, we have determined that the entity meets the criteria of a variable interest entity under FIN 46R but that we are not the primary beneficiary.  Accordingly, we do not consolidate the Royal Island entity and instead account for it under the equity method of accounting in accordance with Statement of Position 78-9, as amended and interpreted.  At September 30, 2008, there was approximately $118.6 million of real estate-related assets and real estate under development related to Royal Island.

9.         Notes Receivable

We lease the hotel portion of the Chase Park Plaza property to the hotel operator, an unaffiliated entity that owns the remaining 5% of Chase Park Plaza.  In conjunction with the lease agreement, we made a working capital and inventory loan of up to $1.9 million to the hotel operator in December 2006.  The interest rate under the note is fixed at 5% per annum.  The term of the note is the earlier of December 31, 2016 or the termination of the related hotel lease agreement.  Annual payments of interest only are required each December with any remaining balance payable at the maturity date.  In accordance with the hotel lease agreement, the tenant will receive a reduction in its base rental payment due in January in the amount of the interest paid on the promissory note in the previous December.  This reduction in the lease payment is reflected as a straight-line adjustment to base rental revenue.  At September 30, 2008, the note receivable balance was $1.9 million.

In December 2007, we participated in a bridge loan financing arrangement for the continuing development and construction of Royal Island.  The aggregate principal amount available under the bridge loan is $60 million consisting of three tranches.  Under the bridge loan we have agreed to lend a tranche of up to $40 million, which is subordinate to the other two tranches.  The bridge loan accrues interest at the one-month LIBOR rate plus 8% per annum with accrued interest and principal payable at the maturity date, December 20, 2008, and is secured by the Royal Island property.  Under the terms of the loan documents, the bridge loan may be extended once for a period of six months upon the satisfaction of certain conditions with notice given by the borrower by November 20, 2008 and a payment of an extension fee.  To date not all of the conditions have been satisfied and there is no assurance that they will be satisfied.  Discussions between the bridge loan lenders and the borrower to extend the maturity date of the loan have begun; however, there are no assurances that the loan maturity date will be extended.  At September 30, 2008, the loan balance owed to us was $34.6 million, with an annual interest rate of 11.9%.  In addition, $1.9 million of accrued interest and fees is included in receivables from related parties at September 30, 2008.

10.      Capitalized Costs

We capitalize interest, property taxes, insurance, and construction costs to real estate under development.  During the nine months ended September 30, 2008, we capitalized $47.2 million of such costs associated with real estate under development and certain investments accounted for by the equity method, including $8.4 million and $0.2 million, respectively, in interest and deferred financing costs.

Certain redevelopment costs including interest, property taxes, insurance, and construction costs associated with Chase Park Plaza and The Lodge & Spa at Cordillera have been capitalized to condominium inventory on our consolidated balance sheet at September 30, 2008.  During the nine months ended September 30, 2008, we capitalized a total of $25.9 million of such costs associated with the condominium redevelopment at Chase Park Plaza and The Lodge & Spa at Cordillera, including $4.2 million of interest and deferred financing costs.

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During the third quarter of 2008, $1.4 million in costs were transferred from real estate under development to land on our balance sheet.  Also, during the third quarter of 2008, $14.9 million and $0.5 million of real estate under development costs were transferred to building and improvements and to furniture, fixtures, and equipment, respectively, on our balance sheet.

11.      Notes Payable

Our notes payable balance was $424.4 million at September 30, 2008, as compared to $243.9 million at December 31, 2007, and consists of borrowings and assumptions of debt related to our property acquisitions as well as the notes payable of our mezzanine borrowers we consolidate under FIN 46R.  Each of our mortgage loans is collateralized by one or more of our properties.  At September 30, 2008, our notes payable interest rates ranged from 5% to 6.8%, with a weighted average interest rate of approximately 5.9%.  Of our $424.4 million in notes payable at September 30, 2008, $384.4 million represented debt subject to variable interest rates.  At September 30, 2008, our notes payable have maturity dates that range from January 2009 to January 2016.  Our loan agreements generally stipulate that we comply with certain reporting and financial covenants.  These covenants include among other things, notifying the lender of any change in management and maintaining minimum debt service coverage ratios.  At September 30, 2008, we are not aware of any non-compliance with our debt covenants under our loan agreements.

On February 13, 2008, we entered into a senior secured revolving credit facility providing for up to $75 million of secured borrowings.  The initial credit facility allows us to borrow up to $75 million in revolving loans, of which up to $20 million is available for issuing letters of credit.  Loans under the credit facility bear interest at an annual rate that is equal to or a combination of (1) the LIBOR plus an applicable margin that, depending upon the debt service coverage ratio, may vary from 1.5% to 1.7%, or (2) the prime rate plus an applicable margin that, depending upon the debt service coverage ratio, may vary from 0% to 0.2%.  The credit facility matures on February 13, 2011.  The credit facility is secured by a first lien on certain real property assets.

The credit facility may be increased to up to $150 million upon satisfaction of certain conditions including additions to the collateral pool.  We have unconditionally guaranteed payment of the $75 million senior secured revolving credit facility.  As of September 30, 2008, borrowings under the credit facility were $58 million.  The proceeds were used to fund ongoing costs at our development properties, to fund a portion of our acquisition of the Central Europe Portfolio, and for general corporate purposes.  On November 6, 2008, we paid down on the credit facility in the amount of $20 million.

On July 30, 2008, the existing debt of Frisco Square was replaced with a new $57.8 million credit agreement (“Frisco Square Loan”) with two banks.  The Frisco Square Loan consists of five separate tranches with varying payment terms and bears interest at annual rates based on LIBOR plus applicable margins ranging from 1.9% to 2.5%.  The Frisco Square Loan is secured by Frisco Square and matures on July 11, 2011, except for a $25.8 million tranche which matures July 28, 2009.  We have unconditionally guaranteed payment of the Frisco Square Loan.  The balance of the Frisco Square Loan was $56.2 million at September 30, 2008.

The following table summarizes our contractual obligations for principal payments as of September 30, 2008 (amounts in thousands):

Principal Payments Due:
October 1, 2008 - December 31, 2008	$	116
2009	81,642
2010	190,297
2011	113,646
2012	1,660
Thereafter	35,908
Unamortized premium	1,166
	$	424,435

12.      Derivative Instruments and Hedging Activities

In June 2007, we entered into two interest rate cap agreements associated with our Santa Clara Tech Center property.  In November 2007, we entered into a foreign currency forward contract to hedge our net investment in Becket House.  In December 2007, we entered into interest rate swap and interest rate cap agreements associated with Chase Park

18

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Plaza and Becket House. The swap and cap agreements related to Becket House were not designated a hedge until December 31, 2007.  Accordingly, the change in their fair value through December 31, 2007 was reported in our consolidated statement of operations as a component of interest expense.  In July 2008, we entered into a foreign currency forward contact to hedge our net investment in the Central Europe Joint Venture.

We may be exposed to the risk associated with variability of interest rates that might impact our cash flows and the results of operations.  The hedging strategy of entering into interest rate caps and swaps, therefore, is to eliminate or reduce, to the extent possible, the volatility of cash flows.  In addition, we may be exposed to foreign currency exchange risk related to our net investments in the Becket House leasehold interest and the Central Europe Joint Venture.  Accordingly, our hedging strategy is to protect our net investments in foreign currency denominated entities against the risk of adverse changes in foreign currency to U.S. dollar exchange rates.

The following table summarizes the notional values of our derivative financial instruments as of September 30, 2008.  The notional values provide an indication of the extent of our involvement in these instruments at September 30, 2008, but do not represent exposure to credit, interest rate, or market risks (amounts in thousands).

