Behringer Harvard Opportunity REIT I (BHOR) 10-Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

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	(I.R.S. Employer
Organization)	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 ¨

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

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:

Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer  þ	(Do not check if a smaller reporting company)	Smaller reporting company ¨

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

As of October 28, 2011, the Registrant had 56,500,473 shares of common stock outstanding.

BEHRINGER HARVARD OPPORTUNITY REIT I, INC.

FORM 10-Q

Quarter Ended September 30, 2011

		Page
	PART I
	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2011 and 2010	4
	Condensed Consolidated Statements of Equity for the Nine Months Ended September 30, 2011 and 2010	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41
	PART II
	OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Removed and Reserved
Item 5.	Other Information	42
Item 6.	Exhibits	42
Signature		43

2

 

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

Behringer Harvard Opportunity REIT I, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(Unaudited)

	September 30,			December 31,
	2011			2010
Assets
Real estate
Land and improvements, net	$	80,841		$	97,741
Buildings and improvements, net		275,274			337,103
Real estate under development		13,152			19,060
Total real estate		369,267			453,904
Condominium inventory		30,340			59,219
Assets associated with real estate held for sale		25,815			-
Cash and cash equivalents		11,068			9,833
Restricted cash		4,247			2,574
Accounts receivable, net		10,048			9,249
Prepaid expenses and other assets		3,204			3,921
Leasehold interests, net		19,551			15,781
Investments in unconsolidated joint ventures		42,996			59,099
Furniture, fixtures and equipment, net		6,099			7,757
Deferred financing fees, net		2,246			2,681
Notes receivable, net		34,811			48,011
Lease intangibles, net		13,091			16,430
Other intangibles, net		7,163			7,671
Receivables from related parties		87			1,494
Total assets	$	580,033		$	697,624
Liabilities and Equity
Notes payable	$	303,668		$	347,825
Note payable to related parties		1,500			-
Accounts payable		805			1,786
Payables to related parties		3,830			861
Acquired below-market leases, net		7,480			9,638
Accrued and other liabilities		22,236			21,244
Obligations associated with real estate held for sale		491			-
Total liabilities		340,010			381,354
Commitments and contingencies
Equity
Behringer Harvard Opportunity REIT I, Inc. 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, and 56,379,760 and 56,500,473 shares issued and outstanding at December 31, 2010, and September 30, 2011, respectively		6			6
Additional paid-in capital		503,405			502,102
Accumulated distributions and net loss		(266,902	)		(185,491	)
Accumulated other comprehensive loss		(3,736	)		(3,956	)
Total Behringer Harvard Opportunity REIT I, Inc. equity		232,773			312,661
Noncontrolling interest		7,250			3,609
Total equity		240,023			316,270
Total liabilities and equity	$	580,033		$	697,624

See Notes to Condensed Consolidated Financial Statements.

3

Behringer Harvard Opportunity REIT I, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Revenues
Rental revenue	$	10,544		$	9,646		$	31,420		$	28,494
Hotel revenue		1,810			1,721			3,550			3,769
Condominium sales		5,288			664			8,253			26,228
Interest income from notes receivable		-			-			-			6,434
Total revenues		17,642			12,031			43,223			64,925
Expenses
Property operating expenses		4,827			4,290			12,684			12,545
Bad debt expense		165			89			515			367
Cost of condominium sales		5,399			773			8,432			26,710
Condominium inventory impairment		-			-			5,925			-
Interest expense		4,418			3,500			13,214			9,289
Real estate taxes		1,569			1,259			4,961			4,196
Impairment charge		12,795			12,913			12,795			12,913
Provision for loan losses		-			-			5,342			7,136
Property management fees		426			512			1,197			1,341
Asset management fees		1,341			1,305			3,929			4,021
General and administrative		1,122			1,605			3,814			4,205
Depreciation and amortization		4,878			4,692			15,490			13,771
Total expenses		36,940			30,938			88,298			96,494
Interest income		12			19			41			87
Other income (expense), net		26			(72	)		32			(31	)
Loss on troubled debt restructuring		-			(5,036	)		-			(5,036	)
Loss from continuing operations before income taxes and equity in losses of unconsolidated joint ventures		(19,260	)		(23,996	)		(45,002	)		(36,549	)
Benefit (provision) for income taxes		(41	)		(390	)		(158	)		(211	)
Equity in losses of unconsolidated joint ventures		(2,346	)		(2,491	)		(37,869	)		(4,074	)
Loss from continuing operations		(21,647	)		(26,877	)		(83,029	)		(40,834	)
Income (loss) from discontinued operations		(510	)		(11,395	)		(3,382	)		(17,805	)
Gain (loss) on sale of real estate		-			3,935			1,334			3,935
Net loss		(22,157	)		(34,337	)		(85,077	)		(54,704	)
Add: Net loss attributable to the noncontrolling interest		917			499			5,076			1,101
Net loss attributable to common shareholders	$	(21,240	)	$	(33,838	)	$	(80,001	)	$	(53,603	)
Weighted average shares outstanding:
Basic and diluted		56,500			56,261			56,486			56,127
Loss per share attributable to common shareholders:
Basic and diluted:
Continuing operations	$	(0.36	)	$	(0.40	)	$	(1.36	)	$	(0.64	)
Discontinued operations		(0.01	)		(0.20	)		(0.06	)		(0.31	)
Basic and diluted loss per share	$	(0.37	)	$	(0.60	)	$	(1.42	)	$	(0.95	)
Amounts attributable to common shareholders:
Continuing operations	$	(20,730	)	$	(22,443	)	$	(76,619	)	$	(35,798	)
Discontinued operations		(510	)		(11,395	)		(3,382	)		(17,805	)
	$	(21,240	)	$	(33,838	)	$	(80,001	)	$	(53,603	)
Comprehensive income (loss):
Net loss	$	(22,157	)	$	(34,337	)	$	(85,077	)	$	(54,704	)
Other comprehensive loss:
Foreign currency translation gain (loss)		(1,212	)		2,336			221			(1,171	)
Unrealized gain (loss) on interest rate derivatives		(2	)		(366	)		(34	)		383
Reclassifications due to hedging activities		-			617			-			662
Total other comprehensive income (loss)		(1,214	)		2,587			187			(126	)
Comprehensive loss		(23,371	)		(31,750	)		(84,890	)		(54,830	)
Comprehensive loss attributable to noncontrolling interest		892			515			5,109			1,070
Comprehensive loss attributable to common shareholders	$	(22,479	)	$	(31,235	)	$	(79,781	)	$	(53,760	)

See Notes to Condensed Consolidated Financial Statements.

4

Behringer Harvard Opportunity REIT I, Inc.

Condensed Consolidated Statements of Equity

(in thousands, except share amounts)

(Unaudited)

													Accumulated			Accumulated
	Convertible Stock				Common Stock					Additional			Distributions			Other
	Number of		Par		Number of			Par		Paid-In			and			Comprehensive			Noncontrolling			Total
	Shares		Value		Shares			Value		Capital			Net Loss			Income (Loss)			Interest			Equity
Balance at January 1, 2010		1,000	$	-		55,825,078		$	6	$	497,648		$	(115,496	)	$	(3,412	)	$	(4,325	)	$	374,421
Cumulative effect of adoption of accounting standard														(3,995	)					9,412			5,417
Redemption of common stock						(104,557	)				(839	)											(839	)
Distributions declared on common stock														(6,995	)					(43	)		(7,038	)
Contributions from noncontrolling interest																				78			78
Shares issued pursuant to Distribution Reinvestment Plan, net						590,930					4,745												4,745
Comprehensive loss:
Net loss														(53,600	)					(1,104	)		(54,704	)
Other comprehensive income:
Foreign currency translation gain (loss)																	(1,206	)		35			(1,171	)
Unrealized gains (losses) on interest rate derivatives																	351			32			383
Reclassifications due to hedging activities																	695			(33	)		662
Total comprehensive loss																				(1,070	)		(54,830	)
Balance at September 30, 2010		1,000	$	-		56,311,451		$	6	$	501,554		$	(180,086	)	$	(3,572	)	$	4,052		$	321,954
Balance at January 1, 2011		1,000	$	-		56,379,760		$	6	$	502,102		$	(185,491	)	$	(3,956	)	$	3,609		$	316,270
Distributions declared on common stock														(1,410	)								(1,410	)
Contributions from noncontrolling interest																				9,893			9,893
Distributions to non-controlling interest																				(766	)		(766	)
Transfer of non-contrilling interest											377									(377	)		-
Shares issued pursuant to Distribution Reinvestment Plan, net						120,713					926												926
Comprehensive loss:
Net loss														(80,001	)					(5,076	)		(85,077	)
Other comprehensive income:
Foreign currency translation gain (loss)																	254			(33	)		221
Unrealized gains (losses) on interest rate derivatives																	(34	)		-			(34	)
Reclassifications due to hedging activities																	-			-			-
Total comprehensive loss																				(5,109	)		(84,890	)
Balance at September 30, 2011		1,000	$	-		56,500,473		$	6	$	503,405		$	(266,902	)	$	(3,736	)	$	7,250		$	240,023

See Notes to Condensed Consolidated Financial Statements.

5

Behringer Harvard Opportunity REIT I, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Nine months ended September 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(85,077	)	$	(54,704	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		15,641			15,347
Amortization of deferred financing fees		2,291			2,078
Loss on troubled debt restructuring		-			5,036
Loss on debt extinguishment		-			2,253
Gain on sale of real estate		(2,559	)		(3,935	)
Impairment charge		22,349			25,263
Provision for loan losses		5,342			7,136
Bad debt expense		515			366
Equity in losses of unconsolidated joint ventures		37,869			4,074
Unrealized gain on derivatives		(35	)		(2,432	)
Change in operating assets and liabilities:
Accounts receivable		(1,763	)		(2,383	)
Condominium inventory		23,064			19,997
Prepaid expenses and other assets		659			(900	)
Accounts payable		(246	)		1,004
Accrued and other liabilities		1,199			(2,790	)
Payables to related parties		2,402			1,157
Lease intangibles		(1,674	)		(1,447	)
Cash provided by operating activities		19,977			15,120
Cash flows from investing activities:
Proceeds from sale of real estate		38,165			2,770
Investment in unconsolidated joint ventures		(30	)		(2,850	)
Capital expenditures for real estate under development		(1,964	)		(6,990	)
Additions of property and equipment		(5,632	)		(3,727	)
Change in restricted cash		(1,673	)		1,811
Cash assumed from conversion of mezzanine loan to equity		-			407
Investment in notes receivable		(3,663	)		(3,841	)
Proceeds from payments on note receivables		425			600
Cash provided by (used in) investing activities		25,628			(11,820	)
Cash flows from financing activities:
Financing costs		(1,339	)		(866	)
Proceeds from notes payable		11,365			7,151
Deposits received under sales contracts		-			6,025
Payments on notes payable		(33,768	)		(26,624	)
Net borrowings (repayments) on senior secured revolving credit facility		(21,820	)		7,482
Borrowings on note payable related party		1,500			-
Redemptions of common stock		-			(840	)
Distributions		(485	)		(2,250	)
Contributions from noncontrolling interest holders		887			78
Distributions to noncontrolling interest holders		(766	)		(43	)
Cash used in financing activities		(44,426	)		(9,887	)
Effect of exchange rate changes on cash and cash equivalents		56			1,618
Net change in cash and cash equivalents		1,235			(4,969	)
Cash and cash equivalents at beginning of the period		9,833			9,511
Decrease in cash from deconsolidation due to adoption of accounting standard		-			(1,011	)
Cash and cash equivalents at end of the period	$	11,068		$	3,531

See Notes to Condensed Consolidated Financial Statements.

6

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Business

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 operate commercial real estate or real estate-related assets located in and outside the United States on an opportunistic basis.  In particular, we have focused on acquiring properties with significant possibilities for 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 completed our first property acquisition in March 2006.  As of September 30, 2011, we were invested in 20 assets including:

· 10 wholly-owned properties (including one asset held for sale);

· four consolidated properties through investments in joint ventures;

· a consolidating interest in a note receivable joint venture;

· a mezzanine loan for one multifamily property;

· a noncontrolling, unconsolidated ownership interests in three properties that are accounted for using the equity method; and

· a noncontrolling, unconsolidated ownership interest in a joint venture consisting of 22 properties which is accounted for using the equity method.

Our investment properties are located in Arizona, California, Colorado, Missouri, Nevada, Texas, The Commonwealth of The Bahamas, London, England, the Czech Republic, Poland, Hungary and Slovakia.

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 partnership interest by our wholly-owned subsidiary, BHO Business Trust, a Maryland business trust.

We are externally managed and advised by Behringer Harvard Opportunity Advisors I, LLC (“Behringer Harvard Opportunity Advisors I” or the “Advisor”), a Texas limited liability company formed in June 2007.  Behringer Harvard Opportunity Advisors I is responsible for managing our day-to-day affairs and for identifying and making acquisitions, dispositions and investments on our behalf.

Our office is located at 15601 Dallas Parkway, Suite 600, Addison, Texas 75001, and our toll-free telephone number is (866) 655-3600.  The name Behringer Harvard is the property of Behringer Harvard Holdings, LLC (“Behringer Harvard Holdings”) and is used by permission.

2. Interim Unaudited Financial Information

The accompanying condensed 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, 2010, which was filed with the Securities and Exchange Commission (“SEC”) on March 31, 2011.  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 condensed consolidated balance sheet and condensed consolidated statement of equity as of September 30, 2011, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2011 and 2010, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2011 and 2010 have not been audited by our independent registered public accounting firm.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to fairly present our condensed consolidated financial position as of September 30, 2011 and our condensed consolidated results of operations, equity, and cash flows for the periods ended September 30, 2011 and 2010.  Such adjustments are normal and recurring in nature.

