Monogram Residential Trust (BHORL) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

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

For the quarterly period ended September 30, 2013

OR

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

For the transition period from                          to  

Commission File Number: 000-53195

Behringer Harvard Multifamily REIT I, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

15601 Dallas Parkway, Suite 600, Addison, Texas 75001

(Address of Principal Executive Offices) (ZIP Code)

(866) 655-3600

(Registrant’s Telephone Number, Including Area Code)

None

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

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

Indicate by check mark whether the registrant 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 o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company o
(Do not check if a 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  o  No x

As of October 31, 2013, the Registrant had 168,575,584 shares of common stock outstanding.

BEHRINGER HARVARD MULTIFAMILY REIT I, INC.

Form 10-Q

Quarter Ended September 30, 2013

		Page
PART I
FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012	4
	Consolidated Statements of Equity for the nine months ended September 30, 2013 and 2012	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	73
Item 4.	Controls and Procedures	75
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings	76
Item 1A.	Risk Factors	76
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76
Item 3.	Defaults Upon Senior Securities	78
Item 4.	Mine Safety Disclosures	78
Item 5.	Other Information	78
Item 6.	Exhibits	79
Signature		80

2

Behringer Harvard Multifamily REIT I, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(Unaudited)

	September 30, 2013			December 31, 2012
Assets
Real estate
Land	$	337,295		$	327,946
Buildings and improvements	1,820,732			1,849,483
	2,158,027			2,177,429
Less accumulated depreciation	(173,757		)	(123,360		)
Net operating real estate	1,984,270			2,054,069
Construction in progress, including land ($188.6 million and $46.1 million related to VIEs as of September 30, 2013 and December 31, 2012, respectively)	408,446			151,605
Total real estate, net	2,392,716			2,205,674
Investment in unconsolidated real estate joint venture	14,526			3,030
Cash and cash equivalents	148,865			450,644
Intangibles, net	26,813			19,063
Other assets, net	87,712			66,282
Total assets	$	2,670,632		$	2,744,693
Liabilities and equity
Liabilities
Mortgages and notes payable ($3.7 million related to VIEs as of September 30, 2013)	$	943,554		$	979,558
Credit facility payable	10,000			10,000
Construction costs payable ($19.0 million and $1.3 million related to VIEs as of September 30, 2013 and December 31, 2012, respectively)	29,338			9,751
Accounts payable and other liabilities	32,302			22,461
Deferred revenues, primarily lease revenues, net	16,705			17,497
Distributions payable	4,911			4,980
Tenant security deposits	4,053			4,059
Total liabilities	1,040,863			1,048,306
Commitments and contingencies
Redeemable noncontrolling interests ($10.1 million and $3.9 million related to VIEs as of September 30, 2013 and December 31, 2012, respectively)	19,539			8,585
Equity
Preferred stock, $0.0001 par value per share; 124,999,000 shares authorized:
7.0% Series A non-participating, voting, cumulative, convertible preferred stock, liquidation preference $10 per share, 10,000 shares issued and outstanding as of September 30, 2013, none outstanding as of December 31, 2012	—			—
Non-participating, non-voting convertible stock, $0.0001 par value per share; 1,000 shares authorized, none and 1,000 shared issued and outstanding as of September 30, 2013 and December 31, 2012, respectively	—			—
Common stock, $0.0001 par value per share; 875,000,000 shares authorized, 168,308,595 and 167,542,108 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively	17			17
Additional paid-in capital	1,509,256			1,523,646
Cumulative distributions and net income (loss)	(214,572		)	(201,211		)
Total equity attributable to common stockholders	1,294,701			1,322,452
Non-redeemable noncontrolling interests	315,529			365,350
Total equity	1,610,230			1,687,802
Total liabilities and equity	$	2,670,632		$	2,744,693

See Notes to Consolidated Financial Statements.

3

Behringer Harvard Multifamily REIT I, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
Rental revenues	$	48,412		$	44,449		$	140,878		$	126,375
Expenses
Property operating expenses	13,349			12,245			37,821			34,129
Real estate taxes	6,231			5,703			18,177			16,375
Asset management fees	1,850			1,716			5,521			4,887
General and administrative expenses	3,652			3,500			7,870			8,330
Acquisition expenses	3,688			—			3,688			2,518
Transition expenses	8,157			—			8,605			—
Investment and development expenses	265			—			265			—
Interest expense	5,875			7,839			18,597			23,712
Depreciation and amortization	22,050			21,214			63,259			78,545
Total expenses	65,117			52,217			163,803			168,496
Interest income	2,271			1,849			6,402			5,924
Gain on revaluation of equity on a business combination	—			1,723			—			1,723
Loss on early extinguishment of debt	—			(176		)	—			(502		)
Equity in income (loss) of investments in unconsolidated real estate joint ventures	449			(144		)	810			(1,310		)
Other income (expense)	(129		)	(517		)	177			(910		)
Loss from continuing operations	(14,114		)	(5,033		)	(15,536		)	(37,196		)
Income (loss) from discontinued operations:
Income (loss) from discontinued operations	129			(220		)	(700		)	(2,558		)
Gain on sale of real estate	12,722			—			50,941			13,312
Net income (loss)	(1,263		)	(5,253		)	34,705			(26,442		)
Net (income) loss attributable to noncontrolling interests:
Redeemable noncontrolling interests in continuing operations	—			—			—			1,825
Non-redeemable noncontrolling interests in continuing operations	792			1,146			2,983			12,280
Non-redeemable noncontrolling interests in discontinued operations	11			186			(6,905		)	1,591
Net income (loss) available to the Company	(460		)	(3,921		)	30,783			(10,746		)
Dividends to preferred stockholders	(1		)	—			(1		)	—
Net income (loss) attributable to common stockholders	$	(461	)	$	(3,921	)	$	30,782		$	(10,746	)
Weighted average number of common shares outstanding	168,881			166,417			168,620			165,816
Basic and diluted income (loss) per common share:
Continuing operations	$	(0.08	)	$	(0.02	)	$	(0.07	)	$	(0.13	)
Discontinued operations	0.08			—			0.26			0.07
Basic and diluted income per common share	$	—		$	(0.02	)	$	0.19		$	(0.06	)
Amounts attributable to common stockholders:
Continuing operations	$	(13,323	)	$	(3,887	)	$	(12,554	)	$	(23,091	)
Discontinued operations	12,862			(34		)	43,336			12,345
Net income (loss) attributable to common stockholders	$	(461	)	$	(3,921	)	$	30,782		$	(10,746	)

See Notes to Consolidated Financial Statements.

4

Behringer Harvard Multifamily REIT I, Inc.

Consolidated Statements of Equity

(in thousands)

(Unaudited)

																		Cumulative Distributions and Net
	Preferred Stock			Convertible Stock				Common Stock				Additional						Income (Loss)
	Number	Par		Number		Par		Number		Par		Paid-in			Noncontrolling			available to			Total
	of Shares	Value		of Shares		Value		of Shares		Value		Capital			Interests			the Company			Equity
Balance at January 1, 2012	—	$	—	1		$	—	165,087		$	17	$	1,502,010		$	413,071		$	(110,090	)	$	1,805,008
Net loss	—	—		—		—		—		—		—			(13,871		)	(10,746		)	(24,617		)
Redemptions of common stock	—	—		—		—		(1,734	)	—		(15,522		)	—			—			(15,522		)
Acquisition of controlling interest	—	—		—		—		—		—		—			1,018			—			1,018
Acquisitions of noncontrolling interests	—	—		—		—		—		—		(3,746		)	(9,757		)	—			(13,503		)
Sale of noncontrolling interest	—	—		—		—		—		—		1,178			(1,178		)	—			—
Contributions by and adjustments of noncontrolling interests	—	—		—		—		—		—		—			7,783			—			7,783
Distributions:	0	0
Declared on common stock - regular	—	—		—		—		—		—		—			—			(53,882		)	(53,882		)
Declared on common stock - special	—	—		—		—		—		—		—			—			(9,969		)	(9,969		)
Noncontrolling interests	—	—		—		—		—		—		—			(23,432		)	—			(23,432		)
Stock issued pursuant to distribution reinvestment plan, net	—	—		—		—		3,360		—		31,894			—			—			31,894
Balance at September 30, 2012	—	$	—	1		$	—	166,713		$	17	$	1,515,814		$	373,634		$	(184,687	)	$	1,704,778
Balance at January 1, 2013	—	$	—	1		$	—	167,542		$	17	$	1,523,646		$	365,350		$	(201,211	)	$	1,687,802
Net income	—	—		—		—		—		—		—			3,922			30,783			34,705
Redemptions of common stock	—	—		—		—		(1,685	)	—		(15,936		)	—			—			(15,936		)
Acquisition of noncontrolling interest	—	—		—		—		—		—		(23,210		)	(12,761		)	—			(35,971		)
Sale of a noncontrolling interest	—	—		—		—		—		—		1,459			4,437			—			5,896
Contributions by and adjustments of noncontrolling interests	—	—		—		—		—		—		—			(93		)	—			(93		)
Distributions:	0	0
Declared on common stock - regular	—	—		—		—		—		—		—			—			(44,144		)	(44,144		)
Noncontrolling interests	—	—		—		—		—		—		—			(45,326		)	—			(45,326		)
Issuance of preferred stock	10	—		—		—		—		—		—			—			—			—
Cancellation of convertible stock	—	—		(1	)	—		—		—		—			—			—			—
Stock issued pursuant to distribution reinvestment plan, net	—	—		—		—		2,452		—		23,297			—			—			23,297
Balance at September 30, 2013	10	$	—	—		$	—	168,309		$	17	$	1,509,256		$	315,529		$	(214,572	)	$	1,610,230

See Notes to Consolidated Financial Statements.

5

Behringer Harvard Multifamily REIT I, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	For the Nine Months Ended   September 30,
	2013			2012
Cash flows from operating activities
Net income (loss)	$	34,705		$	(26,442	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Gain on revaluation of equity on a business combination	—			(1,723		)
Gain on sale of real estate	(50,941		)	(13,312		)
Loss on early extinguishment of debt	—			502
Equity in (income) loss of investments in unconsolidated real estate joint ventures	(810		)	1,310
Distributions received from investment in unconsolidated real estate joint venture	460			110
Depreciation	63,763			62,228
Amortization of deferred financing costs and debt premium/discount	(1,861		)	(918		)
Amortization of intangibles	1,332			22,495
Amortization of deferred revenues, primarily lease revenues, net	(1,127		)	(1,056		)
Other, net	591			673
Changes in operating assets and liabilities:
Accounts payable and other liabilities	10,745			3,161
Other assets	283			(2,055		)
Cash provided by operating activities	57,140			44,973
Cash flows from investing activities
Additions to real estate:
Acquisitions of real estate, net of cash acquired of $0.8 million for the nine months ended September 30, 2012	(108,014		)	(67,583		)
Additions to existing real estate	(5,674		)	(5,722		)
Construction in progress, including land	(259,533		)	(69,664		)
Proceeds from sale of real estate, net	205,498			23,902
Investments in unconsolidated real estate joint ventures	(4,810		)	(1,154		)
Acquisition of a controlling interest, net of cash acquired of $0.6 million for the nine months ended September 30, 2013	(8,643		)	—
Acquisitions of noncontrolling interests	(48,483		)	(18,122		)
Sale of noncontrolling interest	7,272			—
Investment in short-term investments	—			(25,000		)
Advances on notes receivable	(29,107		)	(16,422		)
Collection on note receivable	7,900			4,160
Escrow deposits	(2,212		)	(5,550		)
Other, net	(377		)	(626		)
Cash used in investing activities	(246,183		)	(181,781		)
Cash flows from financing activities
Mortgage proceeds	41,379			196,453
Mortgage principal payments	(74,203		)	(164,773		)
Contributions from noncontrolling interests	7,126			9,455
Distributions paid on common stock - regular	(20,963		)	(25,606		)
Distributions paid on common stock - special	—			(9,969		)
Distributions paid to noncontrolling interests	(45,277		)	(23,380		)
Redemptions of common stock	(15,936		)	(15,522		)
Other, net	(4,862		)	(2,788		)
Cash used in financing activities	(112,736		)	(36,130		)
Net change in cash and cash equivalents	(301,779		)	(172,938		)
Cash and cash equivalents at beginning of period	450,644			655,495
Cash and cash equivalents at end of period	$	148,865		$	482,557

See Notes to Consolidated Financial Statements.

6

Behringer Harvard Multifamily REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1.Organization and Business

Organization

Behringer Harvard Multifamily REIT I, Inc. (which, together with its subsidiaries as the context requires, may be referred to as the “Company,” “we,” “us,” or “our”) was organized in Maryland on August 4, 2006.  We invest in, develop and operate high quality multifamily communities. These multifamily communities include conventional multifamily assets, such as mid-rise, high-rise, garden style, and age-restricted properties, typically requiring residents to be age 55 or older.  Our targeted communities include existing “core” properties, which we define as properties that are already stabilized and producing rental income, as well as properties in various phases of development, redevelopment, lease up or repositioning which we intend to transition to core properties.  Further, we may invest in other types of commercial real estate, real estate-related securities, and mortgage, bridge, mezzanine, land or other loans, or in entities that make investments similar to the foregoing.  We completed our first investment in April 2007.

From our inception to July 31, 2013, we had no employees, were externally managed by Behringer Harvard Multifamily Advisors I, LLC (the “Advisor”) and were supported by related party service agreements with the Advisor and its affiliates. Through July 31, 2013, we exclusively relied on the Advisor and its affiliates to provide certain services and personnel for management and day-to-day operations, including advisory services performed by the Advisor and property management services provided by Behringer Harvard Multifamily Management Services, LLC and its affiliates (“BHM Management” or the “Property Manager”). 

Effective July 31, 2013, we entered into a series of agreements with the Advisor and its affiliates in order to begin our transition to self-management. On August 1, 2013, we hired five executives who were previously employees of the Advisor and its affiliates. In addition to their management responsibilities, these five executives will lead the Company in completing its transition to self-management. See further discussion at Note 13, “Transition to Self-Management.”