	Notional		Interest Rate/
Hedge Type/Description	Value		Strike Rate			Maturity
Cash Flow Hedges
Interest rate cap - Santa Clara Tech Center	$	35,115	6.00		%	June 15, 2010
Interest rate cap - Santa Clara Tech Center	$	17,000	6.00		%	June 15, 2010
Interest rate cap - Chase - Private Residences	$	30,000	6.00		%	December 15, 2009
Interest rate swap - Chase Park Plaza Hotel	$	77,295	3.82		%	November 15, 2010
Interest rate cap - Becket House	£	12,700	5.75		%	November 21, 2010
Interest rate swap - Becket House	£	12,700	5.50		%	November 21, 2009
Net Investment Hedges
Foreign currency forward - Becket House	£	6,120	£	1.9644		November 23, 2011
Foreign currency forward - Central Europe Joint Venture	€	17,000	€	1.5339		July 28, 2010

13.      Stockholders’ Equity

On November 23, 2004 (date of inception), we sold 1,000 shares of convertible stock and 21,739 shares of common stock to Behringer Harvard Holdings, LLC (“Behringer Harvard Holdings”) for $201,000 in cash.  Pursuant to its terms, the convertible stock generally is convertible into shares of our common stock with a value equal to 15% of the amount by which (1) our enterprise value, including the total amount of distributions paid to our stockholders, exceeds (2) the sum of the aggregate capital invested by our stockholders plus a 10% cumulative, non-compounded, annual return on such capital.  At the date of issuance of the shares of convertible stock, management determined the fair value under GAAP was less than the nominal value paid for the shares; therefore, the difference is not material.  Conversion of the convertible stock may be limited by our board of directors if it determines that full conversion may jeopardize our qualification as a REIT.  Our board of directors may authorize additional shares of capital stock and their characteristics without obtaining stockholder approval.

Share Redemption Program

Our board of directors has authorized and adopted a share redemption program that enables our stockholders to sell their shares to us in limited circumstances after they have held them for at least one year.  The purchase price for the redeemed shares is set forth in the prospectus for the primary offering of our common stock, as supplemented.  Our board of directors reserves the right in its sole discretion at any time, and from time to time, to (1) waive the one-year holding period in the event of the death, disability or bankruptcy of a stockholder or other exigent circumstances, (2) reject any request for redemption, (3) change the purchase price for redemptions, or (4) terminate, suspend or amend the share redemption program.  Under the terms of the plan, during any calendar year, we will not redeem in excess of 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption.  In addition, our board of directors will determine whether we have sufficient cash from operations to repurchase shares, and such purchases will generally be limited to proceeds of our distribution reinvestment plan plus 1% of operating cash flow for the previous fiscal year (to the extent positive).  We redeemed 342,590 shares of common stock for $3.1 million during the nine months ended September 30, 2008, for an aggregate total of 499,323 shares of common stock redeemed since inception.

19

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Distributions

We initiated the payment of monthly distributions in August 2006 in the amount of a 2% annualized rate of return, based on an investment in our common stock of $10.00 per share and calculated on a daily record basis of $0.0005479 per share.  In December 2006, our board of directors declared distributions to be paid in the first quarter of 2007 in the amount of a 2.5% annualized rate of return, calculated on a daily record basis of $0.0006849 per share.  In March 2007, our board of directors declared distributions to be paid in the second quarter of 2007 in the amount of a 3% annualized rate of return, calculated on a daily record basis of $0.0008219 per share.  The distribution rate has remained at 3%.  Pursuant to our Second Amended and Restated Distribution Reinvestment Plan (“Secondary DRIP”), stockholders may elect to reinvest any cash distribution in additional shares of common stock.  We record all distributions when declared, except that the stock issued through our distribution reinvestment plan (the “DRIP”) and Secondary DRIP is recorded when the shares are actually issued.

The following are the distributions declared by quarter for the nine months ended September 30, 2008 and 2007 (amounts in thousands):

2008	Total Distributions Declared		Cash Declared		DRIP Declared
3rd Quarter	$	4,129	$	999	$	3,130
2nd Quarter	4,076		978		3,098
1st Quarter	4,055		969		3,086
	$	12,260	$	2,946	$	9,314

2007	Total Distributions Declared		Cash Declared		DRIP Declared
3rd Quarter	$	3,217	$	773	$	2,444
2nd Quarter	2,254		523		1,731
1st Quarter	1,279		272		1,007
	$	6,750	$	1,568	$	5,182

14.      Related Party Arrangements

Behringer Opportunity Advisors I and certain of its affiliates receive fees and compensation in connection with our offering of common stock to the public, and in connection with the acquisition, management, and sale of our assets.  We terminated our initial public offering on December 28, 2007 and currently are offering shares of our common stock only to our existing stockholders through our Secondary DRIP.

Behringer Securities LP (“Behringer Securities”), an affiliate of our advisor and the dealer manager for our initial public offering, received commissions of up to 7% of gross offering proceeds before reallowance of commissions earned by participating broker-dealers; provided that Behringer Securities received 1% of the gross proceeds of purchases pursuant to our DRIP and does not receive any commissions for purchases pursuant to our Secondary DRIP.  Behringer Securities reallowed 100% of the commissions earned to participating broker-dealers.  In addition, up to 2% of gross proceeds before reallowance to participating broker-dealers was paid to Behringer Securities as a dealer manager fee; provided that Behringer Securities did not and does not receive dealer manager fees for purchases pursuant to our DRIP or Secondary DRIP.  Behringer Securities was permitted to reallow all or a portion of its dealer manager fees in an aggregate amount up to 2% of gross offering proceeds to broker-dealers participating in the public offering; provided, however, that Behringer Securities was permitted to reallow, in the aggregate, no more than 1.5% of gross offering proceeds for marketing fees and expenses, conference fees and non-itemized, non-invoiced due diligence efforts, and no more than 0.5% of gross offering proceeds for actual out-of-pocket and bona fide, separately invoiced due diligence expenses incurred as fees, costs or other expenses from third parties.  From inception through the termination date of the public offering on December 28, 2007, Behringer Securities’ commissions and dealer manager fees totaled $35.6 million and $10.7 million, respectively, and were recorded as a reduction to additional paid-in capital.  In the nine months ended September 30, 2008, Behringer Securities

20

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

did not receive any commissions or dealer manager fees associated with our offering of common stock to the public as the initial public offering terminated on December 28, 2007.

Behringer Opportunity Advisors I, or its affiliates, received up to 2% of gross offering proceeds for organization and offering expenses incurred in connection with the initial public offering; except that no organization and offering expenses were or are reimbursed with respect to purchases made pursuant to our DRIP or Secondary DRIP.  Since our inception through the termination date of our initial public offering on December 28, 2007, $10.7 million of organization and offering expenses had been incurred by Behringer Opportunity Advisors I or its predecessor-in-interest on our behalf.  Of this amount, less than $0.1 million had been expensed as organizational costs with the remainder recorded as a reduction of additional paid-in capital.  Behringer Opportunity Advisors I, or its affiliates, determines the amount of organization and offering expenses owed based on specific invoice identification as well as an allocation of costs to us and other Behringer Harvard programs, based on respective equity offering results of those entities in offering.

Behringer Opportunity Advisors I, or its affiliates, receives acquisition and advisory fees of 2.5% of the contract purchase price of each asset for the acquisition, development or construction of real property or 2.5% of the funds advanced in respect of a loan.  Our advisor, or its affiliates, also receives reimbursement of acquisition expenses up to 0.5% of the contract purchase price of each asset, or with respect to a loan, up to 0.5% of the funds advanced.  Behringer Opportunity Advisors I or its predecessor-in-interest earned $4.7 million in acquisition and advisory fees and $0.9 million in acquisition expense reimbursements for our investments made during the nine months ended September 30, 2008.  In the nine months ended September 30, 2007, our advisor earned $12 million in acquisition and advisory fees and $2.4 million in acquisition expense reimbursements.  For property acquisitions, we capitalize these fees as part of our real estate, and for loans, we defer these fees to be amortized over the loan term.