7

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Our financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business as the Company proceeds through its disposition phase.  The Company has experienced significant losses and may generate negative cash flows as mortgage note obligations and expenses exceed revenues.   If we are unable to sell a property when we determine to do so as contemplated in our business plan, it could have a significant adverse effect on our cash flows that are necessary to meet our mortgage obligations and to satisfy our other liabilities in the normal course of business.

The Company’s ability to continue as a going concern is, therefore, dependent upon its ability to sell the real estate investments, to pay down debt as it matures if extensions or new financing is unavailable and to fund certain ongoing costs of the Company and its development and operating properties.

We have evaluated subsequent events for recognition or disclosure in our condensed consolidated financial statements.

3. Summary of Significant Accounting Policies

Described below are certain of our significant accounting policies. The disclosures regarding several of the policies have been condensed or omitted in accordance with interim reporting regulations specified by Form 10-Q.  Please see our Annual Report on Form 10-K for a complete listing of all of our significant accounting policies.

Real Estate

We amortize the value of in-place leases acquired 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.  As of September 30, 2011, the estimated remaining useful lives for acquired lease intangibles range from less than one year to approximately nine years.

Anticipated amortization expense associated with the acquired lease intangibles and acquired other intangible assets for each of the following five years as of September 30, 2011 is as follows (in thousands):

	Lease / Other Intangibles
October 1, 2011 – December 31, 2011	$	284
2012		1,028
2013		951
2014		666
2015		74

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

										Acquired
	Buildings and			Land and			Lease			Below-Market			Leasehold			Other
September 30, 2011	Improvements			Improvements			Intangibles			Leases			Interest			Intangibles
Cost	$	320,400		$	81,632		$	26,850		$	(18,122	)	$	20,608		$	10,438
Less: depreciation and amortization		(45,126	)		(791	)		(13,759	)		10,642			(1,057	)		(3,275	)
Net	$	275,274		$	80,841		$	13,091		$	(7,480	)	$	19,551		$	7,163

										Acquired
	Buildings and			Land and			Lease			Below-Market			Leasehold			Other
December 31, 2010	Improvements			Improvements			Intangibles			Leases			Interest			Intangibles
Cost	$	380,991		$	98,267		$	32,750		$	(20,500	)	$	16,500		$	10,439
Less: depreciation and amortization		(43,888	)		(526	)		(16,320	)		10,862			(719	)		(2,768	)
Net	$	337,103		$	97,741		$	16,430		$	(9,638	)	$	15,781		$	7,671

8

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Condominium Inventory

Condominium inventory is stated at the lower of cost or fair market value, and consists of land acquisition costs, land development costs, construction costs and interest and real estate taxes, which are capitalized during the period beginning with the commencement of development and ending with the completion of construction.  At September 30, 2011, condominium inventory consisted of $17.4 million of finished units and $12.9 million of work in progress.  As of December 31, 2010, condominium inventory consisted of $27.6 million of finished units and $31.6 million of work in progress.  In February 2011, we received $14.7 million related to the monetization of State of Missouri historic tax credits on the redevelopment of the Chase Park Plaza Hotel located in St. Louis, Missouri, which was recorded as a reduction of our condominium inventory.  The proceeds from these historic tax credits were used to pay down the outstanding balance of the Chase Park Plaza Hotel loan.

For condominium inventory, at each reporting date, management compares the estimated fair value less costs to sell to the carrying value.  An adjustment 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.

The nationwide downturn in the housing and related condominium market that began during 2007 and continues through the third quarter of 2011, resulting in lower than expected sales volume and reduced selling prices through the second quarter of 2011.  As a result of our evaluations, we recognized a non-cash charge of $1.9 million during the nine months ended September 30, 2011 to reduce the carrying value of condominiums at Chase-The Private Residences and a non-cash charge of $4 million during the nine months ended September 30, 2011 to reduce the carrying value of the condominium development at Cordillera.  Both of these non-cash charges are classified as condominium inventory impairment charges in the accompanying consolidated statement of operations.  We recognized a non-cash charge of $4.8 million during the nine months ended September 30, 2010 to reduce the carrying value of the condominiums at Chase – The Private Residences.  In the event that market conditions continue to decline in the future or the current difficult market conditions extend beyond our expectations, additional adjustments may be necessary.

Accounts Receivable

Accounts receivable primarily consist of straight-line rental revenue receivables of $7.6 million and $6.7 million as of September 30, 2011 and December 31, 2010, respectively, and receivables from our hotel operators and tenants related to our other consolidated properties of $2.9 million and $3 million as of September 30, 2011 and December 31, 2010, respectively.  The allowance for doubtful accounts was $0.4 million as of both September 30, 2011 and December 31, 2010.

Investment Impairment

For all of our real estate and real estate related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to:  a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers and changes in the global and local markets or economic conditions.  Our assets may at times be concentrated in limited geographic locations and, to the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at a portion of our properties within a short time period, which may result in asset impairments.  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.  We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist.  While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

9

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

We also evaluate our investments in notes receivable as of each reporting date.  If we believe that it is probable that we will not collect all principal and interest in accordance with the terms of the loans, we consider the loan impaired.  When evaluating loans for potential impairment, we compare the carrying amount of the loans to the present value of future cash flows discounted at the loan’s effective interest rate, or, if a loan is collateral dependent, to the estimated fair value of the related collateral net of any senior loans.  For impaired loans, a provision is made for loan losses to adjust the reserve for loan losses.  The reserve for loan losses is a valuation allowance that reflects our current estimate of loan losses as of the balance sheet date.  The reserve is adjusted through the provision for loan losses account on our condensed consolidated statement of operations.  In accordance with GAAP, from the time a loan goes into default until the time that a foreclosure occurs, a satisfactory workout is completed, or the loan is reinstated by the borrower, we do not recognize interest income on the loan, except to the extent we receive payments.

Through the third quarter of 2011, we evaluated certain real estate properties for impairment as a result of changes in expected holding periods.  Accordingly, we recognized impairment charges of $6.2 million related to Rio Salado, $5.1 million related to Frisco Square and $1.5 million related to Regency Center.  We also recognized an impairment charge of $3.6 million related to 2603 Augusta in the first quarter of 2011, which is included in discontinued operations.  2603 Augusta was sold to an unaffiliated third party on June 30, 2011.

On September 14, 2010, we entered into a forbearance agreement with the Royal Island borrower pursuant to which, among other things, the borrower agreed not to contest or oppose any foreclosure, exercise of power of sale, or similar action that we may seek in order to protect our investment once the agreement expired.  Further, the borrower agreed to fully cooperate to expedite the proceedings should we take such a course of action.  The forbearance agreement gave the general partner and other interested parties time to raise additional equity for development of the Royal Island property.  The forbearance period expired on May 27, 2011 without the total additional development equity raised. Consequently, there is a change in the timing of the development of the property.  Based upon a third party appraisal of the collateral obtained after the expiration of the forbearance agreement, there is a decline in the fair market value of the property.  As a result, an impairment was recorded on Royal Island’s books.  Our portion of the impairment is $31.1 million, which was recorded through equity in losses of unconsolidated joint ventures.  This reduced our investment basis in Royal Island to zero as of September 30, 2011.  Additionally, it is probable that we will be unable to collect all amounts due according the terms of the loan agreements.  We believe the only source available to repay the loan is the underlying collateral.  Based upon our evaluation of the current fair value of the Royal Island development, we recorded a provision for loan losses of $5.3 million to reduce our note receivable balance to the underlying collateral value.

In the first quarter of 2010, we recorded a reserve for loan losses of $11.1 million related to our mezzanine loan associated with Alexan Black Mountain, including $7.1 million recognized as a provision to loan losses on our condensed consolidated statement of operations and other comprehensive loss for the nine months ended September 30, 2010, and the remaining $4 million as a cumulative effect adjustment to the opening balance of accumulated distributions and net loss in our condensed consolidated statement of equity for the nine months ended September 30, 2010.

Other than the impairment charges discussed above, we believe the carrying values of our operating real estate assets, properties under development, investments in unconsolidated joint ventures, and notes receivable are currently recoverable.  However, if market conditions worsen beyond our current expectations, if our assumptions regarding expected future cash flows from the use and eventual disposition of our assets decrease, if our expected hold periods decrease, or if changes in our development strategy significantly affect any key assumptions used in our fair value calculations, we may need to take additional charges in future periods for impairments related to existing assets.  Any such non-cash charges would have an adverse effect on our condensed consolidated financial position and results of operations.

Real Estate Held for Sale

We classify properties as held for sale when certain criteria are met, in accordance with GAAP.  We present the assets and obligations of a property held for sale separately on our condensed consolidated balance sheet, and we cease recording depreciation and amortization expense related to that property.  Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell.  As of September 30, 2011, our Crossroads property was classified as held for sale.  On October 4, 2011, we completed the sale of Crossroads to an unaffiliated third party.  We had no properties classified as held for sale at December 31, 2010.

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 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, allowance for doubtful accounts, and allowance for loan losses.  Actual results could differ from those estimates.

10

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

New Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (“FASB”) issued further clarification on when a loan modification or restructuring is considered a troubled debt restructuring. In determining whether a loan modification represents a troubled debt restructuring, an entity should consider whether the debtor is experiencing financial difficulty and the lender has granted a concession to the borrower. This guidance is to be applied retrospectively, with early application permitted.  This guidance was effective for the first interim or annual period beginning on or after June 15, 2011.  The adoption of this guidance did not have a material impact on our financial statements or disclosures.

In May 2011, the FASB issued updated guidance for fair value measurements.  The guidance amends existing guidance to provide common fair value measurements and related disclosure requirements between GAAP and International Financial Reporting Standards.  This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We are currently evaluating this guidance to determine if it will have a material impact on our financial statements or disclosures.

In June 2011, the FASB issued updated guidance related to comprehensive income.  The guidance requires registrants to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, registrants will be required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Early adoption is permitted.  Our current presentation complies with the guidance of this new standard.

4.  Assets and Liabilities Measured at Fair Value

Fair value measurements are 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, 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) has been established.

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.

Recurring Fair Value Measurements

Currently, we use interest rate caps to manage our interest rate risk and foreign exchange put/call options 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.

We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance 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 of September 30, 2011 and December 31, 2010, 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.

11

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following fair value hierarchy table presents information about our assets measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 ($ in thousands):

September 30, 2011	Level 1		Level 2		Level 3		Total
Assets
Derivative financial instruments	$	-	$	1	$	-	$	1
December 31, 2010	Level 1		Level 2		Level 3		Total
Assets
Derivative financial instruments	$	-	$	37	$	-	$	37

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

Nonrecurring Fair Value Measurements

For the nine months ended September 30, 2011 we recorded a $5.3 million provision for loan losses related to our Royal Island loan.  We recognized impairment charges of $6.2 million related to Rio Salado, $5.1 million related to Frisco Square and $1.5 million related to Regency Center.  We also recognized condominium inventory impairment charges of $1.9 million and $4 million related to Chase - The Private Residences and Cordillera, respectively.  In addition, we recorded an impairment charge of $3.6 million related to 2603 Augusta which has been reclassified to discontinued operations.  For the year ended December 31, 2010, we recorded impairment charges of $27.2 million related to our interests in Crossroads, Regency Center, 2603 Augusta, Northpoint Central, our 30.38% unconsolidated interest in Royal Island, and a $5.7 million condominium impairment charge related to Chase–The Private Residences.  In addition, we recognized a provision to the reserve for loan losses of $7.1 million related to our Alexan Black Mountain note receivable for the year ended December 31, 2010.

  The inputs used to calculate the fair value of these assets included projected cash flows and a risk-adjusted rate of return that we estimated would be used by a market participant in valuing these assets.  This fair value estimate is considered Level 3 of the fair value hierarchy.  The following fair value hierarchy table presents information about our assets measured at fair value on a nonrecurring basis during the nine months ended September 30, 2011 and the year ended December 31, 2010 ($ in thousands):

September 30, 2011	Level 1		Level 2		Level 3		Total Fair Value		Gain / (Loss)(1)
Assets
Note receivable, net	$	-	$	-	$	32,250	$	32,250	$	(5,342	)
Land and improvements, net						2,987		2,987		(277	)
Buildings and improvements, net		-		-		46,096		46,096		(6,349	)
Real estate under development						13,470		13,470		(6,169	)
Condominium inventory		-		-		30,340		30,340		(5,925	)
Total	$	-	$	-	$	125,143	$	125,143	$	(24,062	)

(1)  Excludes $3.6 million in impairment loss of our discontinued operations that was disposed of as of the nine months ended September 30, 2011.

December 31, 2010	Level 1		Level 2		Level 3		Total Fair Value		Gain / (Loss)(1)
Assets
Note receivable, net	$	-	$	-	$	2,540	$	2,540	$	(7,136	)
Land						3,974		3,974		(376	)
Buildings and improvements, net		-		-		32,573		32,573		(1,113	)
Real estate intangibles, net						2,451		2,451		(81	)
Condominium inventory		-		-		42,298		42,298		(5,674	)
Investment in unconsolidated joint venture						14,226		14,226		(6,342	)
Total	$	-	$	-	$	98,062	$	98,062	$	(20,722	)

(1) Excludes $16.5 million in impairment losses from one property disposed of as of the year ended December 31, 2010, and two properties included in discontinued operations as of September 30, 2011.

12

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

5. Fair Value Disclosure of Financial Instruments

We determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies.  Considerable judgment is necessary to interpret market data and develop the related estimates of fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

As of September 30, 2011 and December 31, 2010, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses, other liabilities, payables/receivables from related parties, and distributions payable were at amounts that reasonably approximated their fair value based on their highly liquid nature and/or short-term maturities, and the carrying value of notes receivable reasonably approximated fair value based on expected interest rates for notes to similar borrowers with similar terms and remaining maturities.