We invest in multifamily communities that may be wholly owned by us or held through joint venture arrangements with institutional or other real estate investors which we define as “Co-Investment Ventures” or “CO-JVs.”  These are predominately equity investments but also include debt investments, consisting of mezzanine and land loans.  If a Co-Investment Venture makes an equity or debt investment in a separate entity with additional third parties, we refer to such a separate entity as a “Property Entity” and when applicable may name the multifamily community related to the Property Entity or CO-JV.

We have equity and debt investments in 56 multifamily communities as of September 30, 2013, of which 33 are stabilized operating properties, three are in lease up and 20 are in various stages of pre-development and construction. Of the 56 multifamily communities, we wholly own nine multifamily communities and four debt investments for a total of 13 wholly owned investments.  The remaining 43 investments are held through Co-Investment Ventures, all of which are consolidated but one, which is reported on the equity method of accounting. The one unconsolidated Co-Investment Venture holds a debt investment. 

As of September 30, 2013, we are the general partner and/or managing member for each of the separate Co-Investment Ventures, and our Co-Investment Venture partners include Milky Way Partners, L.P. (the “MW Co-Investment Partner”), the primary partner of which is Korea Exchange Bank, as Trustee for and on behalf of National Pension Service (acting for and on behalf of the National Pension Fund of the Republic of Korea Government) (“NPS”), Stichting Depositary PGGM Private Real Estate Fund, a Dutch foundation acting in its capacity as depositary of and for the account and risk of PGGM Private Real Estate Fund, and its affiliates (“PGGM” or the “PGGM Co-Investment Partner”), and other real estate developers/owners. When applicable, we refer to individual investments by referencing the individual co-investment partner or the underlying multifamily community. We refer to our Co-Investment Ventures with the PGGM Co-Investment Partner as “PGGM CO-JVs” and those with the MW Co-Investment Partner as “MW CO-JVs”.

Prior to July 31, 2013, we had multiple Co-Investment Ventures with Behringer Harvard Master Partnership I LP (the “BHMP Co-Investment Partner”). PGGM held a 99% limited partner interest in the BHMP Co-Investment Partner and an affiliate of the Advisor held the 1% general partner interest. On July 31, 2013, we acquired the 1% general partner interest in the BHMP Co-Investment Partner (the “BHMP GP Interest”) from the affiliate of the Advisor for $23.1 million (effectively increasing our ownership interest in each applicable Co-Investment Venture) and consolidated the BHMP Co-Investment

7

Partner. Our acquisition of the BHMP GP Interest on July 31, 2013, resulted in the PGGM Co-Investment Partner becoming our partner in these Co-Investment Ventures as of July 31, 2013.  This transaction did not have a significant effect on the amount of noncontrolling interests in such Co-Investment Ventures because PGGM owns a 99% interest in the BHMP Co-Investment Partner. PGGM’s ownership interest in each applicable Co-Investment Venture was unchanged. Accordingly, we now consider PGGM to be our co-investment partner in these Co-Investment Ventures. We now refer to these Co-Investment Ventures as “PGGM CO-JVs” and to PGGM as the “PGGM Co-Investment Partner.” See more discussion of the acquisition of the BHMP GP Interest at Note 3, “Business Combinations” and Note 13, “Transition to Self-Management.”

The table below presents a summary of the number of multifamily investments we have through Co-Investment Ventures, listed by co-investment partner, and our effective ownership ranges based on our share of contributed capital directly or indirectly in the multifamily investment.  This effective ownership is indicative of, but may differ from, percentages for distributions, contributions or financing requirements for each respective Co-Investment Venture.  Unless otherwise noted, all are reported on the consolidated basis of accounting.

	September 30, 2013			December 31, 2012
	Number of investments through			Number of investments through
Co-Investment Partner	Co-Investment Ventures		Effective Ownership	Co-Investment Ventures		Effective Ownership
PGGM Co-Investment Partner (a)	14	(b)	51% to 74%	16	(b)	51% to 74%
MW Co-Investment Partner	14		55%	15		55%
Developers/owners	15		80% to 100% (c)	8		80% to 100% (c)
Total	43			39

(a)As discussed above, the BHMP Co-Investment Partner was our partner in these Co-Investment ventures as of December 31, 2012.

(b) Includes one unconsolidated investment.

(c)All of the developer’s initial contributed capital has been returned to the developer, and we have 100% of the contributed capital in eight and three of the investments through Co-Investment Ventures with developers/owners as of September 30, 2013 and December 31, 2012, respectively.

We have elected to be taxed, and currently qualify, as a real estate investment trust (“REIT”) for federal income tax purposes. As a REIT, we generally are not subject to corporate-level income taxes.  To maintain our REIT status, we are required, among other requirements, to distribute annually at least 90% of our “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to our stockholders.  If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates.  As of September 30, 2013, we believe we are in compliance with all applicable REIT requirements.

Offerings of Our Common Stock

In December 2007, we completed a private offering (the “Private Offering”), in which we sold approximately 14.2 million shares of our common stock with gross offering proceeds of approximately $127.3 million.  Net proceeds, after selling commissions, dealer manager fees, and other offering costs, were approximately $114.3 million.

On September 2, 2011, we terminated offering shares of common stock in the primary portion of our initial public offering (the “Initial Public Offering”), in which we sold 146.4 million shares of our common stock with aggregate gross primary offering proceeds of approximately $1.46 billion. Net proceeds, after selling commissions, dealer manager fees, and other offering costs, were approximately $1.30 billion.  Upon termination of our Initial Public Offering, we reallocated 50 million unsold shares remaining from our Initial Public Offering to our distribution reinvestment plan (“DRIP”).  As a result, we are offering a maximum of 100 million total shares pursuant to our DRIP at a DRIP offering price set by our board of directors, which from March 1, 2013 is $9.53 per share, based on approximately 95% of our estimated net asset value per share as of March 1, 2013.  For the nine months ended September 30, 2013 and 2012, the DRIP offering price averaged $9.50 and $9.49, respectively. As of September 30, 2013, we have sold approximately 15.2 million shares under our DRIP for gross proceeds of approximately $144.4 million.  There are approximately 84.8 million shares remaining to be sold under the DRIP.

8

Per the terms of our DRIP, we currently expect to offer shares under the DRIP for approximately the next four years, which would be the sixth anniversary of the termination of our Initial Public Offering although our board of directors has the discretion to extend the DRIP beyond that date, in which case we will notify participants of such extension.  We may suspend or terminate the DRIP at any time by providing ten days’ prior written notice to participants, and we may amend or supplement the DRIP at any time by delivering notice to participants at least 30 days’ prior to the effective date of the amendment or supplement.

Our common stock is not currently listed on a national securities exchange. Depending upon then-prevailing market conditions, we intend to begin to consider the process of listing or liquidation within the next three to five years, which is unchanged from the four to six years after the date of the termination of our Initial Public Offering as disclosed in the related offering documents.

2.Summary of Significant Accounting Policies

Interim Unaudited Financial Information

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 which was filed with the Securities and Exchange Commission (“SEC”) on March 1, 2013. 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 from this report.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet as of September 30, 2013 and consolidated statements of operations, equity and cash flows for the periods ended September 30, 2013 and 2012 have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial position as of September 30, 2013 and December 31, 2012 and our consolidated results of operations and cash flows for the periods ended September 30, 2013 and 2012. Such adjustments are of a normal recurring nature.

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

Basis of Presentation

The accompanying consolidated financial statements include our consolidated accounts and the accounts of our wholly owned subsidiaries.  We also consolidate other entities in which we have a controlling financial interest or entities where we are determined to be the primary beneficiary.  Variable interest entities (“VIEs”) are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability.  The primary beneficiary is required to consolidate a VIE for financial reporting purposes.  The determination of the primary beneficiary requires management to make significant estimates and judgments about our rights, obligations, and economic interests in such entities as well as the same of the other owners.  See Note 6, “Variable Interest Entities” for further information about our VIEs.  For entities in which we have less than a controlling financial interest or entities with respect to which we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting.  Accordingly, our share of the net earnings or losses of these entities is included in consolidated net income.  See Note 5, “Investment in Unconsolidated Real Estate Joint Venture” for further information on our unconsolidated investments.  All inter-company accounts and transactions have been eliminated in consolidation.

Real Estate and Other Related Intangibles

Acquisitions

For real estate properties acquired by us or our Co-Investment Ventures classified as business combinations, we determine the purchase price, after adjusting for contingent consideration and settlement of any pre-existing relationships. We record the acquired assets and liabilities based on their fair values, including tangible assets (consisting of land, any associated rights, buildings and improvements), identified intangible assets and liabilities, asset retirement obligations, assumed debt, other liabilities and noncontrolling interests.  Identified intangible assets and liabilities primarily consist of the fair value of in-place leases and contractual rights.  Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interest 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

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consideration transferred and any noncontrolling interest in the acquiree are less than the fair value of the identifiable net assets acquired.

The fair value of any tangible real estate assets acquired is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, buildings and improvements.  Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods.  When we acquire rights to use land or improvements through contractual rights rather than fee simple interests, we determine the value of the use of these assets based on the relative fair value of the assets after considering the contractual rights and the fair value of similar assets. Assets acquired under these contractual rights are classified as intangibles and amortized on a straight-line basis over the shorter of the contractual term or the estimated useful life of the asset. Contractual rights related to land or air rights that are substantively separated from depreciating assets are amortized over the life of the contractual term or, if no term is provided, are classified as indefinite-lived intangibles.  Intangible assets are evaluated at each reporting period to determine whether the indefinite and finite useful lives are appropriate.

We determine the value of 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 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 leasable area considering current market conditions.  In estimating fair value of in-place leases, we consider items such as real estate taxes, insurance, leasing commissions, tenant improvements and other operating expenses to execute similar deals as well as projected rental revenue and carrying costs during the expected lease up period.  The estimate of the fair value of tenant relationships also includes our estimate of the likelihood of renewal. We amortize the value of in-place leases acquired to expense over the remaining term of the leases. The value of tenant relationship intangibles will be amortized to expense over the initial term and any anticipated renewal periods, but in no event will the amortization period for intangible assets exceed the remaining depreciable life of the building. The in-place leases are amortized over the remaining term of the in-place leases, approximately a six month term for multifamily in-place leases and terms ranging from three to 20 years for retail in-place leases.   

We determine the value of above-market and below-market in-place leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) estimates of current market lease rates for the corresponding in-place leases, measured over a period equal to (i) the remaining non-cancelable lease term for above-market leases, or (ii) the remaining non-cancelable lease term plus any fixed rate renewal options for below-market leases. We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the above determined lease term.  Given the short-term nature of multifamily leases, the value of above-market or below-market in-place leases are generally not material.

We determine the value of other contractual rights based on our evaluation of the specific characteristics of the underlying contracts and by applying a fair value model to the projected cash flows or usage rights that considers the timing and risks associated with the cash flows or usage. We amortize the value of finite contractual rights over the remaining contract period. Indefinite-lived contractual rights are not amortized but are evaluated for impairment.

We determine the fair value of assumed debt by calculating the net present value of the scheduled debt service 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.

Initial valuations are subject to change until our information is finalized, which is no later than 12 months from the acquisition date.  We have had no significant valuation changes for acquisitions prior to September 30, 2013.

Developments

We capitalize project costs related to the development and construction of real estate (including interest and related loan fees, property taxes, insurance, and other direct costs associated with the development) as a cost of the development.  Indirect project costs that relate to several developments are capitalized and allocated to the developments to which they relate.  Indirect costs, not clearly related to development and construction, are expensed as incurred.  For each development, capitalization begins when we determine that the development is probable and significant development activities are underway.  We suspend capitalization at such time as significant development activity ceases, but future development is still probable.  We cease capitalization when the developments or other improvements, including any portion, are completed and ready for their

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intended use, or if the intended use changes such that capitalization is no longer appropriate.  Developments or improvements are generally considered ready for intended use when the certificates of occupancy have been issued and the units become ready for occupancy.

For the three months ended September 30, 2013 and 2012, we capitalized interest of $2.8 million and $0.7 million, respectively. For the nine months ended September 30, 2013 and 2012, we capitalized interest of $6.7 million and $1.6 million, respectively.

Depreciation

Buildings are depreciated over their estimated useful lives ranging from 25 to 35 years using the straight-line method.  Improvements are depreciated over their estimated useful lives ranging from 3 to 15 years using the straight-line method.  Properties classified as held for sale are not depreciated.  Depreciation of developments begins when the development is substantially completed and ready for its intended use.

Repairs and Maintenance

Expenditures for ordinary repairs and maintenance costs are charged to expense as incurred.

Investment in Unconsolidated Real Estate Joint Venture

We and our Co-Investment Ventures account for investments in unconsolidated real estate joint ventures using the equity method of accounting because we exercise significant influence over, but do not control, these entities.  These investments are initially recorded at cost, including any acquisition costs, and are adjusted for our share of equity in earnings and distributions.  We report our share of income and losses based on our economic interests in the entities.

We capitalize interest expense to investments in unconsolidated real estate joint ventures for our share of qualified expenditures during their development phase.

We amortize any excess of the carrying value of our investments in joint ventures over the book value of the underlying equity over the estimated useful lives of the underlying operating property, which represents the assets to which the excess is most clearly related.

When we or our Co-Investment Ventures acquire a controlling interest in a previously noncontrolled investment, a gain or loss on revaluation of equity is recognized for the differences between the investment’s carrying value and fair value.

Impairment of Real Estate Related Assets and Investments in Unconsolidated Real Estate Joint Ventures

If events or circumstances indicate that the carrying amount of the property may not be recoverable, we make an assessment of the property’s recoverability by comparing the carrying amount of the asset to our estimate of the undiscounted future operating cash flows expected to be generated over the holding period of the asset including its eventual disposition.  If the carrying amount exceeds the aggregate undiscounted future operating cash flows, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property.  In addition, we evaluate indefinite-lived intangible assets for possible impairment at least annually by comparing the fair values with the carrying values.  The fair value of intangibles is generally estimated by valuation of similar assets.

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

We did not record any impairment losses for the three and nine months ended September 30, 2013 or 2012.