We pay Behringer Opportunity Advisors I or its affiliates a debt financing fee equal to 1% of the amount of any debt made available to us.  We incurred $2.4 million and $0.8 million of debt financing fees during the nine months ended September 30, 2008 and 2007, respectively.

We pay HPT Management Services LP, Behringer Harvard Real Estate Services, LLC, or Behringer Harvard Opportunity Management Services, LLC (collectively, “BH Property Management”), affiliates of our advisor and our property managers, fees for management and leasing of our properties, which may be subcontracted to unaffiliated third parties.  Such fees are equal to 4.5% of gross revenues plus leasing commissions based upon the customary leasing commission applicable to the same geographic location of the respective property.  In the event that we contract directly with a non-affiliated third-party property manager in respect of a property, we will pay BH Property Management an oversight fee equal to 1% of gross revenues of the property managed.  In no event will we pay both a property management fee and an oversight fee to BH Property Management with respect to any particular property.  We incurred and expensed such fees totaling $1.3 million and $0.4 million in the nine months ended September 30, 2008 and 2007, respectively.

We pay Behringer Opportunity Advisors I an annual asset management fee of 0.75% of the aggregate asset value of acquired real estate.  The fee is payable monthly in an amount equal to one-twelfth of 0.75% of the aggregate asset value as of the last day of the preceding month.  For the nine months ended September 30, 2008, we expensed $3.3 million of asset management fees and capitalized $0.2 million of asset management fees to real estate. For the nine months ended September 30, 2007, we expensed $1.5 million of asset management fees and capitalized $0.1 million of asset management fees.

We will reimburse Behringer Opportunity Advisors I or its affiliates for all expenses paid or incurred by them in connection with the services they provide to us, including direct expenses and the costs of salaries and benefits of persons employed by those entities and performing services for us, subject to the limitation that we will not reimburse for any amount by which our advisor’s operating expenses (including the asset management fee) at the end of the four fiscal quarters immediately preceding the date reimbursement is sought exceeds the greater of:  (1) 2% of our average invested assets or (2) 25% of our net income for that four quarter period other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and any gain from the sale of our assets for that period.  Notwithstanding the preceding sentence, we may reimburse the advisor for expenses in excess of this limitation if a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors.  For the nine months ended September 30, 2008, we incurred and expensed costs for administrative services totaling $0.3 million.

At September 30, 2008, we had a payable to our advisor and its affiliates of $1.5 million.  This balance consists primarily of asset management fees and administrative service expenses payable to Behringer Opportunity Advisors I, management fees payable to BH Property Management, and other miscellaneous payables.  This payable is partially offset by a receivable from our advisor and its affiliates of $0.3 million.

21

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

We are dependent on Behringer Opportunity Advisors I and BH Property Management for certain services that are essential to us, including asset acquisition and disposition decisions, property management and leasing services, and other general administrative responsibilities.  In the event that these companies were unable to provide us with the respective services, we would be required to obtain such services from other sources.

15.      Stock-Based Compensation

The Behringer Harvard Opportunity REIT I, Inc. Amended and Restated 2004 Incentive Award Plan (“Incentive Award Plan”) was approved by our board of directors on July 19, 2005 and by our stockholders on July 25, 2005, and provides for equity awards to our directors and consultants and to employees, directors, and consultants of our affiliates.  On July 24, 2008, we issued options to purchase 5,000 shares of our common stock at $9.50 per share to each of our three independent directors pursuant to the Incentive Award Plan.  The options issued pursuant to the Incentive Award Plan become exercisable one year after the date of grant.  As of September 30, 2008, options to purchase 54,583 shares of stock were outstanding, of which 39,583 are fully vested, at a weighted average exercise price of $9.10.  The remaining contractual life of the outstanding options is 8.5 years.  Compensation expense associated with our Incentive Award Plan was not material for the three and nine months ended September 30, 2008 and 2007.

16.      Supplemental Cash Flow Information

Supplemental cash flow information is summarized below (amounts in thousands).

	Nine months ended
	September 30,
	2008		2007
Supplemental disclosure:
Interest paid, net of amounts capitalized	$	7,902	$	3,344
Income taxes paid	$	76	$	—
Non-cash investing activities:
Property and equipment additions and purchases of real estate in accrued liabilities	$	256	$	466
Capital expenditures for real estate under development in accounts payable and accrued liabilities	$	3,259	$	5,607
Capital expenditures for real estate under development of consolidated borrowers in accounts payable and accrued liabilities	$	2,468	$	—
Conversion of notes receivable to investments in unconsolidated joint ventures	$	—	$	14,165
Amortization of deferred financing fees in properties under development	$	378	$	95
Amortization of deferred financing fees in properties under development of consolidated borrowers	$	43	$	—
Non-cash financing activities:
Common stock issued in distribution reinvestment plan	$	9,286	$	5,645
Assumed debt on acquisition of real estate investment	$	22,229	$	29,950

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

The following discussion and analysis should be read in conjunction with the accompanying financial statements of the Company and the notes thereto:

Forward-Looking Statements

This section contains forward-looking statements, including discussion and analysis of the financial condition of us and our subsidiaries, including entities we consolidate under FIN 46R, our anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our stockholders in the future and other matters.  These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on their knowledge and understanding of our business and industry.  Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.  These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false.  We caution investors not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this report on Form 10-Q.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.  Factors that could cause actual results to differ materially from any forward-looking statements made in the Form 10-Q include changes in general economic conditions, changes in real estate conditions, construction costs that may exceed estimates, construction delays, increases in interest rates, lease-up risks, inability to obtain new tenants upon the expiration of existing leases, and the potential need to fund tenant improvements or other capital expenditures out of operating cash flow.  The forward-looking statements should be read in light of the risk factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC.

Cautionary Note

The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this report on Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to 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 be relied upon as accurately describing or reflecting the current state of our affairs.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On a regular basis, we evaluate these estimates, including investment impairment.  These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates.  Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

Principles of Consolidation and Basis of Presentation

Our consolidated financial statements include our accounts, the accounts of VIEs in which we are the primary beneficiary and the accounts of other subsidiaries over which we have control.  All inter-company transactions, balances and profits have been eliminated in consolidation.  Interests in entities acquired are evaluated for consolidation based on FIN 46R, which requires the consolidation of VIEs in which we are deemed to be the primary beneficiary.  If the interest in the entity is determined not to be a VIE under FIN 46R, then the entity is evaluated for consolidation under the American Institute of Certified Public Accountants’ Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures,” and Emerging Issues Task Force 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.”

There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and if so, if we are the primary beneficiary.  The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity.  FIN 46R provides some

23

guidelines as to what the minimum equity at risk should be, but the percentage can vary depending upon the industry and/or the type of operations of the entity and it is up to management to determine that minimum percentage as it relates to our business and the facts surrounding each of our acquisitions.  In addition, even if the entity’s equity at risk is a very low percentage, we are required by FIN 46R to evaluate the equity at risk compared to the entity’s expected future losses to determine if there could still in fact be sufficient equity at the entity.  Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility and using a discount rate to determine the net present value of those future losses.  A change in the judgments, assumptions and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment on the equity method that should in fact be consolidated, the effects of which could be material to our financial statements.

Real Estate and Other Intangible Assets

Upon the acquisition of real estate properties, we allocate the purchase price of those properties to the tangible assets acquired, consisting of land, inclusive of associated rights, land improvements, buildings, building improvements, furniture, fixtures and equipment, identified intangible assets, asset retirement obligations, and assumed liabilities based on their relative fair values in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”  Identified intangible assets consist of the fair value of above-market and below-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions, and tenant relationships.

Upon the completion of a business combination, we record the tangible assets acquired, consisting of land and buildings, any assumed debt, identified intangible assets and asset retirement obligations based on their fair values in accordance with SFAS No. 141, “Business Combinations.”  Identified intangible assets consist of the fair value of above-market and below-market leases, in-place leases, in-place tenant improvements and tenant relationships.  Any amount paid in excess of the fair value of the assets and liabilities acquired is recorded as goodwill.  If the value of the assets and liabilities exceeds the total purchase price, then the resulting negative goodwill is allocated to the tangible and intangible assets acquired.