The notes payable of $303.7 million and $347.8 million as of September 30, 2011 and December 31, 2010, respectively, have a fair value of approximately $304.2 million and $348.4 million, respectively, based upon interest rates for mortgages with similar terms and remaining maturities that management believes we could obtain.  Interest rate swaps and caps are recorded at their respective fair values in prepaid expenses and other assets.

The fair value estimates presented herein are based on information available to our management as of September 30, 2011 and December 31, 2010.  Although our management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these condensed consolidated financial statements since those respective dates, and current estimates of fair value may differ significantly from the amounts presented herein.

6. Real Estate Investments

As of September 30, 2011, we wholly owned 10 properties (including one property held for sale) and consolidated four properties through investments in joint ventures and a consolidating interest in a note receivable joint venture.  We are the mezzanine lender for one multifamily property.  In addition, we have noncontrolling, unconsolidated ownership interests in three properties and one investment in a joint venture consisting of 22 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.

13

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table presents certain additional information about our consolidated properties as of September 30, 2011:

Property Name	Location	Approximate Rentable Square Footage		Description	Encumbrances (in thousands)			Ownership Interest			Year Acquired
Bent Tree Green	Dallas, Texas		138,000	3-story office building	$	6,547			100	%		2006
Las Colinas Commons	Irving, Texas		239,000	3-building office complex	$	11,400	(1)		100	%		2006
5000 S. Bowen Road	Arlington, Texas		87,000	1-story data center campus	$	11,813	(1)		100	%		2007
Northpoint Central	Houston, Texas		180,000	9-story office building	$	14,250	(1)		100	%		2007
Regency Center	Houston, Texas		157,000	6-story office building	$	10,800	(1)		100	%		2007
Northborough Tower	Houston, Texas		207,000	14-story office building	$	20,701			100	%		2007
Crossroads	San Diego, California		140,000	7-story office building	$	26,673	(2)		100	%		2008
Tanglewood at Voss	Houston, Texas		—	multifamily	$	39,085			100	%		2010
Santa Clara 700/750 Joint Venture	Santa Clara, California		306,000	2-building office complex	$	25,000			100	%		2007
Rio Salado Business Center	Phoenix, Arizona		—	development property	$	318			100	%		2007
Chase Park Plaza	St. Louis, Missouri		—	hotel and condominium development property	$	60,369			95	%		2006
The Lodge & Spa at Cordillera	Edwards, Colorado		—	hotel and development property					94	%		2007
Frisco Square	Frisco, Texas		100,500	mixed-use development (multifamily, retail, office, and restaurant)	$	49,647			93	%		2007
Becket House	London, England		46,000	long-term leasehold interest	$	23,594			80	%		2007

(1) These properties secure our Senior Revolving Credit Facility.

(2) On October 4, 2011, Crossroads was sold to an unaffiliated third party.  The proceeds of the sale were paid to the lender in full satisfaction of the outstanding debt.

Investments in Unconsolidated Joint Ventures

The following table presents certain information about our unconsolidated investments as of September 30, 2011 and December 31, 2010 ($ in thousands):

				Carrying Value of Investment
Property Name	Interest			September 30, 2011		December 31, 2010
Royal Island		30.69	%	$	-	$	14,226
GrandMarc at Westberry Place		50.00	%		5,649		6,126
Santa Clara 800 Joint Venture		50.00	%		14,623		14,974
Central Europe Joint Venture		47.27	%		22,724		23,773
Total				$	42,996	$	59,099

14

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Our investments in unconsolidated joint ventures as of September 30, 2011 and December 31, 2010 consisted of our proportionate share of the combined assets and liabilities of our investment properties as follows ($ in thousands):

	September 30,		December 31,
	2011		2010
Real estate assets, net	$	254,989	$	361,430
Cash and cash equivalents		7,731		22,941
Other assets		14,747		3,690
Total assets	$	277,467	$	388,061
Notes payable	$	227,414	$	234,472
Other liabilities		30,514		19,611
Total liabilities		257,928		254,083
Equity		19,539		133,978
Total liabilities and equity	$	277,467	$	388,061

For the three and nine months ended September 30, 2011, we recognized $2.3 million and $37.9 million, respectively, of equity in losses.  For the three and nine months ended September 30, 2010, we recognized $2.5 million and $4.1 million, respectively, of equity in losses.  Our equity in losses from these investments is our proportionate share of the combined losses of our unconsolidated joint ventures for the three and nine months ended September 30, 2011 and 2010 as follows ($ in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Revenue	$	5,050		$	5,975		$	15,316		$	18,386
Operating expenses:
Operating expenses		7,450			2,793			11,992			5,569
Property taxes		376			199			1,008			610
Total operating expenses		7,826			2,992			13,000			6,179
Operating income		(2,776	)		2,983			2,316			12,207
Non-operating expenses:
Depreciation and amortization		2,261			2,430			6,310			7,138
Interest and other, net		1,699			6,887			116,487			14,689
Total non-operating expenses		3,960			9,317			122,797			21,827
Net loss	$	(6,736	)	$	(6,334	)	$	(120,481	)	$	(9,620	)
Company's share of net loss	$	(2,346	)	$	(2,491	)	$	(37,869	)	$	(4,074	)

Held for Sale

As of September 30, 2011, our Crossroads property was classified as held for sale.  On October 4, 2011, we completed the sale of Crossroads to an unaffiliated third party.  We had no properties classified as held for sale at December 31, 2010.

7. Variable Interest Entities

GAAP requires the consolidation of variable interest entities (“VIEs”) in which an enterprise has a controlling financial interest.  A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

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

15

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Tanglewood at Voss

On September 30, 2010, we reached an agreement with the Voss developer and the third-party lender to obtain 100% fee simple interest in Tanglewood at Voss, including assumption of the senior construction loan, in exchange for the full satisfaction of our mezzanine loan balance plus accrued interest. Following the Voss transaction, the Voss developer does not have any continuing involvement with Tanglewood at Voss, and we own 100% of the equity interest.

Royal Island

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”).

Based on our evaluation, we have determined that the entity meets the criteria of a VIE but that we are not the primary beneficiary because we do not have the power to direct the activities of Royal Island that most significantly affect the entity’s economic performance.  The power to direct these activities resides with the general partner.  Accordingly, we do not consolidate the Royal Island entity and instead account for our equity investment under the equity method of accounting.  At September 30, 2011, there was approximately $31.7 million in real estate assets related to Royal Island.

In the second quarter of 2011, the equity method losses exceeded the investment balance in Royal Island.  As a result, our investment in Royal Island was reduced to zero as of September 30, 2011 and the equity method losses that exceeded the investment balance were treated as a reduction in the note receivable.

At September 30, 2011 and December 31, 2010, our recorded investment in unconsolidated VIEs and our maximum exposure to loss were as follows ($ in thousands):

As of September 30, 2011
	Investments in Unconsolidated VIEs		Maximum Exposure to Loss
Alexan Black Mountain (1)	$	-	$	2,540
Royal Island (2)		-		31,353
	$	-	$	33,893

As of December 31, 2010
	Investments in Unconsolidated VIEs		Maximum Exposure to Loss
Alexan Black Mountain (1)	$	-	$	2,540
Royal Island (2)		14,226		59,807
	$	14,226	$	62,347

(1)   We are a mezzanine lender to Alexan Black Mountain, which has been determined to be a VIE. We do not have an equity investment in Alexan Black Moutain.  Our maximum exposure to loss is limited to the net outstanding balance of the note receivable for Alexan Black Mountain. Prior to January 1, 2010, we consolidated Alexan Black Mountain.

(2) Our maximum exposure to loss for Royal Island is limited to our equity investment in the unconsolidated VIE of $14.2 million as of December 31, 2010, plus the outstanding balance of our Royal Island notes receivable of $31.4 million and $45.6 million as of September 30, 2011 and December 31, 2010, respectively.

8. Notes Receivable

Royal Island Bridge Loan

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 was $60 million, consisting of three tranches.  Under the bridge loan, we agreed to lend a tranche of up to $40 million, which is subordinate to the other two tranches.  The bridge loan accrued 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 was secured by the Royal Island property.  In June 2009, we purchased the interest in the first of the two superior tranches, the A-1 tranche, for $3.1 million.  In March 2010, we purchased the interest in two notes in the A-2 tranche for $2.2 million.

16

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Under the terms of the loan documents, the bridge loan could have been extended once for a period of six months upon the satisfaction of certain conditions upon notice given by the borrower by November 20, 2008 and a payment of an extension fee.  At the maturity date, not all of the conditions were satisfied and, as a result, the bridge loan went into default and became a non-performing loan.  The balance owed to us at the time of default was $37.7 million, including accrued interest and fees.  Discussions between the bridge loan lenders and the borrower to complete a satisfactory workout plan are ongoing; however, there are no assurances that a workout plan will be completed or that the loan will be reinstated by the borrower.  Accordingly, we may seek other actions under the loan documents to protect our investment, including foreclosure, exercise of power of sale, or conveyance in satisfaction of debt.  In accordance with GAAP, from the time the loan went into default until the time that a foreclosure occurs, a satisfactory workout is completed, or the loan is reinstated by the borrower, we do not recognize interest income on the loan, except to the extent we receive payments.

In January 2010, we collected $5.5 million, which were applied to unpaid interest and fees from the borrower, pursuant to the terms of the bridge loan agreement.

On September 14, 2010, we entered into a forbearance agreement with the borrower pursuant to which, among other things, the borrower agreed not to contest or oppose any foreclosure, exercise of power of sale, or similar action that we may seek in order to protect our investment.  Further, the borrower agreed to fully cooperate to expedite the proceedings should we take such a course of action.  The forbearance period expired on May 27, 2011.

In January 2011, pursuant to a settlement agreement with Shannon B. Skokos and Theodore C. Skokos (the “Skokoses”), related to a lawsuit filed in December 2008, a new joint venture was created among Behringer Harvard RI Lender, LLC, Behringer Harvard RI A-1 Lender, LLC and the Skokoses to own all of the outstanding notes related to Royal Island.  Each lender contributed its respective note in exchange for a pro rata ownership interest in the joint venture, which resulted in our owning approximately 87% of the joint venture.  As part of this settlement, the Skokos $7 million note was contributed to the partnership in exchange for a 13% ownership interest in the joint venture.

Based upon current information, it is probable that we will be unable to collect all amounts due according the terms of the loan agreement.  The forbearance agreement that allowed the general partner and other interest parties time to raise equity for development of the Royal Island property expired in the second quarter of 2011.  We believe the only source available to repay the loan is the underlying collateral.  During the second quarter of 2011, we evaluated the current fair value of the Royal Island development and recorded an impairment on the unconsolidated entity’s books.  The equity method losses at Royal Island for the second quarter of 2011 exceeded the investment balance.  In accordance with GAAP, equity method losses that exceeded our investment balance were recorded against the basis of other investments the investor had in Royal Island.  As such, the excess equity method losses of $19.6 million were recorded as a reduction in our note receivable through the equity in losses for unconsolidated joint ventures.  Additionally, we recorded $5.3 million as provision for loan losses against the allowance to record the note to the fair value of the underlying collateral.

At September 30, 2011, the balance of the note receivable was $31.4 million, net of the allowance.  Current market conditions with respect to credit availability and fundamentals within the real estate markets instill significant levels of uncertainty.  Accordingly, future adverse developments in market conditions would cause us to re-evaluate our conclusions regarding the collectability of our notes receivable and could result in material provisions for loan loss charges.

17

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

9.  Notes Payable

The following table sets forth our consolidated notes payable at September 30, 2011 and December 31, 2010 ($ in thousands):

	Notes Payable as of				Interest	Maturity
Description	September 30, 2011		December 31, 2010		Rate	Date
Chase - The Private Residences	$	-	$	7,749
Crossroads		26,673		26,174	30-day LIBOR + 7.85%	(1)
Chase Park Plaza Hotel		60,369		77,474	30-day LIBOR + 4%(2)(3)	11/15/11
Frisco Square I, LLC (Land)		14,313		21,466	30-day LIBOR + 4.5%(2)(4)	01/28/12
Frisco Square II, LLC		7,610		7,783	30-day LIBOR + 3.5%(2)(4)	01/28/12
Frisco Square III, LLC		8,419		8,624	30-day LIBOR + 3.5%(2)(4)	01/28/12
Frisco Square IV, LLC		14,519		14,550	30-day LIBOR + 3.5%(2)(4)	01/28/12
Senior Secured Credit Facility		48,263		70,082	30-day LIBOR + 1.5% or Prime Rate (2)(5)	02/13/12
Bent Tree Green		6,546		6,674	3.45%	05/19/12
Frisco Square Theatre, LLC		4,785		3,691	30-day LIBOR + 4.5%(2)	07/28/12
Tanglewood at Voss		39,085		39,415	30-day LIBOR + 4% (2)	08/20/12
Becket House(6)		23,596		18,101	90-day LIBOR + 2.5%(7)	12/31/12
					15%(8)
Santa Clara 700/750 Joint Venture		20,000		20,000	4.75% + Greater of 1% or 30-day LIBOR(2)	06/09/13
Santa Clara 700/750 Joint Venture Mezzanine		5,000		5,000	8.5% + Greater of 1% or 30-day LIBOR(2)	06/09/13
Rio Salado		318		-	12.0%	09/15/14
Northborough Tower		20,701		21,042	5.67%	01/11/16
Royal Island		3,471		-	15.00%	10/10/16
	$	303,668	$	347,825

(1) On October 4, 2011, Crossroads was sold to an unaffiliated third party.  The net proceeds of the sale were paid to the lender in full satisfaction of the outstanding debt.