Assets Held for Sale and Discontinued Operations

Assuming we have no involvement after the sale of a multifamily community, the sale is considered a discontinued operation.  In addition, multifamily communities classified as held for sale are also considered a discontinued operation.  We generally consider assets to be held for sale when all significant contingencies surrounding the closing have been resolved,

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which generally corresponds with the actual closing date.  Multifamily communities held for sale are reported at the lower of their carrying value or their estimated fair value less costs to sell.

Cash and Cash Equivalents

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

As of September 30, 2013 and December 31, 2012, cash and cash equivalents include $15.2 million and $19.0 million, respectively, held by individual Co-Investment Ventures that are available only for use in the business of the related Co-Investment Venture.  Cash held by individual Co-Investment Ventures are not restricted to specific uses within those entities, however, the terms of the joint venture agreements limit the ability to distribute those funds to us or use them for our general corporate purposes.  Cash held by individual Co-Investment Ventures is distributed from time to time to the Company and to the other Co-Investment Venture partners in accordance with the applicable Co-Investment Venture governing agreement, which may not be the same as the stated effective ownership interest.  Cash distributions received by the Company from the individual Co-Investment Ventures are then available for our general corporate purposes.

Noncontrolling Interests

Redeemable noncontrolling interests are comprised of our consolidated Co-Investment Venture partners’ interests in multifamily communities where we believe it is probable that we will be required to purchase the partner’s noncontrolling interest.  We record obligations under the redeemable noncontrolling interest initially at the higher of a) fair value, increased or decreased for the noncontrolling interest’s share of net income or loss and equity contributions and distributions or b) the redemption value.  The redeemable noncontrolling interests are temporary equity not within our control, and presented in our consolidated balance sheet outside of permanent equity between debt and equity.  The determination of the redeemable classification requires analysis of contractual provisions and judgments of redemption probabilities.

Non-redeemable noncontrolling interests are comprised of our consolidated Co-Investment Venture partners’ interests in multifamily communities as well as Class A, preferred cumulative, non-voting membership units (“Preferred Units”) issued by subsidiary REITs.  We record these noncontrolling interests at their initial fair value, adjusting the basis prospectively for their share of the respective consolidated investments’ net income or loss or equity contributions and distributions.  These noncontrolling interests are not redeemable by the equity holders and are presented as part of permanent equity.

Income and losses are allocated to the noncontrolling interest holder based on its economic interests.

Transactions involving a partial sale or acquisition of a controlling interest that does not result in a change of control are recorded at carrying value with no recognition of gain or loss.  Any differences between the cash received or paid and the change in noncontrolling interest is recorded as a direct charge to additional paid-in capital.  Transactions involving a partial sale or acquisition of a controlling interest resulting in a change in control are recorded at fair value with recognition of a gain or loss.

Other Assets

Other assets primarily include deferred financing costs, notes receivable, accounts receivable, restricted cash, interest rate caps, prepaid assets and deposits.  Deferred financing costs are recorded at cost and are amortized using a straight-line method that approximates the effective interest method over the life of the related debt.  We evaluate whether notes receivable are loans, investments in joint ventures or acquisitions of real estate based on a review of any rights to participate in expected residual profits and other equity and loan characteristics.  As of and for the nine months ended September 30, 2013 and 2012, all of our notes receivable were appropriately accounted for as loans.  We account for our derivative financial instruments, all of which are interest rate caps, at fair value.  We use interest rate cap arrangements to manage our exposure to interest rate changes.  We have not designated any of these derivatives as hedges for accounting purposes, and accordingly, changes in fair value are recognized in earnings.

Revenue Recognition

Rental income related to leases is recognized on an accrual basis when due from residents or commercial tenants, generally on a monthly basis.  Rental revenues for leases with uneven payments and terms greater than one year are recognized on a straight-line basis over the term of the lease.  Any deferred revenue is classified as a liability on the consolidated balance sheet and recognized on a straight-line basis as income over its contractual term.

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Interest income is generated primarily on notes receivable and cash balances. Interest income is recorded on an accrual basis as earned.

Acquisition Costs

Acquisition costs for business combinations, which are expected to include most consolidated property acquisitions other than land acquisitions, are expensed when it is probable that the transaction will be accounted for as a business combination and the purchase will be consummated. Our acquisition costs related to investments in unconsolidated real estate joint ventures are capitalized as a part of our basis in the investment. Acquisition costs related to unimproved or non-operating land, primarily related to developments, are capitalized.  Pursuant to our Advisory Management Agreement (as defined below), our Advisor is obligated to reimburse us for all investment-related expenses that the Company pursues but ultimately does not consummate.  Prior to the determination of its status, amounts incurred are recorded in other assets.  Acquisition costs and expenses include amounts incurred with our Advisor and with third parties.

Transition Expenses

Transition expenses include expenses related to our transition to self-management, primarily including legal, financial advisors, consultants, costs of the Company’s special committee of the board of directors, comprised of all of the Company’s independent directors (the “Special Committee”), general transition services (primarily related to staffing, information technology and facilities) and payments to the Advisor and its affiliates (collectively “Behringer Harvard”) in connection with the transition to self-management discussed further in Note 13, “Transition to Self-Management.”

Redemptions of Common Stock

We account for the possible redemption of our shares by classifying securities that are convertible for cash at the option of the holder outside of equity.  We do not reclassify the shares to be redeemed from equity to a liability until such time as the redemption has been formally approved by our board of directors.  The portion of the redeemed common stock in excess of the par value is charged to additional paid-in capital.

Income Taxes

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code and have qualified as a REIT since the year ended December 31, 2007.  To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subject to federal income tax at the corporate level.  We are organized and operate in such a manner as to qualify for taxation as a REIT under the Code and intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to remain qualified as a REIT.

We have evaluated the current and deferred income tax related to state taxes, with respect to which we do not have a REIT exemption, and we have no significant tax liability or benefit as of September 30, 2013 or December 31, 2012.

The carrying amounts of our assets and liabilities for financial statement purposes differ from our basis for federal income taxes due to tax accounting in Co-Investment Ventures, fair value accounting for business combinations, straight lining of lease and related agreements and differing depreciation methods.  The primary asset and liability balance sheet accounts with differences are real estate, assets and liabilities held for sale, intangibles, other assets, mortgages and notes payable and deferred revenues, primarily lease revenues, net.

We recognize the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. As of September 30, 2013 and December 31, 2012, we had no significant uncertain tax positions.

Concentration of Credit Risk

We invest our cash and cash equivalents among several banking institutions and money market accounts in an attempt to minimize exposure to any one of these entities.  As of September 30, 2013 and December 31, 2012, we had cash and cash equivalents deposited in certain financial institutions in excess of federally-insured levels.  We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents.

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Income (Loss) per Share

Basic earnings per share is calculated by dividing net earnings available to the Company less dividends to preferred stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share is calculated similarly, except that during periods of income from continuing operations it includes the dilutive effect of the assumed exercise of securities, including the effect of shares issuable under our preferred stock or stock-based incentive plans.  During periods of net loss, the assumed exercise of securities is anti-dilutive and is not included in the calculation of earnings per share.

The Behringer Harvard Multifamily REIT I, Inc. Amended and Restated 2006 Incentive Award Plan (the “Incentive Award Plan”) authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards.  A total of 10 million shares has been authorized and reserved for issuance under the Incentive Award Plan.  As of September 30, 2013, no options have been issued.  For the three and nine months ended September 30, 2013 and 2012, 6,000 shares of the restricted stock have been included in the basic and dilutive earnings per share calculation.

For all years presented, the preferred stock and the convertible stock, with respect to periods each were outstanding, were excluded from the calculation of earnings per share because the effect would not be dilutive. However, based on changing market conditions, the outstanding preferred stock could be dilutive in future periods.

Reportable Segments

Our current business primarily consists of investing in and operating multifamily communities. Substantially all of our consolidated net income (loss) is from investments in real estate properties that we wholly own or own through Co-Investment Ventures, the latter of which may be accounted for under the equity method of accounting. Our management evaluates operating performance on an individual investment level. However, as each of our investments has similar economic characteristics in our consolidated financial statements, the Company is managed on an enterprise-wide basis with one reportable segment.

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts included in the financial statements and accompanying notes to consolidated financial statements.  These estimates include such items as: the purchase price allocations for real estate and other acquisitions; impairment of long-lived assets, notes receivable and equity-method real estate investments; fair value evaluations; earning recognition of note receivable interest income, noncontrolling interests and equity in earnings of investments in unconsolidated real estate joint ventures; depreciation and amortization; and recognition and timing of transition expenses.  Actual results could differ from those estimates.

Reclassifications

Certain financial information on the Consolidated Balance Sheet as of December 31, 2012 has been revised to conform to the current year presentation. As of December 31, 2012, construction costs payable of $9.8 million previously included in the line item accounts payable and other liabilities is now being disclosed separately on the Consolidated Balance Sheet.

3.Business Combinations

Acquisitions of Real Estate and Other Related Party Interests

On July 31, 2013, we acquired the BHMP GP Interest in a related party transaction with an affiliate of the Advisor for $23.1 million in cash, excluding closing costs, of which $9.3 million related to an acquisition of the general partner’s asset management and related fee revenue services and contracts and has been accounted for as a business combination. The remaining $13.8 million was accounted for as an acquisition of a noncontrolling interest in the PGGM CO-JVs. See Note 11, “Noncontrolling Interests” for additional discussion.

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In July 2013, we acquired a 202 unit multifamily community, located in San Francisco, California, from an unaffiliated seller, for an aggregate gross purchase price of $108.7 million, excluding closing costs.

In April 2012, we acquired Pembroke Woods, a 240 unit multifamily community located in Pembroke, Massachusetts, from an unaffiliated seller, for an aggregate gross purchase price of $42.3 million, excluding closing costs.

In February 2012, we settled a dispute concerning the enforceability of an option agreement with the Grand Reserve Property Entity to acquire the Grand Reserve, a 149 unit multifamily community located in Dallas, Texas.  In the settlement, we agreed to acquire the Grand Reserve multifamily community by repaying the outstanding $26.2 million construction loan, assuming the other existing standard operating liabilities and receiving $0.4 million in net cash and all other standard operating assets and liabilities.  In connection with the closing, we contributed the full amount of the cash acquisition consideration in exchange for an additional 32.5% interest, increasing our stated, controlling ownership to 87.5%.  Prior to this transaction, we had note receivables in the Grand Reserve Property Entity with a carrying value of $5.9 million.  In conjunction with this transaction, the note receivables were canceled.

Consolidation of Previously Unconsolidated Multifamily Community

Effective July 31, 2012, we converted a note receivable due from the Veritas Property Entity, with a carrying value of $20.2 million, into an additional equity interest in the Veritas Property Entity and became the general partner of the Veritas Property Entity. As a result of these transactions, we now account for our investment in the Veritas Property Entity on the consolidated basis of accounting. We also recorded a gain on revaluation of equity of approximately $1.7 million.

Business Combination Summary Information

The following tables present certain additional information regarding our business combinations during the nine months ended September 30, 2013 and 2012.

The amounts recognized for major assets acquired and liabilities assumed, including a reconciliation to cash consideration as of the business combination date are as follows (in millions):

	Business Combination of			Business Combination of
	2013 Acquisitions as of			2012 Acquisitions as of
	September 30, 2013			September 30, 2012
Land	$	20.2		$	19.5
Buildings and improvements	88.5			113.7
Cash	0.6			1.5
Intangibles (a)	9.2			2.9
Investment in unconsolidated real estate joint venture	6.4			—
Other assets	0.1			0.3
Mortgage loans payable	—			(37.1		)
Accrued liabilities	(0.9		)	(1.3		)
Noncontrolling interest	(6.8		)	(1.0		)
Other consideration (b)	—			(5.9		)
Net assets	117.3			92.6
Other consolidation/elimination adjustments:
Investment in unconsolidated real estate joint venture	—			(22.4		)
Gain on revaluation of equity for a business combination	—			(1.7		)
Cash consideration	$	117.3		$	68.5

(a) The intangibles for the 2013 acquisitions are $9.2 million of other contractual intangibles, primarily asset management and related fee revenue services and contracts. The intangibles for the 2012 acquisitions are in-place lease intangibles.

(b) Other consideration represents the cancellation of the notes receivable in connection with the acquisition of the Grand Reserve in 2012.

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The amounts recognized for revenues and net loss attributable to common stockholders from the business combination dates to September 30, 2013 and 2012 are as follows (in millions):

	For the Nine Months Ended   September 30, 2013			For the Nine Months Ended   September 30, 2012
Revenues	$	0.6		$	4.7
Acquisition expenses	$	3.3		$	2.5
Depreciation and amortization	$	1.3		$	3.5
Gain on revaluation of equity on a business combination	$	—		$	1.7
Net loss attributable to common stockholders	$	(2.2	)	$	(2.4	)

The following unaudited consolidated pro forma information is presented as if the acquisitions were acquired on January 1, 2012.  The information excludes activity that is non-recurring and not representative of our future activity, primarily transition expenses of $8.2 million and $8.6 million for the three and nine months ended September 30, 2013, acquisition expenses of $3.7 million for the three and nine months ended September 30, 2013, acquisition expenses of $2.5 million for the nine months ended September 30, 2012, respectively, and gain on revaluation of equity on a business combination of $1.7 million for the three and nine months ended September 30, 2012.  The information presented below is not necessarily indicative of what the actual results of operations would have been had we completed these transactions on January 1, 2012, nor does it purport to represent our future operations (amounts in millions, except per share):

	Pro Forma						Pro Forma
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
Revenues	$	48.4		$	44.9		$	140.9		$	128.4
Depreciation and amortization	$	22.7		$	24.4		$	65.8		$	84.4
Loss from continuing operations	$	(2.4	)	$	(7.9	)	$	(6.1	)	$	(39.6	)
Loss from continuing operations per share	$	(0.01	)	$	(0.05	)	$	(0.04	)	$	(0.24	)

We are in the process of finalizing our acquisition allocations for our 2013 acquisition, which are subject to change until our information is finalized, no later than twelve months from the acquisition date.