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

We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain.  Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan.

The fair value of any tangible assets acquired, expected to consist of land, land improvements, buildings, building improvements, and furniture, fixtures and equipment, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets.  Land values are derived from appraisals and building values are calculated as replacement cost less depreciation or management’s estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods.  Furniture, fixtures, and equipment values are determined based on current reproduction or replacement cost less depreciation and other estimated allowances based on physical, functional, or economic factors.  The value of buildings is depreciated over the estimated useful lives ranging from 25 years for commercial office property to 39 years for hotel/mixed-use property using the straight-line method.  Land improvements are depreciated over the estimated useful life of 15 years, and furniture, fixtures, and equipment are depreciated over estimated useful lives ranging from five to seven years using the straight-line method.

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

The total value of identified real estate intangible assets that we may acquire in the future is further allocated to in-place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant.  The aggregate value of in-place leases acquired and tenant relationships is determined by applying a fair value model.  The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease-up periods for the respective spaces considering current market conditions.  In estimating fair value of in-place leases, we consider items such as real estate taxes, insurance and other operating expenses as well as lost rental revenue during the expected lease-up period and carrying costs that would have otherwise been incurred had the

24

leases not been in place, including tenant improvements and commissions.  The estimates of the fair value of tenant relationships also include costs to execute similar leases including leasing commissions, legal costs and tenant improvements as well as an estimate of the likelihood of renewal as determined by management on a tenant-by-tenant basis.

We amortize the value of in-place leases acquired in the future to expense over the term of the respective leases.  The value of tenant relationship intangibles is amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the in-place lease value and tenant relationship intangibles would be charged to expense.

Other intangible assets include the value of identified hotel trade names and in-place property tax abatements.  These fair values are based on management’s estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods.  The value of the trade names is amortized over their respective estimated useful life of 20 years using the straight-line method and the value of the in-place property tax abatement is amortized over its estimated term of 10 years using the straight-line method.

Impairment of Long-Lived Assets

For real estate we wholly own, our management monitors events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset.  In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value.

For real estate we own through an investment in a joint venture, tenant-in-common interest or other similar investment structure, at each reporting date, management compares the estimated fair value of our investment to the carrying value.  An impairment charge is recorded to the extent the fair value of our investment is less than the carrying amount and the decline in value is determined to be other than a temporary decline.

In evaluating our investments for impairment, management makes several estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership and the projected sales price of each of the properties.  A change in these estimates and assumptions could result in understating or overstating the book value of our investments, which could be material to our financial statements.

Impairment of Condominium Inventory

For condominium inventory, at each reporting date, management compares the estimated fair value less costs to sell to the carrying value.  An impairment charge is recorded to the extent that the fair value less costs to sell is less than the carrying value.  We determine the estimated fair value of condominiums based on comparable sales in the normal course of business under existing and anticipated market conditions.  This evaluation takes into consideration estimated future selling prices, costs spent to date, estimated additional future costs and management’s plans for the property.

Notes Receivable

For notes receivable, management reviews the terms and conditions underlying the outstanding notes receivable.  If management determines that it is probable that all amounts due under the terms of the note will not be collected, an impairment charge is recorded to the extent that the investment in the note exceeds management’s estimate of the fair value of the collateral securing such note.

Overview

We were formed primarily to invest in and operate real estate or real estate related assets on an opportunistic basis.  In particular, we focus on acquiring properties with significant possibilities for short-term capital appreciation, such as those requiring development, redevelopment or repositioning or those located in markets with higher volatility, lower barriers to entry, and high growth potential.  We may acquire office, industrial, retail, hospitality, multi-family and other real properties, including existing or newly constructed properties or properties under development or construction.  Further, we may invest in real estate related securities, including securities issued by other real estate companies, either for investment or in change of control transactions completed on a negotiated basis or otherwise.  We also may invest in collateralized mortgage-backed securities, mortgage, bridge or mezzanine loans, and Section 1031 tenant-in-common interests, or in entities that make investments similar to the foregoing.

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Results of Operations

As of September 30, 2008, we had invested in 23 assets:  eleven consolidated wholly-owned properties; five properties consolidated through investments in joint ventures including two mixed-use hotel and residential properties; two investments in an island development accounted for under the equity method; an investment in a portfolio of 21 properties located in three Central European countries; two investments in student housing projects in Texas and Virginia, also accounted for under the equity method; and two apartment development properties as a mezzanine lender consolidated under FIN 46R.  Our investment properties are located in Arizona, California, Colorado, Massachusetts, Minnesota, Missouri, Nevada, Texas, the Commonwealth of The Bahamas, London, England, the Czech Republic, Poland, and Slovakia.

As of September 30, 2007, we had invested in 18 assets: ten wholly owned properties; three properties consolidated through investments in limited liability companies including two mixed-use hotel and residential properties; one investment in an island development accounted for under the equity method; two investments in student housing projects in Texas and Virginia, also accounted for under the equity method; and two apartment development properties as a mezzanine lender consolidated under FIN 46R.

Accordingly, our results of operations presented for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 reflect significant increases in most categories due to the growth of our portfolio of properties.

Three months ended September 30, 2008 as compared to three months ended September 30, 2007

Revenues. Our total revenues increased by $11.1 million to $21.6 million for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007, primarily due to increased rental revenue resulting from the acquisition of new properties from which we receive rent of $5.9 million and condominium sales of $4.3 million.  Hotel revenues for the three months ended September 30, 2008 totaled $2 million, a decrease of $0.6 million as compared to the three months ended September 30, 2007.  This decrease was primarily related to lower occupancy at The Lodge & Spa at Cordillera.  We expect revenues to increase as available space at our operating properties is leased-up, properties under development become operational, and we close the sales of condominium inventory.

Although difficult operating conditions prevailed across most U.S. housing markets, we closed on the sale of seven condominium units at The Private Residences at The Chase Park Plaza in the third quarter ended September 30, 2008.  Of the remaining 75 units, we had 42 units under sales contracts with non-refundable deposits and six units reserved with refundable deposits.  In October 2008, we closed on the sale of four additional units that were previously under sales contacts.

Property Operating Expenses. Property operating expenses for the three months ended September 30, 2008 were $6.9 million as compared to $4.1 million for the three months ended September 30, 2007.  The increase is primarily related to property operating expenses from new properties of $2.2 million.  In addition, two additional buildings at Frisco Square and Alexan Black Mountain were placed in service in 2008.  We expect property operating expenses to increase as properties under development become operational and available space at our operating properties is leased-up.

Cost of Condominium Sales.  Cost of condominium sales, relating to the sale of condominium units at The Private Residences at The Chase Park Plaza, for the three months ended September 30, 2008 were $4.3 million.  We did not have any such sales and related costs for the three months ended September 30, 2007.

Interest Expense. Interest expense, net of amounts capitalized, for the three months ended September 30, 2008 was $4.1 million as compared to $1.8 million for the three months ended September 30, 2007, and was primarily due to the increase in notes payable balances of $237 million related to our acquisition of real estate properties.  Our total notes payable at September 30, 2008 was $424.4 million as compared to $187.4 million at September 30, 2007.  We expect continued increases in notes payable and in the related interest expense as properties under development become operational.

Real Estate Taxes. Real estate taxes, net of amounts capitalized, for the three months ended September 30, 2008 were $2 million as compared to $1 million for the three months ended September 30, 2007 and were comprised of real estate taxes from each of our consolidated properties.  The increase in real estate taxes is primarily due to our increased number of consolidated real estate properties.  We expect real estate taxes to increase as properties under development become operational and available space at our operating properties is leased-up.