(2) 30-day London Interbank Offer Rate (“LIBOR”) was 0.239% at September 30, 2011.

(3) We are currently working with a new lender to replace the existing loan.  On November 15, 2011, we anticipate that we will pay off the existing loan balance of the Chase Park Plaza Hotel loan and replace the existing debt with new debt.

(4) The interest rate for each of the Frisco Square loans will increase by .50% on October 28, 2011 because we did not meet the lender requirement of having $10 million of sales contracts in place.

(5) Prime rate was 3.25% at September 30, 2011.

(6) Becket House has three loans.

(7) 90-day LIBOR was 0.374% at September 30, 2011.

(8) Rate for junior loan.

Our notes payable balance was $303.7 million at September 30, 2011 as compared to $347.8 million at December 31, 2010 and consisted of borrowings and assumptions of debt related to our property acquisitions and our borrowings under our $75 million senior secured credit facility.  Each of our notes payable is collateralized by one or more of our properties.  At September 30, 2011, our notes payable interest rates ranged from 1.7% to 15%, with a weighted average interest rate of approximately 4%.  Of our $303.7 million in notes payable at September 30, 2011, $272.6 million represented debt subject to variable interest rates.  At September 30, 2011, our notes payable had maturity dates that ranged from November 2011 to October 2016.  We have unconditionally guaranteed payment of the notes payable related to Northborough Tower, Bent Tree Green, Tanglewood at Voss, Chase Park Plaza Hotel and Frisco Square.

On September 1, 2011, we signed a purchase and sale agreement for the sale of Crossroads.  On September 30, 2011, the lender agreed to accept the net sales proceeds of $26.1 million as full payment of the outstanding debt of $26.7 million.  On October 4, 2011, the property was sold to an unaffiliated third party, and the net proceeds from the sale of Crossroads were paid to the lender in full satisfaction of the outstanding debt.

18

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Additionally, our notes payable related to Chase Park Plaza Hotel, Frisco Square I, II, III and IV, the senior secured credit facility, Bent Tree Green, Frisco Square Theatre and Tanglewood at Voss all mature within the next twelve months.  We are currently working with a new lender to replace the existing Chase Park Plaza Hotel loan.  We have an agreement with the new lender and anticipate that we will pay off the existing loan balance of the Chase Park Plaza Hotel loan and replace the existing debt with new debt on November 15, 2011.  We are working with our lenders to either extend the maturity dates of the other loans or refinance the loans under different terms.  We currently expect to use funds generated by our operating properties, additional borrowings, and proceeds from the disposition of properties to continue making our scheduled debt service payments until the maturity dates of the loans are extended, the loans are refinanced, or the outstanding balance of the loans are completely paid off.  However, there is no guarantee that we will be able to refinance our borrowings with more or less favorable terms or extend the maturity dates of such loans.  In the event that the lenders demanded immediate payment of the entire loan balances, we would have to consider all available alternatives, including transferring legal possession of the property to the lender.

We are not in compliance with covenants related to Becket House, Bent Tree Green, Frisco Square, Chase Park Plaza Hotel and our senior secured credit facility.  The Becket House senior loan requires that a hedging arrangement remain in place during the term of the loan.  We currently do not have a hedge in place.  This is not an event of default unless the lender provides notification and requires us to purchase the hedge.  The Bent Tree Green loan requires a debt service coverage ratio that the property does not meet as of September 30, 2011.  Under the Bent Tree Green loan agreement, we have a 120 day period to cure the deficiency.  We are working with the lender to cure the deficiency within the time frame allowed by obtaining new tenant leases and are in discussions with the lender for additional time to cure the deficiency.

Loan covenants related to Frisco Square, Chase Park Plaza Hotel and the senior secured credit facility include covenants that require us to maintain a tangible net worth of $242 million.  As of September 30, 2011, our tangible net worth is $228 million.  We are working with the lenders to waive the events of noncompliance or modify the covenant so that we are in compliance.  However, there is no assurance that the lenders will agree to waive the events of noncompliance or to modify the covenant and may pursue their rights and remedies under the loan agreement.

Becket House

We executed an agreement with the senior lender effective as of February 18, 2011 to bifurcate the loan into two new loans consisting of an A loan of £8 million ($12.9 million) and a B loan of £3.7 million ($6 million).  We also executed an agreement with an unaffiliated third party to provide up to £4 million ($6.5 million) in additional financing (the “Junior Loan”).  The B loan and Junior Loan have essentially the same terms and are subordinate to the A loan.  The A loan, B loan and Junior Loan will mature on December 31, 2012.  At September 30, 2011, the cumulative outstanding principal balance of the Becket House loans was $23.6 million.  At December 31, 2010, the outstanding balance of the Becket House loans was $18.1 million.

Credit Facility

In February 2008, we entered into a senior secured credit facility providing for up to $75 million of secured borrowings.  The initial credit facility allowed us to borrow up to $75 million in revolving loans, of which up to $20 million was available for issuing letters of credit.  We have unconditionally guaranteed payment of the senior secured credit facility.  The availability of credit under the senior secured credit facility is limited by the terms of the credit agreement.  As of December 31, 2010 and September 30, 2011, the maximum availability under the senior secured credit facility was fully utilized.  Effective February 13, 2011, we reached an agreement with the lenders of the senior secured credit facility to extend the maturity date of the loan from February 13, 2011 to February 13, 2012.  The loan extension required a principal payment of $0.7 million.  On April 26, 2011, we made a principal payment of $4 million from the proceeds of the sale of 12600 Whitewater.  On June 30, 2011, we made a principal payment of $17.1 million from the proceeds of the sale of 2603 Augusta.  The credit facility balance is $48.3 million as of September 30, 2011.

Royal Island

In February 2011, Behringer Harvard Royal Island Debt, L.P. secured a $10.4 million loan (the “Debt LP Loan”) for the purpose of preserving and protecting the collateral securing the bridge loan.  The Debt LP Loan bears interest at 15% per annum.  Payments are due from proceeds from sales or refinancing of the project or from other payments received on the bridge loan.  The Debt LP Loan matures at the earliest of (a) the date that the cash proceeds from sales of the collateral or refinancing of the bridge loan repay all accrued principal and interest outstanding, (b) five years from the date of foreclosure of the project, or (c) October 10, 2016.  The Debt LP Loan would be converted to limited partnership interest in Royal Island L.P. as part of any recapitalization of Royal Island.  As of September 30, 2011, the outstanding balance of the Debt LP Loan was $3.5 million.  We had not entered into the Debt LP Loan as of December 31, 2010.

19

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Frisco Square

On August 31, 2011, effective as of August 28, 2011, we, through wholly owned subsidiaries of our operating partnership, entered into a Modification and Extension Agreement (the “Frisco Square Loan Extension”) with the Frisco Square lenders for the five loan tranches associated with Frisco Square to extend the maturity date of the Frisco Square loans to January 28, 2012.  The interest rates for the five separate tranches of the Frisco Square Loan Extension were unchanged from the terms of the original Frisco Square loans, subject to the lender condition that if less than $10 million of lender approved sales contracts were in place by October 28, 2011, the interest rates for each tranche within the Frisco Square Loan Extension would increase by 50 basis points.  As of October 28, 2011, $10 million of lender approved sales were not in place.  The Frisco Square Loan Extension requires that a principal payment of $0.2 million be made each month and that all excess cash flow after interest and required amortization is placed into a restricted deposit account and held as additional collateral.  As a result of the Frisco Square Loan Extension, we have unconditionally guaranteed payment of the Frisco Square loans. The Frisco Square Loan Extension may be extended for an additional six months, upon meeting certain lender requirements.  As of November 14, 2011, we do not believe that we will have the necessary sales contracts in place to meet the lender requirements necessary to extend the loans for the additional six months.

Chase–The Private Residences

In September 2011, the loan for Chase–The Private Residences was fully repaid through proceeds from condominium sales.  Under the prospective new loan with a new lender, future proceeds from condominium sales will be used to pay down the Chase Park Plaza Hotel loan until certain covenants are met.

Rio Salado

On September 15, 2011, Behringer Harvard Rio Salado, LLC secured a $3.6 million loan for the purpose of completing certain infrastructure-related projects at Rio Salado.  The loan bears interest at 12% and matures on September 15, 2014.  The principal balance of the loan was $0.3 million as of September 30, 2011.  We had not entered into the loan as of December 31, 2010.

The following table summarizes our aggregate contractual obligations for principal payments as of September 30, 2011 ($ in thousands):

Principal Payments Due:
October 1, 2011 - December 31, 2011	$	87,722
2012		138,556
2013		53,637
2014		680
2015		382
Thereafter		21,972
Unamortized premium		719
	$	303,668

10. Derivative Instruments and Hedging Activities

We may be exposed to the risk associated with variability of interest rates that might impact our cash flows and 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.

In August 2010, we entered into two new interest rate cap agreements related to the debt on our Santa Clara 700/750 buildings.  In July 2010, our foreign currency put/call option related to Central Europe Joint Venture expired.

20

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Derivative instruments classified as assets were reported at their combined fair values of less than $0.1 million in prepaid expenses and other assets at September 30, 2011 and December 31, 2010.  We had no derivative instruments classified as liabilities as of September 30, 2011 or December 31, 2010.  During the nine months ended September 30, 2011, we recorded an unrealized loss of less than $0.1 million to accumulated other comprehensive income (“AOCI”) in our statement of equity to adjust the carrying amount of the interest rate swaps and caps qualifying as hedges at September 30, 2011.  During the nine months ended September 30, 2010, we recorded an unrealized gain of $0.4 million to AOCI in our statement of equity to adjust the carrying amount of the interest rate swaps and caps qualifying as hedges at September 30, 2010.

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

Type / Description	Notional Value (in thousands)		Interest Rate / Strike Rate			Maturity	Fair Value Asset
Cash Flow Hedges
Interest rate cap - Santa Clara 700/750	$	20,000		4.00	%	June 15, 2013	$	-
Interest rate cap - Santa Clara 700/750	$	5,000		4.00	%	June 15, 2013	$	1

The table below presents the fair value of our derivative financial instruments, as well as their classification on the condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010 ($ in thousands).

		Asset Derivatives
	Balance Sheet Location	Fair Value at September 30, 2011		Fair Value at December 31, 2010
Derivatives designated as hedging instruments:
Interest rate derivative contracts	Accrued and other liabilities	$	1	$	37

The tables below present the effect of our derivative financial instruments on the condensed consolidated statements of operations as of September 30, 2011 and 2010 ($ in thousands).

Derivatives in Cash Flow Hedging Relationships
	Amount of Gain or (Loss) Recognized in AOCI on Derivative (Effective Portion)						Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)(1)
	Three Months Ended September 30,						Three Months Ended September 30,
	2011			2010			2011		2010
Interest rate	$	(2	)	$	(336	)	$	-	$	617

(1)  Amounts related to interest rate derivative contracts are included in interest expense.

	Amount of Gain or (Loss) Recognized in AOCI on Derivative (Effective Portion)					Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)(1)
	Nine Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011		2010
Interest rate	$	(34	)	$	383	$	-	$	662

(1)  Amounts related to interest rate derivative contracts are included in interest expense.
 

21

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Derivatives in Net Investment Hedging Relationships
	Amount of Gain or (Loss) Recognized in AOCI on Derivative (Effective Portion)					Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)(1)				Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
	Three Months Ended September 30,					Three Months Ended September 30,				Three Months Ended September 30,
	2011		2010			2011		2010		2011		2010
Foreign exchange	$	-	$	(2	)	$	-	$	-	$	-	$	-

(1) We do not expect to reclassify any gain or loss from AOCI into income until the sale or upon complete or substantially complete liquidation of the respective investment in the foreign entity.

	Amount of Gain or (Loss) Recognized in AOCI on Derivative (Effective Portion)					Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)(1)				Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
	Nine Months Ended September 30,					Nine Months Ended September 30,				Nine Months Ended September 30,
	2011		2010			2011		2010		2011		2010
Foreign exchange	$	-	$	(10	)	$	-	$	-	$	-	$	-

(1) We do not expect to reclassify any gain or loss from AOCI into income until the sale or upon complete or substantially complete liquidation of the respective investment in the foreign entity.

Derivatives Not Designated as Hedging Instruments
	Location of Gain	Amount of Gain or (Loss)					Amount of Gain or (Loss)
	or (Loss)	Three Months Ended September 30,					Nine Months Ended September 30,
	Recognized in	2011		2010			2011		2010
Interest rate derivative contract	Interest expense	$	-	$	(43	)	$	-	$	343

Credit risk and collateral

Our credit exposure related to interest rate and foreign currency derivative instruments is represented by the fair value of contracts with a net liability fair value at the reporting date.  These outstanding instruments may expose us to credit loss in the event of nonperformance by the counterparties to the agreements.  However, we have not experienced any credit loss as a result of counterparty nonperformance in the past.  To manage credit risk, we select and will periodically review counterparties based on credit ratings and limit our exposure to any single counterparty.  Under our agreement with the counterparty related to our interest rate caps of the Santa Clara 700/750 buildings, cash deposits may be required to be posted by the counterparty whenever their credit rating falls below certain levels.  At September 30, 2011, no collateral has been posted with our counterparties nor have our counterparties posted collateral with us related to our derivative instruments.

11. Distributions

We initiated the payment of monthly distributions in August 2006.  From April 2007 through March 2009, the declared distribution rate was a 3% annualized rate of return, calculated on a daily record basis of $0.0008219 per share.  Pursuant to our Third Amended and Restated Distribution Reinvestment Plan (the “DRP”), many of our stockholders elected to reinvest any cash distribution in additional shares of common stock.  We recorded all distributions when declared, except that the stock issued through the DRP was recorded when the shares were actually issued.