4.Real Estate Investments

Real Estate Investments and Intangibles and Related Depreciation and Amortization

As of September 30, 2013 and December 31, 2012, major components of our real estate investments and intangibles and related accumulated depreciation and amortization were as follows (in millions):

	September 30, 2013									December 31, 2012
	Buildings			Intangibles						Buildings			Intangibles
	and			In-Place			Other			and			In-Place			Other
	Improvements			Leases			Contractual			Improvements			Leases			Contractual
Cost	$	1,820.7		$	41.9		$	25.5		$	1,849.5		$	43.6		$	16.4
Less: accumulated depreciation and amortization	(173.8		)	(39.0		)	(1.6		)	(123.4		)	(40.1		)	(0.8		)
Net	$	1,646.9		$	2.9		$	23.9		$	1,726.1		$	3.5		$	15.6

Depreciation expense for the three months ended September 30, 2013 and 2012 was approximately $20.1 million and $18.9 million, respectively. Depreciation expense for the nine months ended September 30, 2013 and 2012 was approximately $60.8 million and $56.6 million, respectively.

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Cost of intangibles relates to the value of in-place leases and other contractual intangibles.  As discussed in Note 3, “Business Combinations,” we acquired intangibles of $9.2 million other contractual intangibles, primarily asset management and related fee revenue services and contracts related to our acquisition of the BHMP GP Interest on July 31, 2013. Also included in other contractual intangibles as of September 30, 2013 and December 31, 2012 is $6.8 million related to the use rights of a parking garage and site improvements and $9.5 million of indefinite-lived contractual rights related to land air rights.

Amortization expense associated with our lease and other contractual intangibles for the three months ended September 30, 2013 and 2012 was approximately $0.8 million and $0.7 million, respectively. Amortization expense associated with our lease and other contractual intangibles for the nine months ended September 30, 2013 and 2012 was approximately $1.3 million and $20.4 million, respectively.

Anticipated amortization associated with lease and other contractual intangibles for each of the following five years is as follows (in millions):

	Anticipated Amortization
Year	of Intangibles
October through December 2013	$	1.1
2014	$	4.2
2015	$	2.8
2016	$	1.4
2017	$	1.4

Sales of Real Estate and Discontinued Operations

The following table presents our sales of real estate for the nine months ended September 30, 2013 and 2012 (in millions):

Date of Sale	Multifamily Community	Sales Contract Price		Net Cash Proceeds		Gain on Sale of Real Estate
For the Nine Months Ended September 30, 2013
September 2013	Grand Reserve Orange	$	35.3	$	34.3	$	12.7
June 2013	Halstead	43.5		42.4		12.0
May 2013	Cyan/PDX (“Cyan”)	95.8		95.5		19.2
March 2013	The Reserve at John’s Creek Walk (“Johns Creek”)	37.3		33.3		7.0
	Total	$	211.9	$	205.5	$	50.9
For the Nine Months Ended September 30, 2012
March 2012	Mariposa Lofts Apartments (“Mariposa”)	$	40.0	$	23.9	$	13.3

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The table below includes the results of operations and gains on sale of real estate for the multifamily communities that have been classified as discontinued operations in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012 (in millions):

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2013		2012			2013			2012
Rental revenue	$	0.8	$	4.2		$	8.0		$	13.4
Expenses
Property operating expenses	0.3		1.3			2.6			4.1
Real estate taxes	0.1		0.5			1.0			1.7
Interest expense	—		0.7			1.0			2.4
Depreciation and amortization	0.3		1.9			3.3			7.8
Total expenses	0.7		4.4			7.9			16.0
Loss on early extinguishment of debt	—		—			(0.8		)	—
Income (loss) from discontinued operations	0.1		(0.2		)	(0.7		)	(2.6		)
Income (loss) attributable to noncontrolling interests	—		0.2			(6.9		)	1.6
Income (loss) from discontinued operations attributable to common stockholders	$	0.1	$	—		$	(7.6	)	$	(1.0	)
Gain on sale of real estate	$	12.7	$	—		$	50.9		$	13.3

5.Investment in Unconsolidated Real Estate Joint Venture

Unconsolidated Real Estate Joint Venture Structure

As of September 30, 2013 and December 31, 2012, we have a $14.5 million and $3.0 million, respectively, investment in an unconsolidated joint venture with PGGM.  Our effective ownership in the Custer CO-JV is 55%. Distributions are made pro rata in accordance with ownership interests. The primary asset of the Custer CO-JV is a $14.1 million mezzanine loan secured by the development of a 444 unit multifamily community in Allen, Texas, a suburb of Dallas.  The mezzanine loan, which as of September 30, 2013 has been fully funded, has an interest rate of 14.5% and matures in 2015. 

Prior to July 31, 2012, we had one investment on the equity method of accounting, the Veritas Property Entity.  Effective July 31, 2012, we converted a notes receivable due from the Veritas Property Entity into an additional equity interest in the Veritas Property Entity and became the general partner of the Veritas Property Entity.  As a result of these transactions, effective as of July 31, 2012, we account for our investment in the Veritas Property Entity on the consolidated basis of accounting, and recorded a gain on revaluation of equity of approximately $1.7 million in July 2012.

6.Variable Interest Entities

As of September 30, 2013 and December 31, 2012, we have concluded that we are the primary beneficiary of eight and three VIEs, respectively.  All of these VIEs are Co-Investment Ventures with separate unaffiliated multifamily developers to develop multifamily communities with a total combined 2,300 units, in Austin, Dallas and Houston, Texas, Denver, Colorado, Costa Mesa, California, and Cambridge and Wakefield, Massachusetts.  We entered into these Co-Investment Ventures in 2012 and 2013.  At inception, we had determined that none of the Co-Investment Ventures were VIEs and because we were the general partner of each Co-Investment Venture and had control of their operations and business affairs, we consolidated each Co-Investment Venture.  After separate reconsideration events during 2012 and 2013, all of which were related to capital restructuring, we have concluded that all of these Co-Investment Ventures are now VIEs.  Because these Co-Investment Ventures were previously consolidated, the VIE determination did not affect our financial position, financial operations or cash flows.  Our ownership interest in each of the Co-Investment Ventures based upon contributed capital is 100%.

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Any significant amounts of assets and liabilities related to our consolidated VIEs are identified parenthetically on our accompanying consolidated balance sheets. Three VIEs, which are developing multifamily communities, have closed combined construction financing of $79.4 million during 2013 which will be drawn on during the construction of the developments. As of September 30, 2013, $3.7 million has been drawn under one of the construction loans. The lender has no recourse other than a guaranty provided by the Company for the performance of all terms in the loan agreement with respect to the construction of the project (a completion guaranty). The construction loan is secured by a first mortgage in the development. See Note 9, “Mortgages and Notes Payable” for further information on the debt.  The total assets of the VIEs are $191.2 million and $47.0 million as of September 30, 2013 and December 31, 2012, respectively, $188.6 million and $46.1 million of which is reflected in construction in progress.  Thus far, the Co-Investment Ventures have been capitalized with only cash contributions.

7.Other Assets

The components of other assets are as follows (in millions):

	September 30, 2013		December 31, 2012
Notes receivable, net (a)	$	52.4	$	36.0
Escrows and restricted cash	12.1		10.3
Deferred financing costs, net	9.9		8.5
Resident, tenant and other receivables	5.1		6.2
Prepaid assets, deposits and other assets	7.9		5.0
Interest rate caps	0.3		0.3
Total other assets	$	87.7	$	66.3

(a) Notes receivable include mezzanine and land loans, primarily related to multifamily development projects.  As of September 30, 2013, the weighted average interest rate is 14.5% and the remaining years to scheduled maturity is 2.0 years.

We enter into interest rate cap agreements for interest rate risk management purposes and not for trading or other speculative purposes.  The following table provides a summary of our interest rate caps as of September 30, 2013 (in millions):

Notional amount	$	162.7
Range of LIBOR cap rate	2.0% to 4.0%
Range of maturity dates	2016 to 2017
Estimated fair value	$	0.3

8.Leasing Activity

In addition to multifamily resident units, certain of our consolidated multifamily communities have retail areas, representing approximately 2% of total rentable area of our consolidated multifamily communities.  Future minimum base rental payments due to us under these non-cancelable retail leases in effect as of September 30, 2013 are as follows (in millions): 

	Future Minimum
Year	Lease Payments
October through December 2013	$	1.0
2014	3.8
2015	3.7
2016	3.6
2017	3.6
Thereafter	32.2
Total	$	47.9

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9.Mortgages and Notes Payable

The following table summarizes the carrying amounts of the mortgages and notes payable classified by whether the obligation is ours or that of the applicable consolidated Co-Investment Venture as of September 30, 2013 and December 31, 2012 (amounts in millions and monthly LIBOR at September 30, 2013 is 0.18%):

					As of September 30, 2013
	September 30,		December 31,		Wtd. Average
	2013		2012		Interest Rates	Maturity Dates
Company Level (a)
Fixed rate mortgage payable	$	30.3	$	30.3	3.86%	2018
Variable rate mortgage payable	24.0		24.0		Monthly LIBOR + 2.45%	2014
Variable rate construction loans payable (b)	3.7		—		Monthly LIBOR + 2.25%	2016 to 2017
Fixed rate construction loan payable (c)	—		—		4.31%	2023
Total Company Level	58.0		54.3
Co-Investment Venture Level - Consolidated (d)
Fixed rate mortgages payable	853.3		902.2		3.68%	2015 to 2020
Variable rate mortgage payable	12.3		12.5		Monthly LIBOR + 2.35%	2017
Fixed rate construction loan payable (e)	12.6		—		4.0%	2018
	878.2		914.7
Plus: unamortized adjustments from business combinations	7.4		10.6
Total Co-Investment Venture Level - Consolidated	885.6		925.3
Total consolidated mortgages and notes payable	$	943.6	$	979.6

(a) Company level debt is defined as debt that is a direct or indirect obligation of the Company or its wholly owned subsidiaries.

(b) Includes two loans with total commitments of $48.1 million. As of September 30, 2013, no draws have been made under either loan. These loans include one to two year extension options.

(c)    Includes one loan with a total commitment of $31.3 million.

(d)    Co-Investment Venture level debt is defined as debt that is an obligation of the Co-Investment Venture and

not an obligation or contingency for us.

(e) Includes one loan with a total commitment of $53.5 million.

As of September 30, 2013, $1.6 billion of the net consolidated carrying value of real estate collateralized the mortgages payable.  We believe we are in compliance with all financial covenants as of September 30, 2013.

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As of September 30, 2013, contractual principal payments for our mortgages and notes payable for the five subsequent years and thereafter are as follows (in millions):

			Co-Investment		Total
Year	Company Level		Venture Level		Consolidated
October through December 2013	$	—	$	1.1	$	1.1
2014	24.0		5.6		29.6
2015	0.2		83.6		83.8
2016	4.3		135.8		140.1
2017	0.6		219.9		220.5
Thereafter	28.9		432.2		461.1
Total	$	58.0	$	878.2	936.2
Add: unamortized adjustments from business combinations					7.4
Total mortgages and notes payable					$	943.6

10.Credit Facility Payable

The $150.0 million credit facility matures on April 1, 2017, when all unpaid principal and interest is due.  Borrowing tranches under the credit facility bear interest at a “base rate” based on either the one-month or three-month LIBOR rate, selected at our option, plus an applicable margin which adjusts based on the facility’s debt service requirements. As of September 30, 2013, the applicable margin was 2.08% and the base rate was 0.18% based on one-month LIBOR.  The credit facility also provides for fees based on unutilized amounts and minimum usage.  The unused facility fee is equal to 1% per annum of the total commitment less the greater of 75% of the total commitment or the actual amount outstanding. The minimum usage fee is equal to 75% of the total credit facility times the lowest applicable margin less the margin portion of interest paid during the calculation period.  The loan requires minimum borrowing of $10.0 million and monthly interest-only payments and monthly or annual payment of fees.  We may prepay borrowing tranches at the expiration of the LIBOR interest rate period without any penalty.  Prepayments during a LIBOR interest rate period are subject to a prepayment penalty generally equal to the interest due for the remaining term of the LIBOR interest rate period.

Draws under the credit facility are secured by a pool of certain wholly owned multifamily communities.  We have the ability to add and remove multifamily communities from the collateral pool, pursuant to the requirements under the credit facility agreement. We may also add multifamily communities in our discretion in order to increase amounts available for borrowing.  As of September 30, 2013, $172.3 million of the net carrying value of real estate collateralized the credit facility.  The aggregate borrowings under the credit facility are limited to 70% of the value of the collateral pool, which may be different than the carrying value for financial statement reporting.  As of September 30, 2013, available but undrawn amounts under the credit facility are approximately $138.1 million.

The credit facility agreement contains customary provisions with respect to events of default, covenants and borrowing conditions.  In particular, the credit facility agreement requires us to maintain a consolidated net worth of at least $150.0 million, liquidity of at least $15.0 million and net operating income of the collateral pool to be no less than 155% of the facility debt service cost. Certain prepayments may be required upon a breach of covenants or borrowing conditions.  We believe we are in compliance with all provisions as of September 30, 2013.

11.Noncontrolling Interests

Non-redeemable Noncontrolling Interests

Non-redeemable noncontrolling interests for the Co-Investment Venture partners represent their proportionate share of the equity in consolidated real estate ventures.  Income and losses are allocated to the noncontrolling interest holders based on their effective ownership percentage.  This effective ownership is indicative of, but may differ from, percentages for distributions, contributions or financing requirements.  Each noncontrolling interest is not redeemable by the holder and, accordingly, is reported as equity. 

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As of September 30, 2013 and December 31, 2012, non-redeemable noncontrolling interests consisted of the following, including the direct and non-direct noncontrolling interests (“NCI”) ownership ranges where applicable (in millions):

	September 30, 2013			December 31, 2012
			Effective			Effective
	Amount		NCI %(a)	Amount		NCI %(a)
PGGM Co-Investment Partner (b)	$	149.5	26% to 45%	$	166.2	26% to 45%
MW Co-Investment Partner	161.1		45%	192.6		45%
Other Co-Investment Venture partners	3.5		0% to 10%	5.1		0% to 20%
Subsidiary preferred units	1.4		N/A	1.5		N/A
Total non-redeemable NCI	$	315.5		$	365.4

(a)        Effective noncontrolling percentage is based upon the noncontrolling interest’s share of contributed capital. This effective ownership is indicative of, but may differ from, percentages for distributions, contributions or financing requirements.