Property / Asset Management Fees. Property and asset management fees for the three months ended September 30, 2008 totaled $2 million as compared to $1 million for the three months ended September 30, 2007 and were comprised of fees incurred by our consolidated properties.  Property and asset management fees increased due to the additional properties acquired. In addition, Alexan Black Mountain was placed into service in 2008.  We expect property and asset

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management fees to increase as properties under development become operational and available space at our operating properties is leased-up.

General and Administrative Expenses. General and administrative expenses for the three months ended September 30, 2008 were $1.2 million as compared to $0.3 million for the three months ended September 30, 2007 and were comprised of corporate general and administrative expenses including directors’ and officers’ insurance premiums, auditing fees, legal fees, and other administrative expenses.  The increase is due to increased corporate activity as our portfolio has grown to 23 real estate investments as of September 30, 2008 as compared to only 18 investments at September 30, 2007.

Depreciation and Amortization Expense. Depreciation and amortization expense for the three months ended September 30, 2008 was $6.8 million as compared to $3.7 million for the three months ended September 30, 2007 and was comprised of depreciation and amortization expense from each of our consolidated operational properties.  The increase in depreciation and amortization expense is primarily due to the increased number of operating properties in 2008, including Alexan Black Mountain, Becket House, Northborough Tower, and Crossroads.  We expect depreciation and amortization expense to increase as development properties become operational.

Equity in Losses of Unconsolidated Joint Ventures.  Equity in losses of unconsolidated joint ventures totaled $2 million for the three months ended September 30, 2008, as compared to $0.2 million for the three months ended September 30, 2007, and consisted of net losses of our five noncontrolling interests in Royal Island, GrandMarc at Westberry Place, GrandMarc at the Corner, Royal Island - Rock House, and the Central Europe Joint Venture, as compared to only Royal Island, GrandMarc at Westberry Place, and GrandMarc at the Corner for the three months ended September 30, 2007.

Minority Interest.  Minority interest for the three months ended September 30, 2008 was $2.3 million, as compared to $0.1 million for the three months ended September 30, 2007.  For both periods, minority interest was a reduction of our net loss.  Minority interest represents the net income or loss that is not allocable to us from properties that we consolidate.  For the three months ended September 30, 2008, minority interest consisted of the results of eight investments, whereas it consisted of the results of only four investments for the three months ended September 30, 2007.

Nine months ended September 30, 2008 as compared to nine months ended September 30, 2007

Revenues. Our total revenues increased by $28.7 million to $51.1 million for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007, primarily due to increased rental revenue resulting from the acquisition of new properties from which we receive rent of $20.1 million, condominium sales of $4.3 million, and an increase in rental revenues at Chase Park Plaza of $0.8 million.  Hotel revenues for the nine months ended September 30, 2008 totaled $5.2 million as compared to $3.2 million for the nine months ended September 30, 2007 and consisted of revenues generated by the operations of The Lodge & Spa at Cordillera, a resort and spa property acquired in June 2007.  We expect revenues to increase as available space at our operating properties is leased-up, properties under development become operational, and we close the sales of condominium inventory.

Although difficult operating conditions prevailed across most U.S. housing markets, we closed on the sale of seven condominium units at The Private Residences at The Chase Park Plaza in the third quarter ended September 30, 2008.  Of the remaining 75 units, we had 42 units under sales contracts with non-refundable deposits and six units reserved with refundable deposits.  In October 2008, we closed on the sale of four additional units that were previously under sales contacts.

Property Operating Expenses. Property operating expenses for the nine months ended September 30, 2008 were $18.2 million as compared to $7.5 million for the nine months ended September 30, 2007 and were comprised of property operating expenses from our consolidated properties.  The increase is primarily related to property operating expenses from new properties of $9.8 million.  Further, two additional buildings at Frisco Square and Alexan Black Mountain were placed in service in 2008.  We expect property operating expenses to increase as properties under development become operational and available space at our operating properties is leased-up.

Cost of Condominium Sales.  Cost of condominium sales, relating to the sale of condominium units at The Private Residences at The Chase Park Plaza, for the nine months ended September 30, 2008 were $4.3 million.  We did not have any such sales and related costs for the nine months ended September 30, 2007.

Interest Expense. Interest expense, net of amounts capitalized, for the nine months ended September 30, 2008 was $9.1 million as compared to $4.1 million for the nine months ended September 30, 2007, and was primarily due to the increase in notes payable balances of $237 million related to our acquisition of real estate properties.  Our total notes payable at September 30, 2008 was $424.4 million as compared to $187.4 million at September 30, 2007.  We expect

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continued increases in notes payable and in the related interest expense as properties under development become operational.

Real Estate Taxes. Real estate taxes, net of amounts capitalized, for the nine months ended September 30, 2008 were $5.3 million as compared to $2.3 million for the nine months ended September 30, 2007 and were comprised of real estate taxes from each of our consolidated properties.  The increase in real estate taxes is primarily due to our increased number of consolidated real estate properties.  We expect real estate taxes to increase as properties under development become operational and available space our operating properties is leased-up.

Property / Asset Management Fees. Property and asset management fees for the nine months ended September 30, 2008 totaled $5.2 million as compared to $2.1 million for the nine months ended September 30, 2007 and were comprised of fees incurred by our consolidated properties.  Property and asset management fees increased due to the additional properties acquired.  In addition, Alexan Black Mountain was placed into service in 2008.  We expect property and asset management fees to increase as properties under development become operational and available space at our operating properties is leased-up.

General and Administrative Expenses. General and administrative expenses for the nine months ended September 30, 2008 were $3 million as compared to $1 million for the nine months ended September 30, 2007 and were comprised of corporate general and administrative expenses including directors’ and officers’ insurance premiums, auditing fees, legal fees, and other administrative expenses.  The increase is due to increased corporate activity as our portfolio has grown to 23 real estate investments as of September 30, 2008 as compared to only 18 investments at September 30, 2007.

Depreciation and Amortization Expense. Depreciation and amortization expense for the nine months ended September 30, 2008 was $18.6 million as compared to $8 million for the nine months ended September 30, 2007 and was comprised of depreciation and amortization expense from each of our consolidated operational properties.  The increase in depreciation and amortization expense is primarily due to the increased number of operating properties in 2008, including Alexan Black Mountain, Becket House, Northborough Tower, and Crossroads.  We expect depreciation and amortization expense to increase as development properties become operational.

Equity in Losses of Unconsolidated Joint Ventures.  Equity in losses of unconsolidated joint ventures totaled $3.5 million for the nine months ended September 30, 2008 as compared to $0.3 million for the nine months ended September 30, 2007 and consisted of net losses of our five noncontrolling interests in Royal Island, GrandMarc at Westberry Place, GrandMarc at the Corner, Royal Island - Rock House and the Central Europe Joint Venture, as compared to only Royal Island, GrandMarc at Westberry Place, and GrandMarc at the Corner for the nine months ended September 30, 2007.

Minority Interest.  Minority interest for the nine months ended September 30, 2008 was $5.3 million, a reduction of our net loss for the period.  For the nine months ended September 30, 2007, minority interest was $0.2 million and increased our net loss.  Minority interest represents the net income or loss that is not allocable to us from properties that we consolidate.  For the nine months ended September 30, 2008, minority interest consisted of the results of eight investments, whereas it consisted of the results of only four investments for the nine months ended September 30, 2007.

Cash Flow Analysis

Cash flows used in operating activities for the nine months ended September 30, 2008 were $21.6 million and were comprised primarily of the net loss of $10.6 million, an increase in condominium inventory of $20.6 million, offset by depreciation and amortization expense of $15.1 million, minority interest of $5.3 million, an increase in accounts receivable of $4.1 million, and an increase in accrued liabilities of $3.5 million.  During the nine months ended September 30, 2007, cash flows used by operating activities were $5.4 million and were comprised primarily of the net loss of $0.9 million, adjusted for depreciation and amortization expense of $6.4 million, and by an increase in condominium inventory of $12.7 million.