In connection with entering our disposition phase, on March 28, 2011, our board of directors discontinued regular, quarterly distributions in favor of those that may arise from proceeds available to be distributed from the sale of assets.  On May 25, 2011, we filed Post-Effective Amendment No. 1 to our registration statement on Form S-3 (File No. 333-146965) (the “S-3 Amendment”) to deregister 2,941,591 unsold shares of common stock being offered pursuant to the DRP.  By filing the S-3 Amendment, we terminated the offering of shares under the registration statement.

12. Related Party Transactions

Since the Company’s inception, the Advisor or its predecessors have been responsible for managing our day-to-day affairs and for, among other things, identifying and making acquisitions and other investments on our behalf.  The Company’s relationship with the Advisor, including the fees paid by us to the Advisor or the reimbursement of expenses by us for amounts paid, or incurred by the Advisor, on our behalf is governed by an advisory management agreement that has been in place since September 20, 2005 and amended at various times thereafter.

22

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In early 2011, the Advisor and the Company, through members of its audit committee, considered and discussed the application of certain fee and expense reimbursement provisions contained in the advisory management agreement.  To clarify the calculation of these fees and expense reimbursements and to, among other things, revise the calculation of the debt financing fee that may be paid to the Advisor, we entered into the Second Amended and Restated Advisory Management Agreement (the “Amended Agreement”) with our Advisor on May 13, 2011.  The Amended Agreement is effective as of December 31, 2010.

We pay Behringer Harvard Opportunity Advisors I an annual asset management fee of 0.75% of the aggregate asset value of acquired real estate and real estate related assets.  The fee is payable monthly in arrears in an amount equal to one-twelfth of 0.75% of the aggregate asset value as of the last day of the month.  For the nine months ended September 30, 2011 and 2010, we expensed $4.2 million and $4.5 million, respectively, of asset management fees.  Amounts include asset management fees from discontinued operations.

Behringer Harvard 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.  Under the Amended Agreement, our obligation to reimburse the Advisor for acquisition expenses is no longer limited 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 (including expenses paid or incurred prior to amendment of the advisory management agreement).  For the nine months ended September 30, 2011, we expensed $0.2 million in acquisition and advisory fees.  Behringer Harvard Opportunity Advisors I did not earn acquisition and advisory fees or acquisition expense reimbursements in the nine months ended September 30, 2010.

Under the Amended Agreement, the debt financing fee paid to the Advisor for a Loan (as defined in the Amended Agreement) will be 1% of the loan commitment amount.  Amounts due to the Advisor for a Revised Loan (as defined in the Amended Agreement) will be 40 basis points of the loan commitment amount for the first year of any extension (provided the extension is for at least 120 days), an additional 30 basis points for the second year of an extension, and another 30 basis points for the third year of an extension in each case, prorated for any extension period less than a full year.  The maximum debt financing fee for any extension of three or more years is 1% of the loan commitment amount.  Under the previous agreement, the Advisor was entitled to a fee of 1% of the loan commitment amount regardless of the length of the extension.  For the nine months ended September 30, 2011 and 2010, we incurred $0.5 million and $0.2 million, respectively, in debt financing fees.

We reimburse Behringer Harvard 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.  The salaries and benefits that we reimburse to our Advisor exclude the salaries and benefits that our Advisor or its affiliates may pay to our named executive officers.  For the nine months ended September 30, 2011 and 2010, we expensed costs for administrative services of $1.3 million and $1.4 million, respectively.

We pay HPT Management Services LLC, 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, leasing, and construction supervision 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 0.5% 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.  In the nine months ended September 30, 2011 and 2010, we expensed property management fees or oversight fees of $0.7 million and $1.2 million, respectively.

The Company has obtained a $2.5 million loan from our Advisor to further bridge the Company’s short-term liquidity needs.  The $2.5 million loan bears interest at a rate of 5% and has a maturity date of the earliest of (i) the second anniversary of the date of the note, (ii) the termination without cause of the advisory agreement, or (iii) the termination without cause of the property management agreement.  The balance on the loan at September 30, 2011 was $1.5 million.  The loan did not exist as of December 31, 2010.

23

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

At September 30, 2011, we had a payable to our Advisor and its affiliates of $5.3 million.  This balance consists of accrued and deferred fees during 2011, including asset management fees, administrative service expenses, debt financing fees, acquisition fees, property management fees, a loan of $1.5 million and other miscellaneous costs payable to Behringer Harvard Opportunity Advisors I and BH Property Management.  At December 31, 2010, we had a payable to our Advisor and its affiliates of $0.9 million.

We are dependent on Behringer Harvard 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 are unable to provide us with the respective services, we would be required to obtain such services from other sources.

On September 26, 2011, we, through a wholly-owned subsidiary of our operating partnership, entered into a lease agreement with Behringer Harvard REIT I, Inc., a real estate investment program sponsored by our sponsor Behringer Harvard Holdings LLC, for approximately 14,500 rentable square feet at Bent Tree Green.  The lease commenced on November 1, 2011 for a 66-month term (the first six months of which are free rent) with scheduled rent increases every 12 months.  The Company’s management and board of directors determined that the lease was fair and reasonable to the Company and on terms and conditions that are no less favorable to the Company than can be obtained from unaffiliated third parties for comparable transactions or services in the same location.

13.  Supplemental Cash Flow Information

Supplemental cash flow information is summarized below.

	Nine months ended September 30,
	2011		2010
Supplemental disclosure:
Interest paid, net of amounts capitalized	$	10,380	$	9,487
Non-cash investing and financing activities:
Property and equipment additions and purchases of real estate in accrued liabilities	$	77	$	42
Capital expenditures for real estate under development in accounts payable and accrued liabilities	$	90	$	2,422
Contribution of notes receivable and accrued interest by noncontrolling interest holder	$	8,607	$	-
Amortization of deferred financing fees  in properties under development	$	-	$	56
Common stock issued in distribution reinvestment plan	$	925	$	4,745
Capitalized deferred financing costs in accrued  liabilities	$	521	$	-

14. Sales of Real Estate

On January 12, 2011, we sold 4.77 acres of land that was a part of our Frisco Square investment to an unaffiliated third party for approximately $6 million.  We used the net proceeds of approximately $5.7 million to pay down the principal balance of the Frisco Square notes payable.  On April 26, 2011, we sold 12600 Whitewater to an unaffiliated third party for $9.6 million.  We used approximately $4 million of the proceeds to pay down our senior secured credit facility and received net proceeds of approximately $5 million.  On June 30, 2011, we sold 2603 Augusta to an unaffiliated third party for $24 million.  We used approximately $17.1 million of the proceeds to pay down our senior secured credit facility.  We received net proceeds of approximately $6.3 million.  On October 4, 2011, we sold Crossroads to an unaffiliated third party.  The net proceeds of $26.1 million from the sale of Crossroads were paid to the lender in full satisfaction of the outstanding debt.  During the nine months ended September 30, 2011, we sold 11 of the Chase – The Private Residences condominiums for total revenue of $8.3 million.

24

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On August 17, 2010, we transferred ownership of our property, Ferncroft Corporate Center, to the lender associated with this property.  During the nine months ended September 30, 2010, we sold 13 of the Chase – The Private Residences condominiums for $26.2 million.

15.  Discontinued Operations and Real Estate Held for Sale

In August 2010, we transferred ownership of our property, Ferncroft Corporate Center, to the lender associated with this property.  In April 2011, we completed the sale of 12600 Whitewater to an unaffiliated third party.  In June 2011, we completed the sale of 2603 Augusta to an unaffiliated third party.

As of September 30, 2011, our Crossroads property was classified as held for sale.  On October 4, 2011, we completed the sale of Crossroads to an unaffiliated third party.  We had no properties classified as held for sale at December 31, 2010.

We have reclassified the results of operations for these properties into discontinued operations in the consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010.  The results of these properties are classified as discontinued operations in the accompanying condensed consolidated statements of operations and other comprehensive loss for the three and nine months ended September 30, 2011 and 2010 and summarized in the following table ($ in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Revenues
Rental revenue	$	720		$	2,319		$	4,254		$	8,016
Expenses
Property operating expenses		291			1,012			1,471			3,476
Bad debt expense		-			1			-			1
Interest expense		547			592			1,061			2,036
Real estate taxes		37			372			473			1,194
Impairment charge		-			8,120			3,629			12,350
Property management fees		29			92			163			350
Asset management fees		64			176			339			563
Depreciation and amortization		270			1,096			1,726			3,599
Total expenses		1,238			11,461			8,862			23,569
Interest income		-			-			2			1
Other expense		-			-			-			-
Loss on debt extinguishment		-			(2,253	)		-			(2,253	)
Gain on sale of real estate property		8			-			1,224			-
Income (loss) from discontinued operations	$	(510	)	$	(11,395	)	$	(3,382	)	$	(17,805	)

*****

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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

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include discussion and analysis of the financial condition of Behringer Harvard Opportunity REIT I, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “REIT,” “we,” “us,” or “our”), including our ability to rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, the value of our assets, our anticipated capital expenditures, the amount and timing of anticipated future cash distributions to our stockholders, the estimated per share value of our common stock and other matters.  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 forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions.  These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 31, 2011 and the factors described below:

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

· the availability of cash flow from operating activities for capital expenditures;

· our level of debt and the terms and limitations imposed on us by our debt agreements;

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

· the need to invest additional equity in connection with debt financings as a result of reduced asset values and requirements to reduce overall leverage;

· future increases in interest rates;

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

· our ability to retain our executive officers and other key personnel of our Advisor, our property manager and their affiliates;

· impairment charges;

· conflicts of interest arising out of our relationships with our Advisor and its affiliates;

· unfavorable changes in laws or regulations impacting our business or our assets; and

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

Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect.  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.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.

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.

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Executive Overview

We are a Maryland corporation that was formed in November 2004 to invest in and operate commercial real estate or real-estate related assets located in or outside the United States on an opportunistic basis.  We conduct substantially all of our business through our operating partnership and its subsidiaries. We are organized and qualify as a REIT for federal income tax purposes.

We are externally managed and advised by Behringer Harvard Opportunity Advisors I, a Texas limited liability company formed in June 2007.  Behringer Harvard Opportunity Advisors I is responsible for managing our day-to-day affairs and for identifying and making acquisitions and investments on our behalf. 

As of September 30, 2011, we were invested in 20 assets including ten wholly-owned properties, four consolidated properties through investments in joint ventures and a consolidating interest in a note receivable joint venture.  In addition, we are the mezzanine lender for one multifamily property.  During the third quarter of 2011, we purchased the remaining interest in the Rio Salado property for a di minimis amount, bringing our interest in the property to 100% from approximately 99%.  We also have noncontrolling, unconsolidated ownership interests in three properties and one investment in a joint venture consisting of 22 properties that are accounted for using the equity method.  Our investment properties are located in Arizona, California, Colorado, Missouri, Nevada, Texas, the Commonwealth of The Bahamas, London, England, the Czech Republic, Poland, Hungary, and Slovakia.

Liquidity and Capital Resources

Strategic Asset Sales

We have entered the disposition phase of our life cycle and believe in certain instances it makes economic sense to sell properties in today’s market, such as when the value of the in-place cash flows from existing tenants is stable, predictable and attractive to potential buyers, when the property has a near-term debt maturity which cannot be resolved, or when the equity in a property can be redeployed into other assets in the portfolio in order to achieve better returns or strategic goals.

Our management is continually reviewing its overall business plan and revising the strategies necessary to maximize liquidity for the Company and its stockholders. To that end, management has identified three distinct sub-portfolios of our investments: a near-term disposition portfolio, a mid-term disposition portfolio and a long-term disposition portfolio. Properties are assigned to and may shift among sub-portfolios based on changes in market conditions, property performance, debt maturities, required capital expenditures or other factors. The near-term disposition portfolio is currently comprised of two properties that offer the best opportunity for disposition in 2011. We believe that the majority of the net proceeds from sales occurring in 2011 will be used to provide liquidity to refinance maturing debt, cover operating expenses, and make enhancements to portfolio properties in cases where additional investment makes sense for maximizing total stockholder value. The mid-term disposition portfolio is currently comprised of twelve properties that are either in markets that would benefit from anticipated rental increases and improving local markets before sale, or are in various stages of the stabilization process. As several of the properties stabilize, they may require additional time and capital resources to lease up vacancy, retain key tenants, create value through reinvestment, or sell condominium units or land parcels before their ultimate disposition. The remaining properties in the mid-term portfolio have stabilized and may be refinanced, providing us with more flexibility as to the timing of their dispositions. We anticipate completing these strategies in the 2011 – 2013 timeframe. The long-term liquidation portfolio is currently comprised of four development projects and two notes receivable, and a final exit is contingent upon a stabilized economy and resurgent demand for the respective product types. It is possible that the Company will invest enough additional capital in two of these sites to make them attractive to market to other developers rather than completing the original development plan. Due to the nature of these various portfolios, we believe that special distributions to our stockholders may occur in the future. However, there can be no assurance that future dispositions will occur, or, if they occur, that they will help us to meet our liquidity demands.

Liquidity Demands

The U.S., European and global economies continue to experience the effects of the significant downturn that began more than three years ago.  This downturn continues to disrupt the broader financial and credit markets, weaken consumer confidence and impact unemployment rates.  While it is unclear when the overall economy will fully recover from these weakened market conditions, we do not expect conditions to improve significantly in the near future.  The primary objectives of our current business plan are to continue to preserve capital, as well as sustain and enhance property values, while continuing to focus on the disposition of our properties.  Our ability to execute this plan is contingent on our ability to dispose of our properties in an orderly fashion thus providing needed liquidity.  The disposal of our properties will be subject to these economic factors, including the ability of potential purchasers to access capital debt financing.