(b) As discussed in Note 1, “Organization and Business”, the BHMP Co-Investment Partner was our partner in these Co-Investment Ventures as of December 31, 2012.

Each PGGM CO-JV and MW CO-JV is a separate legal entity formed for the sole purpose of holding its respective investment(s) and obtaining legally separated debt and equity financing.  Each PGGM CO-JV and MW CO-JV is managed by us or a subsidiary of ours, where we have substantial operational control rights.  PGGM CO-JV and MW CO-JV capital contributions and distributions are generally made pro rata in accordance with these ownership interests. Neither of these Co-Investment Venture partners have any rights to put or redeem their ownership interests.  In certain circumstances the governing documents of the PGGM CO-JV or MW CO-JV may require a sale of the Co-Investment Venture or its subsidiary REIT rather than as an asset sale.

Other noncontrolling interests are held by national and regional multifamily developers/owners, where we are the managing partner or member with substantial operational control rights.  Cash flow is generally first distributed to us until certain preferred returns are collected and in some cases until we receive certain or all of our investment.  Excess distributions may then be distributed to these other noncontrolling interests in excess of their share of contributed capital.  These other noncontrolling interests generally have no obligation to make additional capital contributions. For certain of the other noncontrolling interests, the PGGM Co-Investment Partner also participates in the distributions.

Noncontrolling interests also include between 121 to 125  preferred units issued by a subsidiary of each the PGGM CO-JVs and the MW CO-JVs in order for such subsidiaries to qualify as a REIT for federal income tax purposes.  The preferred units pay an annual distribution of 12.5% on their face value of $500 and are senior in priority to all other members’ equity.  The PGGM CO-JVs and MW CO-JVs may cause the subsidiary REIT, at their option, to redeem the preferred units in whole or in part, at any time for cash at a redemption price of $500 per unit, plus all accrued and unpaid distributions thereon to and including the date fixed for redemption, plus a premium per unit generally of $50 to $100 for the first year which declines in value between $0- and $25 per unit each year until there is no redemption premium remaining.  The preferred units are not redeemable by the unit holders and we have no current intent to exercise our redemption option.  Accordingly, these noncontrolling interests are reported as equity.

For the nine months ended September 30, 2013, we paid distributions to noncontrolling interests of $45.3 million of which $19.0 million was related to operating activity.  For the nine months ended September 30, 2012, we paid distributions to noncontrolling interests of $23.4 million, of which $14.1 million was related to operating activity.

In May 2013, we acquired all of the noncontrolling interest in the Cyan CO-JV for cash of $27.9 million. In addition, on July 31, 2013, we acquired the 1% general partnership interest in the BHMP Co-Investment Partner in a related party transaction with an affiliate of the Advisor for $23.1 million in cash, excluding closing costs, of which $13.8 million related to the partial acquisition of an approximate 1% noncontrolling interest in the BHMP Co-Investment Partner. The remaining $9.3 million was accounted for as a business combination. No gain or loss was recognized in recording these transactions, but a net decrease to additional paid in capital of $23.2 million was recorded. The remaining portion was accounted for as a business

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combination. (See Note 3, “Business Combinations” for additional discussion of the BHMP Co-Investment Partner acquisition and Note 4, “Real Estate Investments” for a discussion of the subsequent sale of the Cyan multifamily community.)

Also during 2013, we partially sold a noncontrolling interest in the Cameron CO-JV to PGGM for $7.3 million in cash. No gain or loss was recognized in recording these transactions, but a net increase to additional paid-in capital of $1.5 million was recorded.

During 2012, we separately contributed a total of $25.3 million, net to the Grand Reserve CO-JV and The Cameron CO-JV increasing our controlling indirect financial interests in each entity. No gain or loss was recognized in recording the contributions, but a net decrease to additional paid-in capital of $4.4 million was recorded. Additionally, effective July 31, 2012, we converted a notes receivable due from the Veritas Property Entity into an additional equity interest in the Veritas Property Entity and became the general partner of the Veritas Property Entity, increasing our controlling financial interests in the Veritas Property Entity. A gain on revaluation of equity on a business combination of $1.7 million was recorded in connection with this transaction.

Redeemable Noncontrolling Interests

As of September 30, 2013 and December 31, 2012, redeemable noncontrolling interests (“NCI”) consisted of the following (in millions):

	September 30, 2013			December 31, 2012
			Effective			Effective
	Amount		NCI %(a)	Amount		NCI %(a)
Other Co-Investment Venture partners (b)	$	19.5	0% to 20%	$	8.6	0% to 20%

(a) Effective noncontrolling interest percentage is based upon the noncontrolling interest’s share of contributed capital.  This effective ownership is indicative of, but may differ from, percentages for distributions, contributions or financing requirements. For Co-Investment Ventures where the developer’s equity has been returned, the effective NCI % is shown as zero.

(b) Includes Co-Investment Venture partners other than the MW Co-Investment Partner and the PGGM Co-Investment Partner.

Other Co-Investment Ventures included in redeemable noncontrolling interests represent ownership interests by regional or national multifamily developers, which may require that we pay or reimburse the partners upon certain events.  These amounts include reimbursing partners once certain development milestones are achieved, generally related to entitlements, permits or final budgeted construction costs.They also generally have put options, usually exercisable one year after completion of the development and thereafter, pursuant to which we would be required to acquire their ownership interest at a set price.  These other Co-Investment Ventures also include buy/sell provisions, generally available after the seventh year after completion of the development.  Each of these Co-Investment Ventures is managed by a subsidiary of ours. As manager, we have substantial operational control rights.  These Co-Investment Ventures generally provide that we have a preferred cash flow distribution until we receive certain returns on and of our investment.  Any excess cash flow would then be distributed disproportionately to these noncontrolling interests. All of these developers also have a back end interest, generally only attributable to distributions related to a property sale.  Generally, these noncontrolling interests have no obligation to make any additional capital contributions.

In June 2012, we acquired all of the redeemable, noncontrolling interest related to the Bailey’s Crossing Property Entity for $3.0 million in cash. In connection with this acquisition, the BHMP Co-Investment Partner contributed $1.4 million. No gain or loss was recorded in connection with this transaction but an increase to additional paid-in capital of $1.8 million was recorded.

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12.Stockholders’ Equity

Capitalization

As of September 30, 2013 and December 31, 2012, we had 168.3 million and 167.5 million shares of common stock outstanding, respectively, including 6,000 shares of stock issued to our independent directors for no cash, and 24,969 shares owned by an affiliate of the Advisor issued for cash of approximately $0.2 million.

 We are authorized to issue 124,999,000 shares of preferred stock which may be issued in a variety of series with different attributes.

As of December 31, 2012, we had 1,000 shares of convertible stock owned by Behringer Harvard, issued for cash of $1,000.  In connection with our transition to self-management, Behringer Harvard surrendered all the 1,000 shares of convertible stock on July 31, 2013, which we immediately canceled.

Also in connection with our transition to self-management, on July 31, 2013, we issued 10,000 shares of a new Series A non-participating, voting, cumulative, 7.0% convertible preferred stock, par value $0.0001 per share (the “Series A Preferred Stock”), to Behringer Harvard. The shares of Series A Preferred Stock entitle the holder to one vote per share on all matters submitted to the holders of the common stock, a liquidation preference equal to $10.00 per share before the holders of common stock are paid any liquidation proceeds, and 7.0% cumulative cash dividends on the liquidation preference and any accrued and unpaid dividends.

As determined and limited pursuant to the Articles Supplementary establishing the Series A Preferred Stock, the Series A Preferred Stock will automatically convert into shares of our common stock upon any of the following triggering events: (a) in connection with a listing of our common stock on a national exchange, (b) upon a change of control of the Company or (c) upon election by the holders of a majority of the then outstanding shares of Series A Preferred Stock on or before July 31, 2018. Notwithstanding the foregoing, if a listing occurs prior to December 31, 2016, such listing (and the related triggering event) will be deemed to occur on December 31, 2016 and if a change of control transaction occurs prior to December 31, 2016, such change of control transaction will not result in a change of control triggering event. Upon a triggering event, all of the shares of Series A Preferred Stock will, in total, generally convert into an amount of shares of our common stock equal in value to 15% of the excess of (i) (a) the value per share of our common stock at the time of the applicable triggering event, as determined pursuant to the Articles Supplementary establishing the Series A Preferred Stock and assuming no shares of the Series A Preferred Stock are outstanding, multiplied by the number of shares of common stock outstanding on July 31, 2013, plus (b) the aggregate value of distributions (including distributions constituting a return of capital) paid through such time on the shares of common stock outstanding on July 31, 2013 over (ii) the aggregate issue price of those outstanding shares plus a 7% cumulative, non-compounded, annual return on the issue price of those outstanding shares. In the case of a triggering event based on a listing or change of control only, this amount will be multiplied by another 1.15 to arrive at the conversion value.

Distributions

On March 29, 2012, our board of directors authorized a special cash distribution related to the sale of Mariposa (the “Mariposa Distribution”) in the amount of $0.06 per share of common stock payable to stockholders of record on July 6, 2012.  The Mariposa Distribution was accrued during March 2012 and paid in cash on July 11, 2012. As of September 30, 2013, no other special distributions have been paid or authorized.

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Distributions, including those paid by issuing shares under the DRIP and the Mariposa Distribution for the three and nine months ended September 30, 2013 and 2012 were as follows (amounts in millions):  

	For the Nine Months Ended September 30,
	2013				2012
	Declared(a)		Paid(b)		Declared(a)		Paid(b)
Third Quarter Distributions
Regular distributions	$	14.9	$	14.9	$	14.7	$	14.6
Special cash distribution	—		—		—		10.0
Total	$	14.9	$	14.9	$	14.7	$	24.6
Second Quarter Distributions
Regular distributions	$	14.7	$	14.9	$	14.4	$	18.1
Special cash distribution	—		—		0.1		—
Total	$	14.7	$	14.9	$	14.5	$	18.1
First Quarter Distributions
Regular distributions	$	14.5	$	14.5	$	24.8	$	24.8
Special cash distribution	—		—		9.9		—
Total	$	14.5	$	14.5	$	34.7	$	24.8
Total through September 30
Regular distributions	$	44.1	$	44.3	$	53.9	$	57.5
Special cash distribution	—		—		10.0		10.0
Total	$	44.1	$	44.3	$	63.9	$	67.5

(a)         Represents distributions accruing during the period on a daily basis.

(b)         The regular distributions that accrue each month are paid in the following month.  Amounts paid include both distributions paid in cash and reinvested pursuant to our DRIP.

We calculate annualized rates as if the shares were outstanding for a full year based on a $10 per share purchase price.

The daily distribution amount from January 1, 2012 through the end of the first quarter of 2012 was $0.0016438 per share of common stock, an annualized rate of 6%.  On March 19, 2012, our board of directors authorized distributions at a daily amount of $0.000958904 per share of common stock, an annualized rate of 3.5%, beginning in the month of April 2012.  Our board of directors has authorized the 3.5% annualized distribution rate through December 31, 2013.

Share Redemption Program

From the inception of our share redemption program (“SRP”) in 2008, all redemption requests properly submitted and approved through the first quarter of 2012 were fulfilled.  For the three months ended March 31, 2012, approximately 1.7 million shares of common stock were redeemed at a total consideration of $15.5 million and a weighted average share price of $9.50. 

Effective from April 1, 2012 through February 28, 2013, our board of directors suspended our SRP.  In connection with its determination of the estimated value of our shares effective March 1, 2013, our board of directors modified and reinstated our SRP, which permits our stockholders to sell their shares back to us subject to the significant conditions and limitations of the program.  The modified and reinstated SRP was effective as of March 1, 2013, and the first time period redemptions were considered under the modified and reinstated SRP was at the end of the second quarter 2013.

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As modified, for redemptions other than those sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility (“Ordinary Redemptions”), the purchase price per share redeemed under our SRP will equal the lesser of (i) 85% of the current estimated share value pursuant to our valuation policy and (ii) the average price per share the original purchaser or purchasers of shares paid to us for all of their shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock) (the “Original Share Price”) less the aggregate of any special distributions so designated by our board of directors, distributed to stockholders prior to the redemption date and declared from the date of first issue of such redeemed shares (the “Special Distributions”).  For redemptions sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility (“Exceptional Redemptions”), the purchase price per share redeemed under our SRP will equal the lesser of: (i) the current estimated share value pursuant to our valuation policy and (ii) the Original Share Price less any Special Distributions.  A quarterly funding limit has been established of $7 million per quarter (which our board of directors may increase or decrease from time to time).  Redemptions are also limited by our charter to no more than 5% of the weighted average of shares outstanding during the preceding twelve months period immediately prior to the date of redemption.

In July 2013, we redeemed approximately 904,393 common shares at an average price of $9.88 per share for $8.9 million. In September 2013, we redeemed approximately 780,569 common shares at an average price of $8.97 per share for $7.0 million. We fulfilled all Exceptional Redemptions requests properly submitted in accordance with the terms of the SRP. As of September 30, 2013, there were unfulfilled Ordinary Redemption requests of approximately 2.6 million common shares, for approximately $21.9 million.

13.Transition to Self-Management

On July 31, 2013 (the “Initial Closing”), we entered into a series of agreements and amendments to our existing agreements and arrangements with Behringer Harvard, beginning the process of becoming self-managed, including a master modification agreement, an amended and restated advisory management agreement, an amended and restated property management agreement, an amended and restated license agreement, a transition services agreement, and a registration rights agreement, and setting forth various terms of and conditions to the modification of the business relationships between us and Behringer Harvard. We collectively refer to these agreements as the “Self-Management Transition Agreements.” With the entry into these transactions and the progression to self-management, over time, the Company expects to incur higher direct costs related to compensation and other administration and less reliance and cost related to related party management agreements.