Cash flows used in investing activities for the nine months ended September 30, 2008 were $166.6 million and primarily represent purchases of real estate properties of $47.4 million, acquisition of interest in unconsolidated joint ventures totaling $31.6 million, expenditures for real estate under development, including capital expenditures of consolidated borrowers totaling $53.1 million, and investment in notes receivable of $27 million.  During the nine months ended September 30, 2007, cash flows used in investing activities were $329.4 million and primarily represented acquisitions of real estate totaling $243.2 million, capital expenditures for real estate under development including capital expenditures of consolidated borrowers totaling $32.6 million, acquisition of an interest in an unconsolidated joint venture of $22.6 million, and investment in notes receivable of $14.2 million.

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Cash flows provided by financing activities for the nine months ended September 30, 2008 were $152.2 million and were comprised primarily of proceeds from notes payable of $117 million, payments on notes payable of $37.7 million, net borrowings on our senior secured revolving credit facility of $58 million and proceeds from mortgages of our consolidated borrowers of $23.3 million.  During the nine months ended September 30, 2007, cash flows provided by financing activities were $327.9 million and were comprised primarily of funds received from the issuance of stock, net of offering costs, of $263.8 million, and proceeds from notes payable of $54.6 million.

Liquidity and Capital Resources

Our principal demands for funds will be for the payment of costs associated with the lease-up of available space at our operating properties including commissions, tenant improvements, and capital improvements, for ongoing costs at our development properties, for the payment of operating expenses and distributions, and for the payment of interest and principal on our outstanding indebtedness.  Generally, cash needs for items other than costs associated with the lease-up of available space at our operating properties including commissions, tenant improvements, and capital improvements and ongoing costs at our development properties are expected to be met from operations and borrowings.

Distributions will be authorized at the discretion of our board of directors, based on its analysis of our earnings, cash flow, anticipated cash flow, capital expenditure requirements and general financial condition.  The board’s discretion will be influenced, in substantial part, by its obligation to cause us to comply with the REIT requirements.  Until we generate sufficient cash flow from operations to fully fund the payment of distributions, we have and will continue to pay some of our distributions from other sources. We may generate cash to pay distributions from financing activities, components of which may include borrowings (including borrowings secured by our assets) in anticipation of future operating cash flow and proceeds of this offering.  In addition, from time 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 other incentives due to them, enter into lease agreements for unleased space, pay general administrative expenses or otherwise supplement investor returns in order to increase the amount of cash available to make distributions to our stockholders.

We expect to fund our short-term liquidity requirements by using the short-term borrowings and cash flow from the operations of our current investments.  Operating cash flows are expected to increase as available space at our operating properties is leased-up, properties under development become operational, and we close on the sale of condominium inventory. For both our short-term and long-term liquidity requirements, other potential future sources of capital may include proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of our investments, if and when any are sold, and undistributed funds from operations.  If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures.

Debt Financings

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

Our notes payable increased to $424.4 million at September 30, 2008, from $243.9 million at December 31, 2007, primarily as a result of notes payable associated with property acquisitions, additional borrowings related to our development properties as well as the notes payable of our mezzanine borrowers we consolidate under FIN 46R.  Each of our loans is secured by one or more of our properties.  At September 30, 2008, our notes payable interest rates ranged from 5% to 6.8%, with a weighted average interest rate of approximately 5.9%.  Of our $424.4 million in notes payable at September 30, 2008, $384.4 million, or 90.6%, represented debt subject to variable interest rates, although we have entered into hedging agreements with respect to approximately $182.4 million, or 43%, of such indebtedness as of September 30, 2008.  As of September 30, 2008, less than 1% of the principal amount of our loans is due this year, and 19.2% of the principal amount is due in 2009.  At September 30, 2008, our notes payable have maturity dates that range from January 2009 to January 2016.  Our loan agreements generally stipulate that we comply with certain reporting and financial covenants.  These covenants include, among other things, notifying the lender of any change in management and maintaining minimum debt service coverage ratios.  At September 30, 2008, we are not aware of any non-compliance with our debt covenants under our loan agreements.

Recently, the U.S. credit markets and the sub-prime residential mortgage market have experienced severe dislocations and liquidity disruptions.  Sub-prime mortgage loans have experienced increasing rates of delinquency, foreclosure, and loss.  These and other related events have had a significant impact on the capital markets associated not only with sub-prime mortgage-backed securities, asset-backed securities, and collateralized debt obligations, but also with the U.S. credit and financial markets as a whole.  Consequently, there is greater uncertainty regarding our ability to access

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the credit market in order to attract financing on reasonable terms.  Our ability to borrow funds to finance future acquisitions or refinance current debt could be adversely affected by our inability to secure permanent financing on reasonable terms, if at all.

Our advisor may, but is not required to, establish capital reserves from gross offering proceeds, out of cash flow generated by operating properties and other investments or out of non-liquidating net sale proceeds from the sale of our properties and other investments.  Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions and major capital expenditures.  Alternatively, a lender may require its own formula for escrow of capital reserves.

Credit Facility

On February 13, 2008, we entered into a senior secured revolving credit facility (the “Credit Agreement”) providing for up to $75 million of secured borrowings with Bank of America, as lender and administrative agent, and other lending institutions to become a party to the Credit Agreement.  The facility under this Credit Agreement allows us to borrow up to $75 million of revolving loans including up to $20 million available for issuing letters of credit.  Loans under the credit facility bear interest at an annual rate that is equal to or a combination of (1) the LIBOR plus an applicable margin that, depending upon the debt service coverage ratio, may vary from 1.5% to 1.7%, or (2) the prime rate plus an applicable margin that, depending upon the debt service coverage ratio, may vary from 0% to 0.2%.  The credit facility matures on February 13, 2011.  The credit facility is secured by a first lien on all real property assets in a collateral pool consisting of seven wholly-owned properties.

The credit facility may be increased to up to $150 million upon satisfaction of certain conditions including additions to the collateral pool.  We have unconditionally guaranteed payment of the $75 million senior secured revolving credit facility.  We are subject to customary affirmative, negative, and financial covenants, representations, warranties, and borrowing conditions.

During the quarter ended September 30, 2008, we borrowed $58 million, net of payments, from our senior secured revolving credit facility.  The proceeds were used to fund ongoing costs at our development properties, to fund a portion of our investment in the Central Europe Joint Venture, and for general corporate purposes.  On November 6, 2008, we paid down on the credit facility in the amount of $20 million.

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Funds from Operations

Funds from operations (“FFO”) is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance.  FFO is defined by the National Association of Real Estate Investment Trusts as net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures, and subsidiaries.  We believe that FFO is helpful to investors and our management as a measure of operating performance of our operating assets because it excludes depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income.  Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time.  Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient.  As a result, our management believes that the use of FFO, together with the required GAAP presentations, provides a supplemental understanding of our performance and a more informed and appropriate basis on which to make decisions involving operating, financing and investing activities.  Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts pending investment, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses.  FFO should not be considered as an alternative to net income (loss) or as an indication of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.  Our calculation of FFO for the three and nine months ended September 30, 2008 and 2007 is presented below (amounts in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
Net loss	$	(5,485	)	$	(288	)	$	(10,586	)	$	(896	)
Real estate depreciation (1)	5,949			2,072			12,618			4,631
Real estate amortization (1)	2,046			1,446			6,146			3,163
Funds from operations (FFO)	$	2,510		$	3,230		$	8,178		$	6,898
GAAP weighted average shares:
Basic and diluted	54,611			42,450			54,433			31,154

(1)This represents the depreciation and amortization expense of the properties we consolidate and our share of depreciation and amortization expense of the properties which we account for under the equity method of accounting.  The expenses of our unconsolidated interests are reflected in our equity in earnings of investments.

Provided below is additional information related to selected non-cash items included in net loss above, which may be helpful in assessing our operating results.