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Our financial statements are presented on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business as the company proceeds through its disposition phase.   If we are unable to sell a property when we determine to do so, it could have a significant adverse effect on our cash flows that are necessary to meet our mortgage obligations and to satisfy our other liabilities in the normal course of business.

 Our principal demands for funds for the next twelve months and beyond 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), certain ongoing costs at our development properties, Company operating expenses, special distributions as they are declared and interest and principal on our outstanding indebtedness.  We expect to fund a portion of these demands by using cash flow from operations of our current investments and borrowings. Additionally, we will use proceeds from our strategic asset sales.

To bridge the Company’s liquidity needs until these asset sales occur, in January 2011, the Company obtained a deferral from our Advisor of the payment of all asset management fees accruing during the months of May 2010 through March 2011 and all debt financing fees and expense reimbursements accruing during the months of July 2010 through March 2011 until the earlier of January 10, 2013 or such time as the Company has sufficient (a) net sales proceeds, (b) net refinancing proceeds, or (c) cash flow from operations, after establishing appropriate working capital reserves, to enable the Company to make payments thereon. Also in January 2011, BH Property Management deferred our obligation to pay property management oversight fees accruing during the months of July 2010 through March 2011 until the earlier of January 10, 2013 or such time as the Company has sufficient (a) net sales proceeds, (b) net refinancing proceeds, or (c) cash flow from operations, after establishing appropriate working capital reserves, to enable the Company to make payments thereon.  The total deferred fees and expenses at September 30, 2011 was $3 million.  No such deferral existed as of December 31, 2010.

The Company has also obtained a $2.5 million loan from our Advisor to further bridge the Company’s liquidity needs.  The $2.5 million loan bears interest at a rate of 5% and has a maturity date of the earliest of (i) the second anniversary of the date of the note, (ii) the termination without cause of the advisory agreement or (iii) the termination without cause of the property management agreement.  The balance on the loan at September 30, 2011 was $1.5 million.  As we entered into the loan in the first quarter of 2011, there was no balance as of December 31, 2010.

On August 31, 2011, effective as of August 28, 2011, we, through wholly owned subsidiaries of our operating partnership, entered into a Modification and Extension Agreement (the “Frisco Square Loan Extension”) with the Frisco Square lenders for the five loan tranches associated with Frisco Square to extend the maturity date of the Frisco Square loans to January 28, 2012.  The interest rates for the five separate tranches of the Frisco Square Loan Extension were unchanged from the terms of the original Frisco Square loans, subject to the lender condition that if less than $10 million of lender approved sales contracts were in place by October 28, 2011, the interest rates for each tranche within the Frisco Square Loan Extension would increase by 50 basis points.  As of October 28, 2011, $10 million of lender approved sales were not in place.  The Frisco Square Loan Extension requires that a principal payment of $0.2 million be made each month and that all excess cash flow after interest and required amortization is placed into a restricted deposit account and held as additional collateral.  The Frisco Square Loan Extension may be extended for an additional six months, upon meeting certain lender requirements.  As of November 14, 2011, we do not believe that we will meet the lender requirements to extend the Frisco Square Loan Extension for an additional six months.  We have unconditionally guaranteed payment of the Frisco Square loans.

We continually evaluate the Company’s liquidity and ability to fund future operations and debt obligations.  As part of those analyses, we consider lease expirations and other factors.  As indicated below, leases representing 20% of the Company’s annualized base rent will expire by the end of 2012.  In the normal course of business, the Company is pursuing renewals, extensions and new leases.  If the Company is unable to renew or extend the expiring leases under similar terms or is unable to negotiate new leases, it would negatively impact our liquidity and consequently adversely affect the Company’s ability to fund its ongoing operations.  In addition, our portfolio is concentrated in certain geographic regions and industries, and downturns relating generally to such regions or industries may result in defaults on a number of our investments within a short time period.  Such defaults would negatively affect our liquidity and adversely affect our ability to fund our ongoing operations.  As of September 30, 2011, 63% and 14% of our 2011 base rent was derived from tenants in Texas and California, respectively, and 23%, 16% and 11% of our lease agreements at the office and industrial properties we consolidate on our financial statements were concentrated in the professional, scientific and technical services industry, other services (except for public administration) industry, and finance and insurance industry, respectively.

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Portfolio Lease Expirations

The following table presents lease expirations at our consolidated office and industrial properties as of September 30, 2011 ($ in thousands):

Year of Expiration	Number of Leases Expiring		Annualized(1) Base Rent		Percent of Portfolio Annualized Base Rent Expiring			Leased Rentable Sq. Ft.		Percent of Portfolio Rentable Sq. Ft. Expiring
2011		17	$	3,744		13	%		128,506		9	%
2012		17		1,925		7	%		103,123		7	%
2013		18		4,490		15	%		281,786		19	%
2014		14		1,864		6	%		79,041		5	%
2015		11		1,622		6	%		90,093		6	%
Thereafter		34		15,448		53	%		802,125		54	%
Total		111	$	29,093		100	%		1,484,674		100	%

(1) Annualized Base Rent represents contractual base rental income on a GAAP straight line adjustment basis from the time of our acquisition, without consideration of tenant contraction or termination rights.  Tenant reimbursements generally include payment of real estate taxes, operating expenses, common area maintenance and utility charges.

Geographic Diversification

The following table shows the geographic diversification of our real estate portfolio for those developed properties we consolidate on our financial statements for the nine months ended September 30, 2011 ($ in thousands):

Location	September 30, 2011 Revenue(1)(2)		Percentage of September 30, 2011 Revenue
Texas	$	19,477		63	%
California		4,150		14	%
Colorado		3,608		12	%
Missouri		2,950		10	%
International		339		1	%
	$	30,524		100	%

(1) Other than Cordillera, which represented 12% of our September 30, 2011 revenue, Frisco Square, which represented 12% of our September 30, 2011 revenue, Tanglewood at Voss which represented 11% of our September 30, 2011 revenue, and Northborough, which represented 11% of our September 30, 2011 revenue, no other single property represented more than 10% of our September 30, 2011 revenue. No single tenant represented more than 10% of our 2011 revenue.  As an opportunistic fund, we utilize a business model driven by investment strategy and expected performance characteristics.  Accordingly, we have investments in several types of real estate, including office, hotel, multifamily, condominium and land held for development.

(2) September 30, 2011 Revenue represents contractual base rental income of our office and industrial properties, as well as revenue from our multifamily and hotel properties, without consideration of tenant contraction or termination rights.

Please see Note 3 to the Consolidated Financial Statements for information regarding how geographic concentration may be considered in the evaluation of our investments for impairment.

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Tenant Diversification

The following table shows the tenant diversification of our real estate portfolio for those office and industrial properties that we consolidate on our financial statements as of September 30, 2011.  In addition, we have approximately 400 leases at our multifamily property.  These multifamily leases are cancelable and short-term in nature.  We have no industry breakdown of the tenants associated with these leases, therefore, the leases are not reflected in the table below.

Tenant Diversification	Leases at September 30, 2011		Percentage of September 30, 2011 Leases
Professional, Scientific & Technical Services		25		23	%
Other Services (except Public Administration)		18		16	%
Finance & Insurance		12		11	%
Accommodation & Food Services		10		9	%
Manufacturing		9		8	%
Retail Trade		7		6	%
Real Estate & Rental & Leasing		6		5	%
Health Care & Social Assistance		4		4	%
Management of Companies & Enterprises		4		4	%
Utilities		3		3	%
All Other		13		11	%
		111		100	%

For both our short-term and long-term liquidity requirements, other potential sources of capital may include proceeds from secured or unsecured debt financing, decreases in the amount of nonessential capital expenditures, and asset sales.  The board has suspended the share redemption program and discontinued payments of quarterly distributions.

On January 12, 2011, we sold 4.77 acres of land that was a part of our Frisco Square investment to an unaffiliated third party for approximately $6 million.  We used the net proceeds of approximately $5.7 million to pay down the principal balance of the Frisco Square notes payable.

On April 26, 2011, we sold 12600 Whitewater to an unaffiliated third party for $9.6 million.  We used approximately $4 million of the proceeds to pay down our senior secured credit facility.  We received net proceeds of approximately $5 million.

On June 30, 2011, we sold 2603 Augusta to an unaffiliated third party for $24 million.  We used approximately $17.1 million of the proceeds to pay down our senior secured credit facility.  We received net proceeds of approximately $6.3 million.

During the nine months ended September 30, 2011, we sold 11 of the Chase – The Private Residences condominiums for $8.3 million.  The proceeds were used to fully repay the principal balance of the Chase – The Private Residences loan.  Under the prospective new loan with a new lender, future proceeds from condominium sales will be used to pay down the Chase Park Plaza Hotel loan until certain covenants are met.

On September 1, 2011, we signed a purchase and sale agreement for the sale of Crossroads.  On September 30, 2011, the lender agreed to accept the net proceeds of $26.1 million as full payment of the outstanding debt of $26.7 million.  On October 4, 2011, the property was sold to an unaffiliated third party.  The net proceeds from the sale of Crossroads were paid to the lender in full satisfaction of the outstanding debt.

As discussed in more detail in “Strategic Asset Sales” above, there can be no assurance that future dispositions will occur or that, if they occur, they will help us to achieve our objectives.  In addition, we may seek to raise capital by contributing one or more of our existing assets to a joint venture with a third party.  Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved.  Our ability to successfully identify, negotiate, and complete joint venture transactions on acceptable terms or at all is highly uncertain in the current economic environment.  Asset sales also may be required under terms that are less advantageous than we could achieve with a longer holding period.

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Debt Financings

One of our principal short-term and long-term liquidity requirements includes the repayment of maturing debt, including borrowings under our senior secured credit facility discussed below.  The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of September 30, 2011.  The table does not represent any extension options ($ in thousands).

	Payments Due by Period(1)
	October 1, 2011 - December 31, 2011		2012		2013		2014		2015		After 2015		Total
Principal payments - fixed rate debt	$	259	$	45,812	$	341	$	679	$	382	$	21,972	$	69,445
Interest payments - fixed rate debt		946		3,124		1,684		1,654		1,604		970		9,982
Principal payments - variable rate debt		87,463		92,744		53,296		-		-		-		233,503
Interest payments - variable rate debt (based on rates in effect as of September 30, 2011)		1,684		3,692		882		-		-		-		6,258
Total	$	90,352	$	145,372	$	56,203	$	2,333	$	1,986	$	22,942	$	319,188

(1) Does not include approximately $0.7 million of unamortized premium related to debt we assumed on our acquisition of Northborough Tower.

The table below provides information regarding our notes payable with scheduled maturities in the twelve months following September 30, 2011, along with extension options, if available.  Available extension options that are associated with the notes payable listed below are subject to certain conditions as required under the respective loan agreements ($ in thousands).

Description	Balance at September 30, 2011		Maturity Date	Extension Options	Recourse to the Company
Crossroads	$	26,673	(1)	(1)		100	%
Chase Park Plaza Hotel		60,369	11/15/11(2)	One six-month option		100	%
Frisco Square I, LLC (Land)		14,313	01/28/12	One six-month option		100	%
Frisco Square II, LLC		7,609	01/28/12	One six-month option		100	%
Frisco Square III, LLC		8,419	01/28/12	One six-month option		100	%
Frisco Square IV, LLC		14,519	01/28/12	One six-month option		100	%
Senior Secured Revolving Credit Facility		48,262	02/13/12	none		100	%
Bent Tree Green		6,546	05/19/12	Two one-year options		100	%
Frisco Square Theatre, LLC		4,785	07/28/12	One one-year option		100	%
Tanglewood at Voss		39,085	08/20/12	One one-year option		100	%
Total due in next twelve months	$	230,580

(1)  On October 4, 2011, Crossroads was sold to an unaffiliated third party.  The proceeds of the sale were paid to the lender in full satisfaction of the outstanding debt.

(2)  We are currently working with a new lender to replace the existing loan.  On November 15, 2011, we anticipate that we will pay off the existing loan balance of the Chase Park Plaza Hotel loan and replace the existing debt with new debt.

With respect to our debt due in the next twelve months, we are working with our lenders to either extend the maturity dates of the loans or refinance the loans under different terms.  We are currently working with a new lender to replace the existing Chase Park Plaza Hotel loan.  On or before November 15, 2011, we anticipate that we will pay off the existing loan balance of the Chase Park Plaza Hotel loan and replace the existing debt with new debt, however, there is no guarantee that these events will occur.

We currently expect to use funds generated by our operating properties, additional borrowings, and proceeds from the disposition of properties to continue making our scheduled debt service payments until the maturity dates of the loans are extended, the loans are refinanced, or the outstanding balance of the loans are completely paid off.  However, there is no guarantee that we will be able to refinance our borrowings with more or less favorable terms or extend the maturity dates of such loans.  In addition, the continued economic downturn and lack of available credit to buyers could delay or inhibit our ability to dispose of our properties in an orderly manner, or cause us to have to dispose of our properties for a lower than anticipated return.  To the extent we are unable to reach agreeable terms with respect to extensions or refinancings, we may not have the cash necessary to repay our debt as it matures, which could result in an event of default that could allow lenders to foreclose on the property in satisfaction of the debt, seek repayment of the full amount of the debt outstanding from us or pursue other remedies.

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Each of our loans is secured by one or more of our properties.  At September 30, 2011, our notes payable interest rates ranged from 1.7% to 15%, with a weighted average interest rate of 4%.  Generally, our notes payable mature at approximately two to ten years from origination and require payments of interest only for approximately two to five years, with all principal and interest due at maturity. Notes payable associated with our Northborough Tower and Frisco Square investments require monthly payments of both principal and interest.  The Chase Park Plaza Hotel loan requires quarterly principal payments of $375,000.  At September 30, 2011, our notes payable had maturity dates that ranged from November 2011 to October 2016.