At the Initial Closing, Behringer Harvard waived the non-solicitation and non-hire provisions contained in the agreements with the Company with respect to five executive officers who previously provided services on our behalf as employees of Behringer Harvard. As noted in Note 1, “Organization and Business,” these five executives became our employees on August 1, 2013. The completion of the remainder of the self-management transactions will occur at a second closing (the “Self-Management Closing”), which is expected to occur on June 30, 2014. The obligations of the parties to consummate the self-management transactions are subject to certain limited conditions.

As discussed in Note 12, “Stockholders’ Equity,” we issued 10,000 shares of a new Series A non-participating, voting, cumulative, 7.0% convertible preferred stock, par value $0.0001 per share (the “Series A Preferred Stock”), to Behringer Harvard at the Initial Closing. As part of the consideration for issuing the Series A Preferred Stock, Behringer Harvard surrendered all existing 1,000 convertible shares of non-participating, non-voting stock, par value $0.0001 per share, of the Company, which we immediately canceled.

As discussed in Note 3, “Business Combinations”, at the Initial Closing, we acquired from Behringer Harvard the BHMP GP Interest in the BHMP Co-Investment Partner. The purchase price for the BHMP GP Interest was $23.1 million. This acquisition entitles us to a 1% ownership interest and a promoted interest in the cash flows of the BHMP Co-Investment Partner and the advisory and incentive fees specified in the BHMP Co-Investment Partner agreements that Behringer Harvard would have otherwise been entitled to receive.

At the Initial Closing, we also paid Behringer Harvard $2.5 million as reimbursement for its costs and expenses related to the negotiation of the Self-Management Transition Agreements. These expenses are in addition to the expenses that we have incurred on our own behalf for legal and financial advisors in connection with this transaction, which were approximately $1.2 million.

Commencing at the Initial Closing and lasting through the six month anniversary of the Self-Management Closing, Behringer Harvard will be entitled to additional fees with respect to any new investment arrangements between us and certain specified funds or programs pursuant to which we receive an asset management or any similar fee and/or a promote interest or

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similar security, excluding PGGM (each, a “New Platform”). For each New Platform with certain specified potential future investors, Behringer Harvard will be entitled to a fee equal to 2.5% of the total aggregate amount of capital committed by such investor or its affiliates. We will not be obligated to pay any fees with respect to a New Platform unless and until the Self-Management Closing occurs.

Commencing at the Initial Closing, the Self-Management Transition Agreements provide that in certain circumstances, Behringer Harvard will rebate to us, or may provide us a credit with respect to, (a) acquisition fees paid pursuant to the amended and restated advisory management agreement and (b) acquisition and advisory fees and development fees paid pursuant to the Self-Management Transition Agreements, in the event that certain existing investments are subsequently structured as a joint venture or co-investment.

In addition, during the period from the Initial Closing through September 30, 2014, Behringer Harvard will provide general transition services in support of our transition to self-management. For these services we will pay Behringer Harvard (a) the sum of approximately $0.4 million per month during the period beginning on the Initial Closing and ending on September 30, 2014 and (b) an amount equal to $1.25 million at the Self-Management Closing.

Upon the Self-Management Closing, the remaining professionals and staff providing advisory and property management services that are currently employed by Behringer Harvard exclusively for our benefit will also become our employees, completing a major step in the self-management transition. From now through the Self-Management Closing, Behringer Harvard will continue to be paid fees and reimbursements under the terms of amended advisory and property management agreements that include a reduction of certain fees and expenses paid to Behringer Harvard under the prior agreements, which are described in Note 16, “Related Party Arrangements.” Regarding asset management fees and property management expense reimbursements, we will receive a monthly reduction of approximately $150,000 and $50,000, respectively, from the amount that otherwise would have been payable, through June 30, 2014.

At the Self-Management Closing, we will pay Behringer Harvard $3.5 million for certain intangible assets, rights and contracts. Behringer Harvard will also transfer to us certain furnishings, fixtures and equipment.

From the Initial Closing and through and following the Self-Management Closing, certain fees generally similar to fees under the amended and restated advisory management agreement as described in Note 16, “Related Party Arrangements” will be due with respect to acquisitions, financing and asset management. Regarding acquisition and advisory fees, we will pay the Advisor a fee (1) at the current rate of 1.75% of the defined costs for acquisitions that were identified and agreed to as of the Initial Closing and (2) at a rate of 1.575% of the defined costs for other acquisitions generally through the Self-Management Closing, but which may also include acquisitions approved prior to the Self-Management Closing that have closed within six months following the Self-Management Closing. The non-accountable acquisition expense reimbursement of 0.25% was not changed. Regarding debt financing fees, debt financings projected and identified as of the Initial Closing will continue to incur fees at a rate of 1% and other debt financings will incur fees at a rate of 0.9%. In addition, we will reimburse the Advisor for certain additional joint venture financing expenses paid to third parties which were previously included in the debt financing fee. After the Self-Management Closing, the Advisor will provide the debt financing services through June 30, 2015.

Behringer Harvard will also provide shareholder services for an initial two year term, commencing on the Self-Management Closing at a cost to us based on the then monthly number of stockholder accounts. We estimate the monthly amount based on current stockholder accounts to be approximately $0.1 million. The monthly number of stockholder accounts is subject to adjustments based on future activity related to our DRIP and SRP. In addition, we will pay approximately $0.3 million over the term of the agreement with Behringer Harvard for a limited right to use certain office space. We may also contract with Behringer Harvard for additional services.

In addition to the above transactions, the Company incurred other expenses related to our transition to self-management, primarily related to Special Committee and Company legal and financial advisors and general transition services (primarily staffing, information technology and facilities). The components of our transition expenses are as follows (in millions):

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	For the Three Months Ended September 30, 2013		For the Nine Months Ended September 30, 2013
Special Committee and Company legal and financial advisors	$	0.3	$	0.7
General transition services:
Behringer Harvard	7.7		7.7
Other service providers	0.2		0.2
Total transition expenses	$	8.2	$	8.6

As of September 30, 2013, $6.9 million of the transition costs was an accrued liability to Behringer Harvard. We incurred no transition expenses in 2012.

14.Commitments and Contingencies

All of our Co-Investment Ventures include buy/sell provisions.  Under most of these provisions and during specific periods, a partner could make an offer to purchase the interest of the other partner and the other partner would have the option to accept the offer or purchase the offering partner’s interest at that price.  As of September 30, 2013, no such buy/sell offers are outstanding.

In the ordinary course of business, the multifamily communities in which we have investments may have commitments to provide affordable housing. Under these arrangements, we generally receive from the resident a below market rent, which is determined by a local or national authority. In certain arrangements, a local or national housing authority makes payments covering some or substantially all of the difference between the restricted rent paid by residents and market rents. In connection with our acquisition of The Gallery at NoHo Commons, we assumed an obligation to provide affordable housing through 2048. As partial reimbursement for this obligation, the California housing authority will make level annual payments of approximately $2.0 million through 2028 and no reimbursement for the remaining 20-year period. We may also be required to reimburse the California housing authority if certain operating results are achieved on a cumulative basis during the term of the agreement. At the acquisition, we recorded a liability of $14.0 million based on the fair value of the terms over the life of the agreement.  In addition, we will record rental revenue from the California housing authority on a straight-line basis, deferring a portion of the collections as deferred lease revenues. As of September 30, 2013 and December 31, 2012, we have approximately $16.0 million and $17.5 million, respectively, of carrying value for deferred lease revenues related to The Gallery at NoHo Commons.

As of September 30, 2013, we have entered into construction and development contracts with $595.4 million remaining to be paid.  These construction costs are expected to be paid during the completion of the development and construction period, generally within 24 months.

See Note 13, “Transition to Self-Management” for discussion of commitments of the Company regarding its transition to self-management which commenced on July 31, 2013.  

15.Fair Value of Derivatives and Financial Instruments

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 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

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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.

In connection with our measurements of fair value related to many real estate assets, noncontrolling interests, financial instruments and contractual rights, there are generally not available observable market price inputs for substantially the same items.  Accordingly, each of these are classified as Level 3, and we make assumptions and use various estimates and pricing models, including, but not limited to, the estimated cash flows, discount and interest rates used to determine present values, market capitalization rates, sales of comparable investments, rental rates, costs to lease properties, useful lives of the assets, the cost of replacing certain assets, and equity valuations. These estimates are from the perspective of market participants and will also be obtained from independent third-party appraisals. However, we are responsible for the source and use of these estimates. A change in these estimates and assumptions could be material to our results of operations and financial condition.

Financial Instruments Carried at Fair Value on a Recurring Basis

We currently use interest rate cap arrangements with financial institutions to manage our exposure to interest rate changes for our loans that utilize floating interest rates.  The fair value of these interest rate caps are determined using Level 2 inputs as defined above.  These inputs include quoted prices for similar interest rate cap arrangements, including consideration of the remaining term, the current yield curve, and interest rate volatility.  Because our interest rate caps are on standard, commercial terms with national financial institutions, credit issues are not considered significant.  As of September 30, 2013 and December 31, 2012, we have $0.3 million of interest rate caps that are carried at fair value on a recurring basis.  See further discussion of these interest rate caps in Note 7, “Other Assets.”

The following fair value hierarchy table presents information about our assets measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 (in millions):

	Balance Sheet Location	Level 1		Level 2		Level 3		Fair Value as of Reporting Date		Gain (Loss) for the Three Months Ended September 30,			Gain (Loss) for the Nine Months Ended September 30,
Assets
Interest rate caps	Other assets
As of September 30, 2013		$	—	$	0.3	$	—	$	0.3	$	(0.2	)	$	—
As of December 31, 2012		$	—	$	0.3	$	—	$	0.3	$	(0.3	)	$	(0.7	)

Nonrecurring Basis — Fair Value Adjustments

For the three and nine months ended September 30, 2013, we had no fair value adjustments on a nonrecurring basis.

As discussed in Note 3, “Business Combinations,” in July 2012, we consolidated the Veritas Property Entity and recognized a gain of $1.7 million related to the revaluation of our equity interest for the difference between our carrying value in the unconsolidated real estate joint venture and the fair value of our ownership interest prior to consolidation. The investment in unconsolidated real estate joint venture was recorded at its fair value on July 31, 2012 based on the fair value of the investment’s underlying assets and liabilities. Fair value of real estate was determined based on market capitalization rates, comparable sales and forecasted operations which include estimates of rental rates, costs to lease, and operating expenses. Fair value of the mortgage loan payable was determined based on market pricing, primarily market interest rates and other market terms as of July 31, 2012. All other assets and liabilities were reviewed to determine their fair value based on applicable market factors. All of these estimates were from the perspective of market participants. The nonrecurring fair value measurement of the investment in unconsolidated real estate joint venture related to the consolidation of the Veritas Property Entity was considered a Level 3 input under 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 three and nine months ended September 30, 2012 (in millions):

For the Three and Nine Months Ended September 30, 2012	Level 1		Level 2		Level 3		Total Fair Value		Gain (Loss)
Assets
Investment in unconsolidated real estate joint venture:
Veritas Property Entity	$	—	$	—	$	24.8	$	24.8	$	1.7

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Financial Instruments Not Carried at Fair Value

Financial instruments held as of September 30, 2013 and December 31, 2012 and not measured at fair value on a recurring basis include cash and cash equivalents, short-term investments, notes receivable, credit facility payable and mortgages and notes payable.  With the exception of our credit facility payable and mortgages and notes payable, the financial statement carrying amounts of these items approximate their fair values due to their short-term nature.  Because the credit facility payable bears interest at a variable rate and has a prepayment option, we believe its carrying amount approximates its fair value.

Estimated fair values for mortgages and notes payable have been determined using market pricing for similar mortgages payable, which are classified as Level 2 in the fair value hierarchy.  Carrying amounts and the related estimated fair value of our mortgages and notes payable as of September 30, 2013 and December 31, 2012 are as follows (in millions):  

	September 30, 2013				December 31, 2012
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Mortgages and notes payable	$	943.6	$	917.2	$	979.6	$	991.8

16.Related Party Arrangements

From our inception to July 31, 2013, we had no employees, were externally managed by the Advisor and were supported by related party service agreements, as further described in the following paragraphs.  Through July 31, 2013, we exclusively relied on the Advisor and its affiliates to provide certain services and personnel for management and day-to-day operations, including advisory services performed by the Advisor and property management services provided by BHM Management and its affiliates. 

Effective July 31, 2013, we entered into a series of agreements with the Advisor and its affiliates in order to begin our transition to self-management. On August 1, 2013, we hired five executives who were previously employees of the Advisor. In addition to their management responsibilities, these five executives will lead the Company in completing its transition to self-management. See further discussion of the transaction and amounts paid to Behringer Harvard in relation to the transition at Note 13, “Transition to Self-Management.”

Upon the Self-Management Closing, the remaining professionals and staff providing advisory and property management services that are currently employed by Behringer Harvard exclusively for our benefit will also become our employees, completing a major step in the self-management transition. From now through the Self-Management Closing, Behringer Harvard will continue to be paid fees and reimbursements under the terms of amended advisory and property management agreements that include a reduction of certain fees and expenses paid to Behringer Harvard under the prior agreements as discussed further below. At the Self-Management Closing, the amended advisory and property management will effectively be terminated (with the property management agreement being assigned to us) and except as otherwise noted, our obligation to pay fees and reimbursement costs will cease.

The Advisor continues to provide us with day-to-day management services pursuant to our advisory management agreement (the “Advisory Management Agreement”), as it has been amended and restated. Our board of directors has a duty to evaluate the performance of our Advisor annually before the parties can agree to renew the agreement. The Advisory Management Agreement will currently expire on June 30. 2014, unless extended or renewed. Below we describe the principal terms of the Advisory Management Agreement.