·Straight-line rental revenue of $0.7 million and $3 million was recognized for the three and nine months ended September 30, 2008, respectively, and $1.1 million and $3 million was recognized for the three and nine months ended September 30, 2007, respectively;

·Amortization of intangible lease assets and liabilities was recognized as a net increase to rental revenues of $1.2 million and $3.6 million for the three and nine months ended September 30, 2008, respectively, and $0.8 million and $1.8 million for the three and nine months ended September 30, 2007, respectively;

·Amortization of intangible property tax abatement assets was recognized as an increase to real estate tax expense of $0.1 million and $0.2 million for the three and nine months ended September 30, 2008, respectively.  Amortization of intangible property tax abatement assets was recognized as an increase to real estate tax expense of $0.1 million and $0.2 million for the three and nine months ended September 30, 2007, respectively;

·Bad debt expense of $0.1 million and $0.3 million was recognized for the three and nine months ended September 30, 2008, respectively.  Bad debt expense of $24,500 and $34,000 was recognized for the three and nine months ended September 30, 2007, respectively; and

·Amortization of deferred financing costs of $0.7 million and $1.5 million was recognized as interest expense for mortgages and notes payable for the three and nine months ended September 30, 2008, respectively, and $0.2 million

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and $0.4 million was recognized as a reduction of interest income for notes receivable for the three and nine months ended September 30, 2008.  Amortization of deferred financing costs of $0.2 million and $0.4 million was recognized as interest expense for mortgages and notes payable for the three and nine months ended September 30, 2007, respectively, and $0.1 million and $0.5 million was recognized as a reduction of interest income for notes receivable for the three and nine months ended September 30, 2007.

In addition, cash flows generated from FFO may be used to fund all or a portion of certain capitalizable items that are excluded from FFO, such as capital expenditures and payments of principal on debt, each of which may impact the amount of cash available for distribution to our stockholders.

Distributions

The distributions declared during the nine months ended September 30, 2008 were $12.3 million and exceed FFO for the nine months ended September 30, 2008 by $4.1 million.  Cash amounts distributed to stockholders in excess of FFO were funded primarily from our offering to the public.  The distributions declared during the nine months ended September 30, 2007 were $6.8 million, which was $0.1 million less than FFO.  Therefore, for the nine months ended September 30, 2007, 100% of distributions were funded from FFO.

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

	2008				2007
	Declared		Paid		Declared		Paid
3rd Quarter	$	4,129	$	4,126	$	3,217	$	2,931
2nd Quarter	4,076		4,115		2,254		1,880
1st Quarter	4,055		4,043		1,279		2,491
	$	12,260	$	12,284	$	6,750	$	7,302

Over the long-term, we expect that a greater percentage of our distributions will be paid from cash flow from operations (except with respect to distributions related to sales of our assets).  However, operating performance cannot be accurately predicted due to numerous factors, including our ability to raise and invest capital at favorable yields, the financial performance of our investments in the current real estate environment, the types and mix of investments in our portfolio, and the accounting treatment of our investments in accordance with our accounting policies.  As a result, future distributions declared and paid may continue to exceed cash flow from operations.  FFO is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. See “Funds from Operations” on page 31 for a reconciliation of FFO to our GAAP net loss.

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Net Operating Income

Net operating income (“NOI”) is a non-GAAP financial measure that is defined as net income (loss), computed in accordance with GAAP, generated from properties before interest expense, asset management fees, interest income, general and administrative expenses, depreciation, amortization, equity in unconsolidated joint ventures, minority interest, income taxes, and the gain or loss on the sale of assets.  We believe that NOI provides an accurate measure of the operating performance of our operating assets because NOI excludes certain items that are not associated with management of the properties.  To facilitate understanding of this financial measure, a reconciliation of NOI to net loss in accordance with GAAP for the three and nine months ended September 30, 2008 and 2007 is provided below (amounts in thousands).

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
Revenues	$	21,552		$	10,501		$	51,132		$	22,440
Operating expenses:
Property operating expenses	6,880			4,107			18,229			7,490
Advertising costs	708			158			1,853			781
Real estate taxes	1,980			1,023			5,311			2,256
Property management fees	583			268			1,781			546
Cost of condominium sales	4,331			—			4,331			—
Total operating expenses	14,482			5,556			31,505			11,073
Net operating income	$	7,070		$	4,945		$	19,627		$	11,367
Reconciliation to Net Loss
Net operating income	$	7,070		$	4,945		$	19,627		$	11,367
Less:
Depreciation and amortization	(6,783		)	(3,692		)	(18,550		)	(8,040		)
General and administrative expense	(1,209		)	(307		)	(3,032		)	(1,016		)
Interest expense	(4,113		)	(1,759		)	(9,059		)	(4,061		)
Asset management fees	(1,456		)	(714		)	(3,399		)	(1,509		)
Provision for income tax	(47		)	(46		)	(146		)	(71		)
Equity in losses on unconsolidated JVs	(1,987		)	(227		)	(3,518		)	(295		)
Add:
Interest income	706			1,366			2,241			2,939
Minority interest	2,334			146			5,250			(210		)
Net loss	$	(5,485	)	$	(288	)	$	(10,586	)	$	(896	)

Off-Balance Sheet Arrangements

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

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Risk

For our net investments in foreign real estate properties, we use British pound and Euro foreign currency forward exchange contracts to eliminate the impact of foreign currency movements on our financial position.  At September 30, 2008, our foreign currency forward exchange contracts was reported at their fair value of $3.5 million within prepaid expenses and other assets in our consolidated balance sheet.  A 10% increase in the respective forward foreign currency - US dollar exchange rate would result in a $3.2 million decrease in fair value.  A 10% decrease in the respective forward foreign currency - US dollar exchange rate would result in a $3.2 million increase in fair value.

We maintain approximately $1.2 million in Euro-denominated accounts at European financial institutions.  Accordingly, we are not materially exposed to any significant foreign currency fluctuations related to these accounts.  We

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do not enter into derivatives for trading or speculative purposes, nor do we maintain any market risk sensitive instruments for trading or speculative purposes.

Interest Rate Risk

We may be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments.  Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, we will borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates.  With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.  We may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps, or floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate portion of our variable rate debt.  Of our $424.4 million in notes payable at September 30, 2008, $384.4 million represented debt subject to variable interest rates, which included the mortgages payable of borrowers we consolidated under FIN 46R.  If our variable interest rates increased 100 basis points, we estimate that total annual interest cost, including interest expensed, interest capitalized, and the effects of the interest rate caps and swaps, would increase by $3.5 million.

At September 30, 2008, interest rate caps used to mitigate our interest rate risk classified as assets were reported at their combined fair value of $0.1 million within prepaid expenses and other assets.  Interest rate swaps classified as liabilities were reported at their combined fair values of $0.9 million in other liabilities at September 30, 2008.  A 100 basis point decrease in interest rates would result in a $1.9 million net decrease in the fair value of our interest rate caps and swaps.  A 100 basis point increase in interest rates would result in a $2 million net increase in the fair value of our interest rate caps and swaps.

Item 4T.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of September 30, 2008, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e).  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of September 30, 2008, were effective for the purpose of ensuring that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

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

Changes in Internal Control over Financial Reporting

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

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PART II

OTHER INFORMATION

Item 1.Legal Proceedings.

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

Item 1A.Risk Factors.

The following risk factors update and should be read in conjunction with the risk factors contained in the “Risk Factors” section set forth in our Annual Report on Form 10-K for the year ended December 31, 2007.

Risks Related to Our Business in General

The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions and make additional investments.

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

Future financing could be impacted by negative capital market conditions.