Although commercial real estate debt markets remain restricted, lending volume has increased year-over-year and secondary market debt is once again available for certain asset classes on a limited basis.  While many lenders continue to demand higher credit spreads, interest rates remain at historically low levels and debt is generally more available than in 2009.

As the overall cost of borrowing increases, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our developments and property investments.  This may result in our investment operations generating lower overall economic returns and a reduced level of cash flow.  In addition, the recent dislocations in the debt markets have reduced the amount of capital that is available to finance real estate, which, in turn: (i) leads to a decline in real estate values generally; (ii) slows real estate transaction activity; (iii) reduces the loan to value upon which lenders are willing to extend debt; and (iv) results in difficulty in refinancing debt as it becomes due.  Any of these events may have a material adverse impact on the value of real estate investments and the revenues, income or cash flow from the acquisition and operation of real properties and mortgage loans.  In addition, the current state of the capital markets may continue to negatively impact our ability to raise additional equity should we decide to bring in partners on our development properties.

Market Outlook

At the beginning of the third quarter of 2011, the U.S. economy was weighed down with concerns over the U.S. debt ceiling and financial conditions in the European Union.  While these issues still remain unresolved and many economists are still split on whether the U.S. is headed for a double-dip recession, key economic fundamentals and analysts are now  pointing to less of a risk of a 2008 level recession, and more towards a longer period of moderate, uneven growth. During the third quarter, GDP growth was reported at 2.5%, with slight declines in unemployment benefits and slight increases in consumer spending and equipment and software expenditures, which while far less than levels needed for a full recovery, were positive and not declining. Further, reports that the European Union was close to a solution to recapitalize European banks indicated more optimism that a severe world-wide recession would be averted.

As an owner of office and industrial real estate properties, the majority of our income and cash flow is derived from rental revenue received pursuant to tenant leases for space at our properties.  Over the past several months there has been some improvement in fundamental benchmarks such as occupancy, rental rates and pricing.  Continued improvement in these fundamentals is dependent upon sustained economic growth.  Occupancy and rental rate stabilization will vary by market and property type.

The hospitality industry is beginning to see early signs of a recovering economy.  Smith Travel Research indicates that the national overall occupancy rate for hospitality properties in the United States rose from 58.9% in the third quarter of 2010 to 66.5% in the third quarter of 2011.  The national overall Average Daily Rate has also risen, from $97.89 in the third quarter of 2010 to $102.96 in the third quarter of 2011.  This positive growth in the hospitality industry is expected to continue.

Although a slower U.S. economy may provide some resistance, primarily with respect to overall job growth, the favorable demand/supply fundamentals present in multifamily investments should still support reasonable growth. On the demand side, the demographics for the targeted multifamily renter, the age group from 20 to 34 years old, are still positive in the sector. This group is growing in size and while the other age segments have experienced employment declines, their aggregate employment has increased. Further, while this age group in previous economic cycles experienced increasing single family home ownership, higher credit standards for single family mortgages and more reluctance to commit to home ownership are currently leading to more rental demand. At the same time on the supply side, developments of new multifamily communities decreased substantially since 2008, such that supply has not been keeping up with demand. We believe that this demand will lead to increased development activity; however, since high quality multifamily developments can take 18 to 36 months to entitle, permit and construct, we believe there is, even in the most aggressive outlook, a continued window of limited supply. Accordingly, many analysts are still projecting continued multifamily rental growth, albeit at a slower pace. However, multifamily performance is highly correlated with job and income growth.  While the factors noted above should position the multifamily sector to perform better in a slow growth environment, eventually the multifamily sector will need stronger employment to maintain rental growth.

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Current interest rates and the availability of multifamily financing are also favorable factors in the multifamily sector.  Five and ten year treasury rates have declined approximately 1% from their rates at December 31, 2010 to September 30, 2011. Competition for multifamily financing, particularly high quality, stabilized communities such as ours, has also added to the favorable financing environment. In addition to government sponsored entities, insurance companies and commercial banks have been aggressive lenders in the multifamily sector. While there is a risk that a downgrade of the U.S. credit rating could reverse these trends, thus far this has not occurred and with the international support provided U.S. treasuries, both during and after the debt ceiling debate, and announcements that many treasury holders would not be required to sell their positions, it would seem to indicate a more limited disruption than originally discussed.

We have several projects in various stages of development including industrial, land and condominiums.  We are continuing to evaluate performing any further substantive development activities on these projects for the near term. At Rio Salado, our 65-acre industrial land project in Phoenix, Arizona, we intend to finish the balance of the infrastructure work and begin to actively market sites for sale or development.

Results of Operations

As of September 30, 2011, we were invested in 20 assets including ten wholly-owned properties (including one asset held for sale), four properties consolidated through investments in joint ventures and a consolidated interest in a note receivable joint venture.  During the third quarter of 2011, we purchased the remaining interest in the Rio Salado property, bringing our interest in the property to 100% from approximately 99%.  In addition, we are the mezzanine lender for one multifamily property.  We also have noncontrolling, unconsolidated ownership interests in three properties and one investment in a joint venture consisting of 22 properties that are accounted for using the equity method.  Our investment properties are located in Arizona, California, Colorado, Missouri, Nevada, Texas, the Commonwealth of The Bahamas, London, England, the Czech Republic, Poland, Hungary, and Slovakia.

As of September 30, 2010, we had invested in 22 assets including ten wholly owned properties and six consolidated properties through investments in joint ventures.  In addition, we were the mezzanine lender for one multifamily property.  We also had noncontrolling, unconsolidated ownership interests in four properties and one investment in a joint venture consisting of 22 properties that was accounted for using the equity method.

Three months ended September 30, 2011 as compared to three months ended September 30, 2010 ($ in thousands)

Continuing Operations

Revenues.  Our total revenues increased by $5.6 million to $17.6 million for the three months ended September 30, 2011.  The change in revenues is primarily due to:

· increase in rental revenue of $0.9 million to $10.5 million for the three months ended September 30, 2011 compared to $9.6 million for the three months ended September 30, 2010; and

· an increase in condominium sales of $4.6 million to $5.3 million for the three months ended September 30, 2011 compared to $0.7 million for the three months ended September 30, 2010.  We sold five condominium units at Chase – The Private Residences in the three months ended September 30, 2011 as compared to one unit sold during the three months ended September 30, 2010.

Cost of Condominium Sales.  Cost of condominium sales, relating to the sale of condominium units at Chase – The  Private Residences, for the three months ended September 30, 2011 was $5.4 million as compared to $0.8 million for the three months ended September 30, 2010.  We closed on the sale of five condominium units at Chase – The Private Residences during the three months ended September 30, 2011.  We closed on the sale of one condominium unit during the three months ended September 30, 2010.

Interest Expense.  For the three months ended September 30, 2011, we recognized $4.4 million in interest expense as compared to $3.5 million for the three months ended September 30, 2010.  The increase is primarily related to the consolidation of the Tanglewood at Voss note payable, the increase in the note payable balance related to the Becket House property improvements and an increase in the cumulative weighted average interest rate for our notes payable from 3.4% as of September 30, 2010 to 4% as of September 30, 2011.

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Impairment charge.  For the three months ended September 30, 2011, we recognized impairment charges related to Rio Salado of $6.2 million, related to Frisco Square of $5.1 million and related to Regency Center of $1.5 million.  For the three months ended September 30, 2010, we recognized impairment charges totaling $12.9 million related to The Private Residences – Chase Park Plaza, and to our 30.38% unconsolidated joint venture interest in Royal Island.

Discontinued Operations and Held for Sale

Gain (loss) from discontinued operations.  In August 2010, we transferred ownership of Ferncroft Corporate Center to the lender associated with the property.  On April 26, 2011 we completed the sale of 12600 Whitewater to an unaffiliated third party.  On June 30, 2011 we completed the sale of 2603 Augusta to an unaffiliated third party.  On September 30, 2011, our Crossroads property was classified as held for sale.  On October 4, 2011, we completed the sale of Crossroads to an unaffiliated third party. We had no properties classified as held for sale at either September 30, 2010 or December 31, 2010.

Nine months ended September 30, 2011 as compared to nine months ended September 30, 2010 ($ in thousands)

Continuing Operations

Revenues.  Our total revenues decreased by $21.7 million to $43.2 million for the nine months ended September 30, 2011.  The change in revenues is primarily due to:

· decrease in condominium sales of $17.9 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.  We closed on the sale of 11 condominium units at Chase – The Private Residences at an average sales price of $0.8 million each during the nine months ended September 30, 2011.  We closed on the sale of 13 condominium units at an average sales price of $2 million each during the nine months ended September 30, 2010; and

· no interest income from notes receivable was earned as of September 30, 2011 as compared to $6.4 million earned as of September 30, 2010.  The interest income from notes receivable for the nine months ended September 30, 2010 is due to interest received from the Royal Island borrowers and interest earned on the Tanglewood at Voss mezzanine loan.

Cost of Condominium Sales.  Cost of condominium sales, relating to the sale of condominium units at Chase – The  Private Residences, for the nine months ended September 30, 2011 was $8.4 million as compared to $26.7 million for the nine months ended September 30, 2010.  We closed on the sale of 11 condominium units at an average sales price of $0.8 million each at Chase – The Private Residences during the nine months ended September 30, 2011.  We closed on the sale of 13 condominium units at an average sales price of $2 million each during the nine months ended September 30, 2010.

Condominium inventory impairment.  We recognized a non-cash charge of $1.9 million to reduce the carrying value of condominiums at Chase-The Private Residences and a $4 million non-cash charge related to our condominium development at  Cordillera during the nine months ended September 30, 2011, due largely to the nationwide downturn in the housing and related condominium market that began during 2007 and has continued through 2011.  This downturn has resulted in lower than expected sales volume and reduced selling prices.  There were no impairment charges related to our condominium inventory for the nine months ended September 30, 2010.

Impairment charge.  For the nine months ended September 30, 2011, we recognized impairment charges related Rio Salado of $6.2 million, related to Frisco Square of $5.1 million and related to Regency Center of $1.5 million.  For the nine months ended September 30, 2010, we recognized impairment charges totaling $12.9 million related to The Private Residences – Chase Park Plaza, and to our 30.38% unconsolidated joint venture interest in Royal Island.

Provision for loan losses.  During the nine months ended September 30, 2011, we recorded a $5.3 million provision for loan losses related to our Royal Island note receivable to record the note receivable balance the underlying collateral value.  During the nine months ended September 30, 2010, we recorded a $7.1 million provision for loan losses to reflect our current estimate of potential loan loss related to the Alexan Black Mountain mezzanine loan.

Equity in losses of unconsolidated joint ventures:  Our equity in losses of unconsolidated joint ventures increased by $33.8 million for the nine months ended September 30, 2011, primarily due to the impairment of the Royal Island assets.

Discontinued Operations and Held for Sale

Gain (loss) from discontinued operations.  In August 2010, we transferred ownership of Ferncroft Corporate Center to the lender associated with the property.  On April 26, 2011 we completed the sale of 12600 Whitewater to an unaffiliated third party.  On June 30, 2011 we completed the sale of 2603 Augusta to an unaffiliated third party.  On September 30, 2011, our Crossroads property was classified as held for sale.  On October 4, 2011, we completed the sale of Crossroads to an unaffiliated third party. We had no properties classified as held for sale at either September 30, 2010 or December 31, 2010.

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Cash Flow Analysis

Cash provided by operating activities for the nine months ended September 30, 2011 was $20 million, and was comprised of the net loss of $85.1 million adjusted for depreciation and amortization, including amortization of deferred financing fees of $17.9 million, an impairment charge of $22.3 million, provision for loan losses of $5.3 million, equity in losses of our unconsolidated joint venture of $37.9 million and change in condominium inventory of $23.1 million, primarily from the sale of the historic tax credits and cash provided by working capital and other operating activities of approximately $1.2 million, offset by the adjustment for gain on sale of real estate of $2.6 million.  Cash provided by operating activities for the nine months ended September 30, 2010 was $15.1 million and was comprised of the net loss of $54.7 million, a change in condominium inventory of $20 million, loss on troubled debt restructuring of $5 million, loss on debt extinguishment of $2.3 million, provision for loan losses of $7.1 million, impairment charges of $25.3 million, equity in losses of $4.1 million and depreciation and amortization expense, including amortization of deferred financing fees of $17.4 million, offset by the adjustment for gain on sale of real estate of $3.9 million and cash used in working capital and other operating activities of $7.5 million.

Cash provided by investing activities for the nine months ended September 30, 2011 was $25.6 million and was comprised of proceeds from the sale of real estate of $38.2 million and proceeds from notes receivable repayments of $0.4 million.  This was offset by cash for expenditures for real estate under development of $2 million, additions of property and equipment of $5.6 million, investment in notes receivable of $3.7 million, and changes in restricted cash of $1.7 million.  Cash used in investing activities for the nine months ended September 30, 2010 was $11.8 million and primarily represented proceeds from the sale of real estate of $2.8 million, a change in restricted cash of $1.8 million, proceeds from payments on notes receivable of $0.6 million and cash assumed from the conversion of our mezzanine loan to equity of $0.4 million.  This was offset by capital expenditures for real estate under development of $7 million, additions of property and equipment of $3.7 million, investment in notes receivable of $3.8 million and investment in unconsolidated joint ventures of $2.9 million.