Prior to July 31, 2013, the Advisor and its affiliates received acquisition and advisory fees of 1.75% of (1) the contract purchase price paid or allocated in respect of the development, construction or improvement of each asset acquired directly by us, including any debt attributable to these assets, or (2) when we make an investment indirectly through another entity, our pro rata share, based on our stated or back-end ownership percentage, of the gross asset value of real estate investments held by that entity. Fees due in connection with a development or improvements are based on amounts approved by our board of directors and reconciled to actual amounts at the completion of the development or improvement.  The Advisor and its affiliates also received a fee based on 1.75% of the funds advanced in respect of a loan or other investment. Effective August 1, 2013, the rate of 1.75% remains unchanged for acquisitions that were identified and agreed to as of the Initial Closing. For other acquisitions, the rate is reduced to 1.575% of the defined costs.

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Additionally, the Advisor receives a non-accountable acquisition expense reimbursement in the amount of 0.25% of (1) the funds paid for purchasing an asset, including any debt attributable to the asset, plus the funds budgeted for development, construction or improvement in the case of assets that we acquire and intend to develop, construct or improve, and (2) funds advanced in respect of a loan or other investment.  We will also pay third parties, or reimburse the Advisor, for any investment-related expenses due to third parties in the case of a completed investment, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, third-party brokerage or finder’s fees, title insurance, premium expenses and other closing costs.  In addition, to the extent our Advisor or its affiliates directly provide services formerly provided or usually provided by third parties, including, without limitation, accounting services related to the preparation of audits required by the SEC, property condition reports, title services, title insurance, insurance brokerage or environmental services related to the preparation of environmental assessments in connection with a completed investment, the direct employee costs and burden to our Advisor of providing these services are acquisition expenses for which we reimburse our Advisor. In addition, acquisition expenses for which we reimburse our Advisor include any payments made to (1) a prospective seller of an asset, (2) an agent of a prospective seller of an asset, or (3) a party that has the right to control the sale of an asset intended for investment by us that are not refundable and that are not ultimately applied against the purchase price for such asset. Except as described above with respect to services customarily or previously provided by third parties, our Advisor is responsible for paying all of the expenses it incurs associated with persons employed by the Advisor to the extent dedicated to making investments for us, such as wages and benefits of the investment personnel. Our Advisor is also responsible for paying all of the investment-related expenses that we or our Advisor incur that are due to third parties or related to the additional services provided by our Advisor as described above with respect to investments we do not make, other than certain non-refundable payments made in connection with any acquisition.

For the three and nine months ended September 30, 2013, the Advisor earned acquisition and advisory fees, including the acquisition expense reimbursement, of approximately $9.7 million and $17.5 million, respectively, and we capitalized approximately $7.5 million and $15.7 million, respectively, of such fees to our development projects as construction in progress. For the three and nine months ended September 30, 2012, the Advisor earned acquisition and advisory fees, including the acquisition expense reimbursement, of approximately $1.8 million and $5.6 million, respectively, and we capitalized approximately $1.8 million and $3.3 million, respectively, of such fees to our development projects as construction in progress.  As of September 30, 2013, $4.4 million of acquisition and advisory fees related to developments, including the acquisition expense reimbursement, were subject to final reconciliation to actual amounts as described above.

Prior to July 31, 2013, the Advisor received debt financing fees of 1% of the amount available to us under debt financing which was originated, assumed or refinanced by or for us. Subsequent to July 31, 2013, the Advisor will continue to receive debt financing fees at a rate of 1% on debt financings identified as of the Initial Closing and other debt financings will incur fees at a rate of 0.9%. The Advisor may pay some or all of these fees to third parties with whom it subcontracts to coordinate financing for us.  For the three months ended September 30, 2013 and 2012, our Advisor has earned debt financing fees of approximately $0.5 million and $0.1 million, respectively.  For the nine months ended September 30, 2013 and 2012, our Advisor earned debt financing fees of approximately $1.1 million and $1.2 million, respectively.

The Advisor receives a monthly asset management fee for each real estate related asset held by us.  The monthly asset management fee is equal to 1/12th of 0.50% of the sum of the higher of the cost of investment or the value of the investment for each and every asset. Prior to July 1, 2013, the Advisor, although under no contractual obligation to do so, waived the difference between asset management fees calculated on the basis of appraised value of our investments and asset management fees calculated on the basis of cost of our investments. Effective July 1, 2013, the Advisor is no longer waiving this difference. Beginning August 1, 2013, we receive a monthly reduction of $150,000 per month from the amount that otherwise would have been paid in asset management fees in recognition of the transfer of the executives to the Company and the associated reduction in the duties of the Advisor.  

For the three months ended September 30, 2013 and 2012, our Advisor earned asset management fees of approximately $1.9 million and $1.6 million, respectively. For the nine months ended September 30, 2013 and 2012, our Advisor earned asset management fees of approximately $5.6 million and $4.7 million, respectively.

We will pay a development fee to our Advisor in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project; provided, however, we will not pay a development fee to an affiliate of our Advisor if our Advisor or any of its affiliates elects to receive an acquisition and advisory fee based on the cost of such development. Our Advisor has earned no development fees since our inception.

Property management services are provided by BHM Management and its affiliates through a property management agreement (the “Property Management Agreement”) for multifamily communities with respect to which we have control over

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the selection of the property manager and choose to hire BHM Management.  The Property Management Agreement expires on June 30, 2015.

Property management fees are equal to 3.75% of gross revenues.  In the event that we contract directly with a non-affiliated third party property manager in respect to a property, we pay BHM Management or its affiliates an oversight fee equal to 0.5% of gross rental revenues of the property managed.  In no event will we pay both a property management fee and an oversight fee to BHM Management or its affiliates with respect to a particular property. We reimburse certain costs and expenses incurred by BHM Management on our behalf, including the wages and salaries and other employee-related expenses of all on-site employees of BHM Management and other out-of-pocket expenses that are directly related to the management of specific properties. Beginning August 1, 2013, we receive a monthly reduction of $50,000 per month in property management expense reimbursements.

For the three months ended September 30, 2013 and 2012, BHM Management or its affiliates earned property management fees, net of expenses to third party property managers but including reimbursements to BHM Management, of $5.8 million and $5.4 million, respectively. For the nine months ended September 30, 2013 and 2012, BHM Management or its affiliates earned property management fees, net of expenses to third party property managers but including reimbursements to BHM Management, of $17.5 million and $15.5 million, respectively.

As part of our reimbursement of administrative expenses, we reimburse the Advisor for any direct expenses and costs of salaries and benefits of persons employed by the Advisor performing advisory services for us, provided, however, we will not reimburse the Advisor for personnel and related costs incurred by the Advisor in performing services under the Advisory Management Agreement to the extent that the employees perform services for which the Advisor receives a separate fee other than with respect to acquisition services formerly provided or usually provided by third parties. We also do not reimburse our Advisor for the salary or other compensation of our executive officers who are employed by our Advisor or its affiliates. 

For the three months ended September 30, 2013 and 2012, the Advisor was reimbursed approximately $0.5 million and $0.6 million, respectively. For the nine months ended September 30, 2013 and 2012, the Advisor was reimbursed approximately $1.3 million and $1.6 million, respectively. As of September 30, 2013 and December 31, 2012, our payables to the Advisor and its affiliates were $8.0 million and $1.3 million, respectively. The payable at September 30, 2013 includes $6.9 million related to the transition to self-management.

17.Supplemental Disclosures of Cash Flow Information

Supplemental cash flow information is summarized below (amounts in millions):

	For the Nine Months Ended   September 30,
	2013			2012
Supplemental disclosure of cash flow information:
Interest paid, net of amounts capitalized of $6.7 million and $1.6 million in 2013 and 2012, respectively	$	20.9		$	25.2
Non-cash investing and financing activities:
Acquisition of controlling interests in business combinations with no consideration paid:
Assets acquired	$	—		$	(38.1	)
Liabilities assumed	$	—		$	37.3
Noncontrolling interests	$	—		$	1.0
Mortgage payable assumed by purchaser of asset held for sale	$	—		$	(15.8	)
Charge to additional paid-in capital in connection with an acquisition of a noncontrolling interest in excess of cash consideration	$	—		$	2.6
Notes receivable canceled in connection with acquisition of real estate	$	4.9		$	5.9
Acquisition of a noncontrolling interest	$	9.0		$	—
Sale of a noncontrolling interest	$	(1.1	)	$	—
Transfer of real estate from construction in progress to operating real estate	$	(37.5	)	$	—
Stock issued pursuant to our DRIP	$	20.6		$	27.1
Distributions payable - regular	$	4.9		$	4.8
Construction costs and other related payables	$	35.8		$	8.3

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18.Subsequent Events

We have evaluated subsequent events for recognition or disclosure in our consolidated financial statements and noted no subsequent events that would require an adjustment to the consolidated financial statements or additional disclosures, other than the ones disclosed herein.

Distributions Paid

On October 1, 2013, we paid total distributions of approximately $4.9 million, of which $2.3 million was cash distributions and $2.5 million was funded by issuing shares pursuant to our DRIP, relating to distributions declared each day in the month of September 2013.  On November 1, 2013, we paid total distributions of approximately $5.0 million, of which $2.4 million was cash distributions and $2.6 million was funded by issuing shares pursuant to our DRIP, relating to distributions declared each day in the month of October 2013.

 * * * * *

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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 consolidated financial statements 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 Multifamily REIT I, Inc. and its subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including, but not limited to, our ability to make accretive investments, our ability to generate cash flow to support cash distributions to our stockholders, our ability to obtain favorable debt financing, our ability to secure leases at favorable rental rates, our assessment of market rental rate trends, capital markets, 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 Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 1, 2013, in Part II, Item 1A, “Risk Factors” in our Quarterly Report on Form 10-Q filed with the SEC on August 14, 2013, and the factors described below:

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

• our ability to make accretive investments in a diversified portfolio of assets;

• future changes in market factors that could affect the ultimate performance of our development projects, including but not limited to delays in obtaining all necessary entitlements, increased construction costs, plan or design changes, schedule delays, availability of construction financing, performance of developers, contractors and consultants and growth in rental rates and operating costs;

• the availability of cash flow from operating activities for distributions;

• 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 obtain debt financing at favorable terms or a failure to satisfy the conditions and requirements of that debt;

• our ability to secure resident leases at favorable rental rates;

• our ability to successfully transition to a self-managed company;

• our ability to retain our executive officers and other key personnel, whether employees of ours, our advisor, our property manager or their affiliates;

• conflicts of interest arising out of our relationships with our advisor and its affiliates;

• unfavorable changes in laws or regulations impacting our business, our assets or our key relationships; 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 or false.  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

34

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 agreements filed as exhibits to this Quarterly Report on Form 10-Q have been included to provide security holders with information regarding their terms.  They are not intended to provide via their terms any other factual information about us.  The representations, warranties, and covenants made by us in any such agreement are made solely for the benefit of the parties to the agreement as of the specific dates, including, in some cases, for the purpose of allocating risk among the parties to the agreement, may be subject to limitations agreed upon by the contracting parties 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.  Any mention or description of any document contained herein does not purport to be complete and is qualified in its entirety by reference to such agreements.

Overview

General

We were incorporated on August 4, 2006 as a Maryland corporation and operate as a real estate investment trust (“REIT”) for federal income tax purposes. We make investments in, develop and operate high quality multifamily communities that we believe have desirable locations, personalized amenities, and high quality construction. We began making investments in multifamily communities in April 2007.  As of September 30, 2013, all of our investments have been in multifamily communities located in the top 50 metropolitan statistical areas located in the United States (“MSA”).  We invest in multifamily communities that may be wholly owned by us or held through joint venture arrangements with institutional or other real estate investors which we define as “Co-Investment Ventures” or “CO-JVs.”

We have investments in 56 multifamily communities as of September 30, 2013.  Of the 56 multifamily communities, we wholly own nine multifamily communities and four debt investments, consisting of mezzanine and land loans, for a total of 13 wholly owned investments. The remaining 43 multifamily communities are held through Co-Investment Ventures, all reported as consolidated but one, which is reported on the equity method of accounting.  The one unconsolidated multifamily community holds a debt investment. We have funded these investments and intend to fund future investments with a combination of sources, including the remaining proceeds from the primary portion of our initial public offering (the “Initial Public Offering”), mortgage debt and unsecured or secured debt facilities.  As discussed below, we have and will continue to utilize available Co-Investment Ventures when it is favorable for us.

Our investment strategy is designed to provide our stockholders with a diversified portfolio, and our management and board of directors have extensive experience in investing in numerous types of real estate, loans and other investments to execute this strategy. We intend to focus on acquiring and developing high quality multifamily communities that will produce increasing rental revenue and will appreciate in value within our targeted life. Our targeted communities include existing “core” properties, which we define as properties that are already stabilized and producing rental income, as well as properties in various phases of development, redevelopment, lease up or repositioning which we intend to transition to core properties.  Further, we may invest in other types of commercial real estate, real estate-related securities and mortgage, bridge, mezzanine, land or other loans, or in entities that make investments similar to the foregoing. Although we intend to primarily invest in real estate assets located in the United States, in the future, we may make investments in real estate assets located outside the United States.

Our multifamily community investment strategy concentrates on multifamily communities located in the top 50 MSAs across the United States. The U.S. Census population estimates are used to determine the largest MSAs. Our top 50 MSA strategy focuses on acquiring communities and other real estate assets that provide us with broad geographic diversity.  We believe these types of investments, particularly those in submarkets with significant barriers of entry, are in demand by institutional investors which can result in better exit pricing.  We also believe that economic conditions in the major U.S. metropolitan markets will continue to provide adequate demand for properly positioned multifamily communities; such conditions include job and salary growth to support revenue growth and household formation, lifestyle trends that attract renters, as well as higher single-family home pricing and constrained credit which tends to increase the supply of renters.

Investments in multifamily communities have benefited from changing demographic and finance trends. These demographic trends include the echo-boomer generation coming of age and entering the rental market, growth in non-traditional households, and increased immigration, all groups that have high proportions of renters. Demand for multifamily communities is also affected by tighter standards for single family financing where changes in underwriting have affected the

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cost, availability and affordability of single family homes.  Consequently, single family home ownership has declined from peaks in the last decade.  Accordingly, the multifamily sector has experienced increased rental rates and occupancy, particularly in the last two years.  While rental rates may eventually reach affordability limits, we believe these trends will still be favorable for multifamily demand in the foreseeable future as the key demographic population increases and single family housing options continue to be more restrictive.  However, changes in these factors could affect the stability and magnitude of these trends and can significantly affect our strategy, both favorably and unfavorably. 