Recently, the U.S. credit markets and the sub-prime residential mortgage market have experienced severe dislocations and liquidity disruptions.  Sub-prime mortgage loans have experienced increasing rates of delinquency, foreclosure and loss.  These and other related events have had a significant impact on the capital markets associated not only with sub-prime mortgage-backed securities, asset-backed securities and collateralized debt obligations, but also with the U.S. housing, credit and financial markets as a whole.  Consequently, there is greater uncertainty regarding our ability to access the credit market in order to attract financing on reasonable terms.  Our ability to borrow funds to finance future acquisitions could be adversely affected by our inability to secure permanent financing on reasonable terms, if at all.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

Use of Proceeds from Registered Securities

Pursuant to a Registration Statement on Form S-11 (SEC Registration No. 333-120847) filed under the Securities Act and declared effective by the SEC on September 20, 2005 and a Registration Statement on Form S-11 (SEC Registration No. 333-138804) filed pursuant to Rule 462(b) under the Securities Act on November 17, 2006, our initial public offering of shares of common stock (the “Offering”) consisted of (1) a maximum of 53,270,000 shares of our common stock at a price of $10.00 per share and (2) up to 965,331 additional shares pursuant to the DRIP under which our stockholders could elect to have their distributions reinvested in additional shares of our common stock at a price of up to $9.50 per share, for a total aggregate offering price of $542 million.  On November 16, 2007, we terminated the DRIP component of the Offering declared effective as of September 20, 2005 and commenced an offering to existing shareholders of up to 6,315,790 shares of common stock at a price of $9.50 per share under our Secondary DRIP pursuant to a Registration Statement on Form S-3 (SEC Registration No. 333-146965).  On December 28, 2007, we terminated the primary offering component of our Offering.  As of December 31, 2007, we had sold approximately 54.1 million shares of our common stock on a best efforts basis pursuant to the Offering for aggregate gross offering proceeds of approximately $538.7 million.

The above-stated number of shares sold and the gross offering proceeds received in connection with the Offering does not include 21,739 shares of common stock purchased by Behringer Harvard Holdings in a private placement in 2004, prior to the commencement of the Offering.

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From the commencement of the Offering through September 30, 2008, we incurred the following expenses in connection with the issuance and distribution of the registered securities pursuant to the Offering (amounts in thousands):

Type of Expense
Other expenses to affiliates *	$	56,857
Other expenses to non-affiliates	1,141
Total expenses	$	57,998

*“Other expenses to affiliates” includes commissions and dealer manager fees paid to Behringer Securities, which reallowed all or a portion of the commissions and fees to soliciting dealers.

From the commencement of the Offering through September 30, 2008, the net offering proceeds to us from the Offering, after deducting the total expenses incurred and described above, were approximately $481.8 million.  From the commencement of the Offering through September 30, 2008, we had used approximately $387 million of such net proceeds to purchase interests in real estate and fund development for real estate, net of notes payable, and approximately $94.8 million was invested through mezzanine loans.  Of the amount used for the purchase of these investments, approximately $24.3 million was paid to Behringer Opportunity Advisors I (or its predecessor-in-interest) as acquisition and advisory fees and acquisition expense reimbursement.

Share Redemption Program

In February 2006, our board of directors adopted a share redemption program for our investors.  The purchase price for the redeemed shares is set forth in the prospectus for our Offering of common stock, as supplemented.  Our board of directors reserves the right in its sole discretion at any time, and from time to time, to (1) waive the one-year holding period in the event of the death, disability or bankruptcy of a stockholder or other exigent circumstances, (2) reject any request for redemption, (3) change the purchase price for redemptions, or (4) terminate, suspend or amend the share redemption program.  Under the terms of the program, during any calendar year, we will not redeem in excess of 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption.  In addition, our board of directors will determine whether we have sufficient cash from operations to repurchase shares, and such purchases will generally be limited to proceeds from our distribution reinvestment plan plus 1% of operating cash flow for the previous fiscal year (to the extent positive).  During the quarter ended September 30, 2008, we redeemed shares as follows:

2008	Total Number of Shares Redeemed	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Be Purchased Under the Plans or Programs
July	122,930	$	9.10	—	(1)
August	—	$	—	—
September	—	$	—	—
	122,930	$	9.10	—	(1)

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

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Item 3.Defaults Upon Senior Securities.

None.

Item 4.Submission of Matters to a Vote of Security Holders.

The Annual Meeting of our stockholders was held on June 23, 2008.  The meeting was adjourned prior to taking a vote on any matters and was reconvened on July 24, 2008 (the “Reconvened Meeting”).  At the Reconvened Meeting, all nominees standing for election as directors were elected.  The following directors were elected to hold office for a term expiring at the 2009 Annual Meeting or until their successors are elected and qualified, with the vote for each director being reflected below:

	Number of	Number of
	Votes	Votes
Director Nominee	For	Withheld
Robert M. Behringer	26,381,193	4,708,166
Robert S. Aisner	26,373,257	4,716,102
Terry L. Gage	26,381,500	4,701,859
Barbara C. Bufkin	26,363,461	4,725,898
Steven J. Kaplan	26,366,692	4,722,667

The affirmative vote of the holders of a majority of the outstanding shares of common stock represented at the Reconvened Meeting was required to elect each director.

In addition, at the Reconvened Meeting, our stockholders approved our Second Articles of Amendment and Restatement, which amended certain provisions of our charter.  The affirmative vote of a majority of all votes entitled to be cast at the Reconvened Meeting was required to approve our Second Articles of Amendment and Restatement.  The aggregate number of votes entitled to be cast at the Reconvened Meeting was 54,380,498.  The vote of the stockholders with respect to the approval of our Second Articles of Amendment and Restatement is reflected below:

	Number of	Number of	Number of
	Votes	Votes	Votes
	For	Against	Abstained
Second Articles of Amendment and Restatement	28,812,343	1,118,556	1,158,460

For additional information regarding the revisions to our charter contained in our Second Articles of Amendment and Restatement, please see our Current Report on Form 8-K filed with the SEC on July 29, 2008.

Item 5.Other Information.

None.

Item 6.Exhibits.

The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.

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SIGNATURE

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

	Behringer Harvard Opportunity REIT I, Inc.
Dated: November 14, 2008	By:	/s/ Gary S. Bresky
	Gary S. Bresky
	Chief Financial Officer
	(Principal Financial Officer)

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Index to Exhibits

Exhibit Number	Description
3.1	Second Articles of Amendment and Restatement of the Registrant (previously filed in and incorporated by reference to Form 8-K, filed on July 29, 2008)
3.2	Bylaws of the Registrant (previously filed in and incorporated by reference to Registration Statement on Form  S-11, Commission File No. 333-120847, filed on November 30, 2004)
3.2(a)	Amendment to Bylaws of the Registrant (previously filed in and incorporated by reference to Form 8-K filed on February 24, 2006)
4.1	Form of Subscription Agreement and Subscription Agreement Signature Page (included as Exhibit B to the prospectus of the Registrant filed pursuant to Rule 424(b)(3) on June 1, 2006, as supplemented)
4.2	Amended and Restated Distribution Reinvestment Plan, effective as of April 5, 2006 (included as Exhibit C to the prospectus of the Registrant filed pursuant to Rule 424(b)(3) on June 1, 2006, as supplemented)
4.2(a)	Second Amended and Restated Distribution Reinvestment Plan (previously filed in and incorporated by reference to Exhibit A to prospectus contained in Registration Statement on Form S-3, Commission File No. 333-146965, filed on October 26, 2007)
4.3	Automatic Purchase Plan of the Registrant, effective as of September 20, 2005 (included as Exhibit D to the prospectus of the Registrant filed pursuant to Rule 424(b)(3) on June 1, 2006, as supplemented)
10.1	Form of Amended and Restated Stock Option Agreement under Amended and Restated 2004 Incentive Award Plan (filed herewith)
31.1	Rule 13a-14(a)/15d-14(a) Certification (filed herewith)
31.2	Rule 13a-14(a)/15d-14(a) Certification (filed herewith)
32.1*	Section 1350 Certifications (furnished herewith)

* In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.  Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.