Cash used in financing activities for the nine months ended September 30, 2011 was $44.4 million and was comprised of payments on notes payable and credit facility of $55.5 million offset by borrowings, net of financing costs, of $10 million.  Borrowings on a note payable to a related party were $1.5 million.  Cash distributions were $0.5 million and net contributions from noncontrolling interest holders was $0.1 million.  Cash used in financing activities for the nine months ended September 30, 2010 was $9.9 million and was comprised primarily of payments on notes payable of $26.6 million, offset by net borrowings on our senior secured credit facility of $7.5 million, proceeds from notes payable, net of financing costs, of $6.3 million, deposits received under sales contracts of $6 million, redemptions of $0.8 million and cash distributions of $2.3 million.

Funds from Operations

Funds from operations (“FFO”) is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance.  We use FFO, defined 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, subsidiaries, and noncontrolling interests, as one measure to evaluate our operating performance.

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 more complete understanding of our performance.

We believe that FFO is helpful to investors and our management as a measure of operating performance 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.

FFO should not be considered as an alternative to net income (loss), as an indication of our liquidity, or as an indication of funds available to fund our cash needs, including our ability to make distributions, and should be reviewed in connection with other GAAP measurements.

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Our calculation of FFO for the three and nine months ended September 30, 2011 and 2010 is presented below ($ in thousands except per share amounts):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Net loss	$	(22,157	)	$	(34,337	)	$	(85,077	)	$	(54,704	)
Net loss attributable to noncontrolling interest		917			499			5,076			1,104
Adjustments for:
Real estate depreciation and amortization(1)		5,974			6,828			19,776			20,421
Gain (loss) on sale of real estate		105			(3,935	)		(2,364	)		(3,935	)
Funds from operations (FFO)	$	(15,161	)	$	(30,945	)	$	(62,589	)	$	(37,114	)
GAAP weighted average shares:
Basic and diluted		56,500			56,261			56,486			56,127
FFO per share	$	(0.27	)	$	(0.55	)	$	(1.11	)	$	(0.66	)
Net loss per share	$	(0.39	)	$	(0.61	)	$	(1.51	)	$	(0.97	)

(1) Real estate depreciation and amortization includes our consolidated real depreciation and amortization expense, as well as our pro rata share of those unconsolidated investments which we account for under the equity method of accounting and the noncontrolling interest adjustment for the third-party partners' share of the real estate depreciation and amortization.

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

Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous period, expectations of performance for future periods, including actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial condition and other factors that our board deems relevant.  The board’s decision will be influenced, in substantial part, by its obligation to ensure that we maintain our status as a REIT.  In connection with entering our disposition phase, on March 28, 2011, our board of directors discontinued regular quarterly distributions in favor of those that may arise from proceeds available to be distributed from our asset sales.

Distributions paid to stockholders have been funded through various sources, including cash flow from operating activities, proceeds raised as part of our initial public offering, reinvestment through our distribution reinvestment plan and/or additional borrowings.  The following summarizes certain information related to the sources of recent distributions ($ in thousands):

	September 30,
	2011		2010
Total Distributions Paid	$	1,410	$	6,995
Principal Sources of Funding:
Distribution Reinvestment Plan	$	926	$	4,745
Cash flow provided by operating activities	$	19,977	$	15,120
Cash available at the beginning of the period (1)	$	9,833	$	9,511

(1)  Represents the cash available at the beginning of the reporting period primarily attributable to excess funds raised from the issuance of common stock and borrowings after the impact of historical operating activities, other investing and financing activities.

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Cash amounts distributed to stockholders during the nine months ended September 30, 2011 and 2010 were $0.5 million and $2.3 million, respectively, and were funded from cash flow provided by operating activities.  The following are the distributions declared and paid for the first, second and third quarters in 2011 and 2010 ($ in thousands, except per share amounts).

							Total		Declared
	Distributions Paid						Distributions		Distribution
2011	Cash		Reinvested		Total		Declared		Per Share
Third Quarter	$	-	$	-	$	-	$	-	$	-
Second Quarter		-		-		-		-		-
First Quarter		485		925		1,410		-		-
Total	$	485	$	925	$	1,410	$	-	$	-

							Total		Declared
	Distributions Paid						Distributions		Distribution
2010	Cash		Reinvested		Total		Declared		Per Share
Third Quarter	$	474	$	930	$	1,404	$	1,406	$	0.025
Second Quarter		460		943		1,403		1,406		0.025
First Quarter		1,316		2,872		4,188		1,405		0.025
Total	$	2,250	$	4,745	$	6,995	$	4,217	$	0.075

Distributions were determined and paid in arrears rather than in advance of the period to which they applied.  On March 28, 2011, the board of directors terminated our distribution reinvestment plan and discontinued regular quarterly distributions in favor cash distributions that may arise from proceeds available to be distributed from the sale of assets.  Therefore, we do not expect to issue any additional shares under the distribution reinvestment plan.  On May 25, 2011, we filed the S-3 Amendment to deregister 2,941,591 unsold shares of common stock being offered pursuant to the distribution reinvestment plan.  By filing the S-3 Amendment, we terminated the offering of shares under the registration statement.

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.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP.  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.  We evaluate these estimates, including investment impairment, on a regular basis.  These estimates will be 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 will 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 condensed consolidated financial statements include our accounts 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 will be evaluated based on applicable GAAP, which includes the requirement to consolidate entities deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary. If the interest in the entity is determined not to be a VIE, then the entity will be evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.

There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and, if so, whether 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.  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 using the equity method that should in fact be consolidated, the effects of which could be material to our financial statements.

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Real Estate

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

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

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 and land improvement 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 (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of current market lease rates for the corresponding in-place leases, measured over a period equal to (a) the remaining noncancelable lease term for above-market leases, or (b) the remaining noncancelable 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 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 its 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.

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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.

Investment Impairments

For all of our real estate and real estate related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to:  a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers and changes in the global and local markets or economic conditions.  Our assets may at times be concentrated in limited geographic locations and, to the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at a portion of our properties within a short time period, which may result in asset impairments.  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.  We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist.  While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

We also evaluate our investments in notes receivable as of each reporting date.  If we believe that it is probable we will not collect all principal and interest in accordance with the terms of the notes, we consider the loan impaired.  When evaluating loans for potential impairment, we compare the carrying amount of the loans to the present value of future cash flows discounted at the loan’s effective interest rate, or, if a loan is collateral dependent, to the estimated fair value of the related collateral net of any senior loans.  For impaired loans, a provision is made for loan losses to adjust the reserve for loan losses.  The reserve for loan losses is a valuation allowance that reflects our current estimate of loan losses as of the balance sheet date.  The reserve is adjusted through the provision for loan losses account on our condensed consolidated statement of operations.

In evaluating our investments for impairment, management may use appraisals and make 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, planned development and the projected sales price of each of the properties.  A future 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.

Through the third quarter of 2011, we evaluated certain real estate properties for impairment as a result of changes in expected holding periods.  Accordingly, we recognized impairment charges of $6.2 million related to Rio Salado, $5.1 million related to Frisco Square and $1.5 million related to Regency Center.  We also recognized an impairment charge of $3.6 million related to 2603 Augusta in the first quarter of 2011, which is included in discontinued operations.  2603 Augusta was sold to an unaffiliated third party on June 30, 2011.

On September 14, 2010, we entered into a forbearance agreement with the Royal Island borrower pursuant to which, among other things, the borrower agreed not to contest or oppose any foreclosure, exercise of power of sale, or similar action that we may seek in order to protect our investment once the agreement expired. Further, the borrower agreed to fully cooperate to expedite the proceedings should we take such a course of action. The forbearance agreement gave the general partner and other interested parties time to raise additional equity for development of the Royal Island property. The forbearance period expired on May 27, 2011 with no additional development equity raised. Consequently, there is a change in the timing of the intended use of the investment. Based upon a third party appraisal of the collateral obtained after the expiration of the forbearance agreement, there is a decline in the fair market value of the property. As a result, an impairment was recorded on Royal Island’s books. Our portion of the impairment is $31.1 million which was recorded through equity in losses of unconsolidated joint ventures. This reduced our investment basis in Royal Island to zero as of June 30, 2011. Additionally, it is probable that we will be unable to collect all amounts due according the terms of the loan agreements. We believe the only source available to repay the loan is the underlying collateral. Based upon our evaluation of the current fair value of the Royal Island development, we recorded a provision for loan losses of $5.3 million to reduce our note receivable balance to the underlying collateral value.

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In the first quarter of 2010, we recorded a reserve for loan losses of $11.1 million related to our mezzanine loan associated with Alexan Black Mountain, including $7.1 million recognized as a provision to loan losses on our condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2010, and the remaining $4 million as a cumulative effect adjustment to the opening balance of accumulated distributions and net loss in our condensed consolidated statement of equity for the nine months ended September 30, 2010.

The value of our properties held for development depends on market conditions, including estimates of the project start date, as well as estimates of future demand for the property type under development.  We have analyzed trends and other information related to each potential development and incorporated this information, as well as our current outlook, into the assumptions we use in our impairment analyses.  Due to the judgment and assumptions applied in the estimation process with respect to impairments, including the fact that limited market information regarding the value of comparable land exists at this time, it is possible actual results could differ substantially from those estimated.

We believe the carrying value of our operating real estate assets, properties under development, investments in unconsolidated joint ventures, and notes receivable is currently recoverable.  However, if market conditions worsen beyond our current expectations, or if our assumptions regarding expected future cash flows from the use and eventual disposition of our assets decrease or our expected hold periods decrease, or if changes in our development strategy significantly affect any key assumptions used in our fair value calculations, we may need to take additional charges in future periods for impairments related to existing assets.  Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.

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 adjustment 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.

The nationwide downturn in the housing and related condominium market that began during 2007 and has continued through the third quarter of 2011 has resulted in lower than expected sales volume and reduced selling prices.  As a result of our evaluations, we recognized a non-cash charge of $1.9 million to reduce the carrying value of condominiums at Chase-The Private Residences and a $4 million non-cash charge to reduce the carrying value of condominium development at Cordillera during the nine months ended September 30, 2011.  Both of these non-cash charges are classified as condominium inventory impairment charges in the accompanying consolidated statement of operations.  We recognized a non-cash charge of $4.8 million during the nine months ended September 30, 2010 to reduce the carrying value of the condominiums at Chase-The Private Residences.  In the event that market conditions continue to decline in the future or the current difficult market conditions extend beyond our expectations, additional adjustments may be necessary.

Item 3.                Quantitative and Qualitative Disclosures About Market Risk.

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 $303.7 million in notes payable at September 30, 2011, $272.6 million represented debt subject to variable interest rates.  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 approximately $0.6 million.

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At September 30, 2011, interest rate caps classified as assets were reported at their combined fair value of less than $0.1 million within prepaid expenses and other assets.  A 100 basis point decrease in interest rates would result in a $0.1 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 less than $0.1 million net increase in the fair value of our interest rate caps and swaps.

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of September 30, 2011, 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 were effective as of September 30, 2011 to provide reasonable assurance 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 our management, including our 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 systems 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, 2011 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.

 None.

Item 1A.             Risk Factors.

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2010 or our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.

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

Unregistered Sales of Common Stock

During the period covered by this quarterly report, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

Share Redemption Program

In February 2006, our board of directors authorized a share redemption program for stockholders who held their shares for more than one year.  Under the program, our board reserved 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.

On March 30, 2009, our board of directors adopted an amended and restated share redemption program and voted to accept all redemption requests submitted during the first quarter of 2009 from stockholders whose requests were made on circumstances of death, disability or confinement to a long-term care facility (referred to herein as “Exceptional Redemptions”).  However, the board determined to not accept and to suspend until further notice redemptions other than Exceptional Redemptions, which are referred to as “Ordinary Redemptions”.

On January 10, 2011, as is customary for REITs entering the disposition phase and in accordance with the Company’s third amended and restated share redemption program, the board suspended the redemption program with respect to all redemption requests until further notice.  Therefore, we did not redeem any shares of our common stock during the period covered by this report.

Any redemption requests submitted while the program is suspended will be returned to investors and must be resubmitted upon resumption of the share redemption program.  If the share redemption program is resumed, we will give all stockholders notice that we are resuming redemptions, so that all stockholders will have an equal opportunity to submit shares for redemption. Upon resumption of the program, any redemption requests will be honored pro rata among all requests received based on funds available.  Requests will not be honored on a first come, first served basis.

Item 3.                Defaults Upon Senior Securities.

None.

Item 4.                Removed and Reserved.

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, 2011	By:	/s/ Kymberlyn K. Janney
	Kymberlyn K. Janney
	Chief Financial Officer and Treasurer
	(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	Certificate of Correction to Second Articles of Amendment and Restatement of the Registrant (previously filed in and incorporated by reference to Form 8-K, filed on June 9, 2011)
3.3	Amended and Restated Bylaws of the Registrant (previously filed in and incorporated by reference to Form 8-K filed on March 11, 2010)
4.1	Third Amended and Restated Distribution Reinvestment Plan (previously filed in and incorporated by reference to Form 10-Q filed on November 13, 2009)
10.1*	Fifth Loan Amendment Agreement among BHFS I, LLC, BHFS II, LLC, BHFS III, LLC, and BHFS IV, LLC, as borrowers, and Bank of America, N.A. effective August 28, 2011.
31.1*	Rule 13a-14(a)/15d-14(a) Certification
31.2*	Rule 13a-14(a)/15d-14(a) Certification
32.1*(1)	Section 1350 Certification
32.2*(1)	Section 1350 Certification
99.1	Third Amended and Restated Share Redemption Program (previously filed and incorporated by reference to Form 10-Q filed on November 13, 2009)
99.2	Amended and Restated Policy for Estimation of Common Stock Value (previously filed and incorporated by reference to form 8-K filed on June 22, 2009)
101(1)	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 14, 2011, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements.

*filed herewith

(1)   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.

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