In addition, the supply of new multifamily communities has been a favorable factor.  From the onset of the recession in 2008 through the last year or so, completed multifamily units coming into the market were less than long term trends. In the past year, supply trends have changed, particularly related to permit activity and construction starts. Several local markets are now approaching or even exceeding historical averages.  Because the period required to develop new multifamily communities is 18 to 36 months, we still expect there will continue to be an overall favorable supply position for the next two to three years. In addition, for many of the MSAs where we have an investment presence, local economic growth supports the new supply and the supply is generally on track of where it would have been if not for the recession.

We have and expect to continue to utilize Co-Investment Ventures in our investment strategy. Co-Investment Ventures’ equity allows us to expand the number and size of our investments, allowing us to obtain interests in multifamily communities we might otherwise not have access to. With a larger portfolio of investments we believe we are also diversifying and managing our risk.  Accordingly, we have used Co-Investment Ventures in many of our different types of investments, including stabilized and development communities and loan investments.

We currently have uninvested proceeds raised from our Initial Public Offering, which we are seeking to invest on attractive terms.  In the current acquisition environment, we believe that investing in multifamily developments may be more attractive than investing in stabilized multifamily communities. In particular, investing in developments is projected to allow ownership at a lower cost per unit and higher stabilized yield. Competition for new developments is increasing but our available liquidity may be a competitive advantage in sourcing new investments. Developments also provide an advantage due to updated amenities resulting in higher resident appeal and in fewer capital expenditures as compared to older multifamily communities.

In pursuing a development focus, we will generally partner with experienced developers and obtain guaranteed maximum construction contracts whenever possible, where we will provide all or substantially all of the equity capital. The developers will receive a promoted interest after we receive certain minimum annual returns. We have or generally expect to have substantial control over property operations, financing and sale decisions, but the developers may have rights to sell their interests at a set price after a prescribed period, usually one or two years after substantial completion.

The decision to focus primarily on developments rather than acquisitions will affect our near-term operating cash flow. Developments require a period to entitle, permit, plan, construct and lease up before realizing cash flow from operations. We will attempt to minimize these risks by selecting development projects that have already completed a portion of the early development stages; however, the time from investment to stabilized operations could be two to three years. During these periods, we may use portions of the remaining proceeds from our Initial Public Offering or other liquidity sources to fund our non-operating requirements, including a portion of distributions paid to our common stockholders. The use of these proceeds could reduce the amount available for other new investments. Developments also include risks related to development schedules, costs and lease up. Estimated construction costs are based on market conditions at the time budgets are prepared, and we intend to use guaranteed maximum construction contracts when possible; however, actual costs may differ as market conditions change. There can be no assurance that all development projects will be completed and/or completed in accordance with projected schedule or cost estimates.

We may also invest a portion of the remaining proceeds from our Initial Public Offering in multifamily-related debt investments. Because government-sponsored entities (“GSEs”) typically do not lend on development properties during construction and banks and other debt providers tend to limit financing to approximately 60% of total costs, we may have lending opportunities with creditworthy borrowers that would provide favorable short-term returns (one to five years). We will seek out these loan investments either as mezzanine or land loans. For mezzanine loans, we will provide financing that is subordinate to the developer’s senior construction loan but senior to the developer’s equity, which we expect to be in the range of 10% to 15% of the total development cost. The mezzanine loans are secured by a pledge, typically of ownership interests in the respective multifamily community development, and will carry interest rates ranging from 12% to 15% for a base term of three years. These loans generally require one to six months to fully fund the loan commitment with interest payments fully or partially deferred until operations have stabilized or the loan is paid off. For land loans, we will finance the developer’s acquisition of the land, usually for a period of approximately one to two years at rates ranging from 10% to 13% and require a

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first lien mortgage as collateral. Similar to mezzanine loans, we will also generally require 10% to 15% of developer equity for each land loan.

While the recent investing trends have positively benefited our multifamily valuations and operations, these trends have also led to increased competition for stabilized multifamily investments, particularly in the markets and with the quality and characteristics that we target.  During these periods of capitalization rate compression, we will still continue to evaluate stabilized acquisitions and seek out properties and situations where our liquidity, financial strength and experience allow us to differentiate our offers from other buyers. Although we do not expect stabilized acquisitions to be our primary investment strategy, we will take advantage of such opportunities when they meet our targeted return objectives.

When appropriate, we may also incorporate into our investment portfolio lease up or value-added multifamily communities that have either been mismanaged or where we believe our operational expertise may create full appreciation and income-generation potential. Generally, we will make capital improvements or seek to aesthetically improve the asset and its amenities, increase rents, and stabilize occupancy with the goal of adding an attractive increase in yield and improving total returns.

The demand for multifamily acquisitions may also provide opportunities to selectively monetize our existing portfolio and potentially make new investments in multifamily communities with greater total return prospects.  We may evaluate total return prospects on an individual property basis, which would include specific property characteristics such as current market value, rental rate growth, operating costs or competition.  We may also make an evaluation based on the sub-market or region, which would include factors related to macro-economic conditions, overall multifamily supply trends or investor demand.  Because older properties have higher capital and maintenance requirements and may not attract higher rents, we will also monitor the overall age of our portfolio, selling certain communities to maintain targeted age characteristics.  From 2011 through September 30, 2013, we have sold partial or entire interests in 12 multifamily communities, generating cash proceeds of $357.6 million, recognizing gains of $191.9 million and net increases to additional paid-in capital of $30.6 million.

Commencement of Transition to Self-Management

As previously disclosed in our Periodic Report on Form 8-K filed with the SEC on August 6, 2013 and our Quarterly Report on Form 10-Q filed with the SEC on August 14, 2013, on July 31, 2013 (the “Initial Closing”), we entered into a series of agreements and amendments to our existing agreements and arrangements with Behringer Harvard Multifamily Advisors I, LLC, our external advisor (the “Advisor”) and its affiliates (collectively “Behringer Harvard”) beginning the process of becoming self-managed. Effective July 31, 2013, we and Behringer Harvard entered into a Master Modification Agreement (the “Modification Agreement”), which set forth various terms of and conditions to the modification of the business relationships between us and Behringer Harvard. At the Initial Closing of the Modification Agreement, Behringer Harvard waived the non-solicitation and non-hire provisions contained in the agreements with the Company with respect to five executive officers who previously provided services on our behalf as employees of Behringer Harvard. We offered employment to these persons and all of them accepted our offer and became our employees on August 1, 2013. The completion of the remainder of the self-management transactions contemplated by the Modification Agreement will occur at a second closing (the “Self-Management Closing”), which is expected to occur on June 30, 2014. The obligations of the parties to consummate the self-management transactions are subject to certain limited conditions.

At the Initial Closing, we issued 10,000 shares of a new Series A non-participating, voting, cumulative, 7.0% convertible preferred stock, par value $0.0001 per share (the “Series A Preferred Stock”), to Behringer Harvard. As part of the consideration for issuing the Series A Preferred Stock, Behringer Harvard surrendered all existing 1,000 convertible shares of non-participating, non-voting stock, par value $0.0001 per share, of the Company, which we immediately canceled.

As determined and limited pursuant to the Articles Supplementary establishing the Series A Preferred Stock, the Series A Preferred Stock will automatically convert into shares of our common stock upon any of the following triggering events: (a) in connection with a listing of our common stock on a national exchange, (b) upon a change of control of the Company or (c) upon election by the holders of a majority of the then outstanding shares of Series A Preferred Stock on or before July 31, 2018. Notwithstanding the foregoing, if a listing occurs prior to December 31, 2016, such listing (and the related triggering event) will be deemed to occur on December 31, 2016 and if a change of control transaction occurs prior to December 31, 2016, such change of control transaction will not result in a change of control triggering event. Upon a triggering event, all of the shares of Series A Preferred Stock will, in total, generally convert into an amount of shares of our common stock equal in value to 15% of the excess of (i) (a) the value per share of our common stock at the time of the applicable triggering event, as determined pursuant to the Articles Supplementary establishing the Series A Preferred Stock and assuming no shares of the Series A Preferred Stock are outstanding, multiplied by the number of shares of common stock outstanding on July 31, 2013, plus (b) the aggregate value of distributions (including distributions constituting a return of capital) paid through such time on the shares of

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common stock outstanding on July 31, 2013 over (ii) the aggregate issue price of those outstanding shares plus a 7% cumulative, non-compounded, annual return on the issue price of those outstanding shares. In the case of a triggering event based on a listing or change of control only, this amount will be multiplied by another 1.15 to arrive at the conversion value. The performance threshold necessary for the Series A Preferred Stock to have any value is based on the aggregate issue price of our shares of common stock outstanding on July 31, 2013, the aggregate distributions paid on such shares through the triggering event, and the value of the Company at the time of the applicable triggering event, as determined pursuant to the Articles Supplementary. It is not based on the return provided to any individual stockholder or to the stockholders in total as of the triggering event. Accordingly, it is not necessary for each of our stockholders to have received any minimum return in order for the Series A Preferred Stock to have any value. In fact, if the Series A Preferred Stock has value, the returns of our stockholders will differ, and some may be less than a 7% cumulative, non-compounded annual return. At any time after July 31, 2018, we may redeem all, and not less than all, of the then outstanding shares of Series A Preferred Stock (excluding any shares of Series A Preferred Stock for which a triggering event has occurred) at a price per share of Series A Preferred Stock equal to the $10 per share liquidation preference plus any declared and unpaid dividends.

In addition, at the Initial Closing, we acquired from Behringer Harvard the 1% general partner interest (the “BHMP GP Interest”) in Behringer Harvard Master Partnership I LP (“BHMP” or the “BHMP Co-Investment Partner”), an entity with which we have made a number of co-investments, as described further below. BHMP is a joint venture with Stichting Depositary PGGM Private Real Estate Fund, a Dutch foundation acting in its capacity as depositary of and for the account and risk of PGGM Private Real Estate Fund (“PGGM”), an investment vehicle for Dutch pension funds that has co-invested with us approximately $297.1 million, based on its share of gross costs, in certain properties, through September 30, 2013. The purchase price for the BHMP GP Interest was $23.1 million. This acquisition entitles us to, among other things, the advisory and incentive fees that Behringer Harvard would have otherwise been entitled to receive.

Mr. Aisner, who will remain an employee of Behringer Harvard, will continue as our Chief Executive Officer until the self-management process is completed, after which time Mark T. Alfieri will become our Chief Executive Officer in addition to the positions he now holds. Upon the Self-Management Closing, the remaining professionals and staff providing advisory and property management services that are currently employed by Behringer Harvard exclusively for our benefit will also become our employees, completing a major step in the self-management transition. From now through the Self-Management Closing, Behringer Harvard will continue to be paid fees and reimbursements under the terms of amended advisory and property management agreements that include a reduction of certain fees and expenses paid to Behringer Harvard under the prior agreements. In addition, during the period from the Initial Closing through September 30, 2014, Behringer Harvard will provide general transition services in support of our transition to self-management. Following the completion of our transition to being a self-managed company, Behringer Harvard will continue to provide certain capital markets and administrative support services to us.

For more information regarding these arrangements, please refer to exhibits filed with this Quarterly Report on Form 10-Q and our Current Report on Form 8-K filed with the SEC on August 6, 2013 and available at www.sec.gov or the website maintained for us at www.behringerharvard.com.

Offerings of Our Common Stock

We terminated offering shares of common stock in our Initial Public Offering on September 2, 2011, having aggregate gross primary offering proceeds of approximately $1.46 billion. Upon termination of our Initial Public Offering, we reallocated 50 million unsold shares remaining from our Initial Public Offering to our distribution reinvestment plan (“DRIP”).  As a result, we are offering a maximum of 100 million total shares pursuant to our DRIP at a DRIP offering price set by our board of directors, which as of March 1, 2013 is $9.53 per share, based on approximately 95% of our estimated net asset value per share as of March 1, 2013.  Prior to March 1, 2013, the DRIP offering price was $9.45 per share, based on approximately 95% of our previous estimated value per share.  For the nine months ended September 30, 2013 and 2012, the DRIP offering price averaged $9.50 and $9.49, respectively.  As of September 30, 2013, we have sold approximately 15.2 million shares under our DRIP for gross proceeds of approximately $144.4 million.  There are approximately 84.8 million shares remaining to be sold under the DRIP.

Per the terms of the DRIP, we currently expect to offer shares for approximately the next four years, which would be the sixth anniversary of the termination of our Initial Public Offering, although our board of directors has the discretion to extend the DRIP beyond that date, in which case we will notify participants of such extension.  We may suspend or terminate the DRIP at any time by providing ten days’ prior written notice to participants, and we may amend or supplement the DRIP at any time by delivering notice to participants at least 30 days prior to the effective date of the amendment or supplement.  Notice may be delivered by use of U.S. mail, electronic means or by including such information in a Current Report on Form 8-K or in our annual or quarterly reports, all of which are filed with the SEC.

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Shares of our common stock are not currently listed on a national securities exchange.  Depending upon then-prevailing market conditions, we intend to begin to consider the process of listing or liquidation within the next three to five years, which is unchanged from the four to six years after the date of the termination of our Initial Public Offering as disclosed in the related offering documents.

Distributions

Regular Distributions

Our board of directors, after considering the current and expected operations of the Company and other market and economic factors, authorized regular distributions payable to stockholders equal to an annual rate of 6.0% (based on a purchase price of $10.00 per share) for the period from September 1, 2010 to March 31, 2012 and 3.5% from April 1, 2012 through December 31, 2013.  See further discussion under “Distribution Activity” below.

Special Cash Distribution

On March 29, 2012, our board of directors authorized a special cash distribution related to the sale of Mariposa Lofts Apartments (the “Mariposa Distribution”) in the amount of $0.06 per share of common stock payable to stockholders of record on July 6, 2012.  The Mariposa Distribution of $10.0 million was paid in cash on July 11, 2012.  Our board of directors has not authorized any other special distributions, although it may in future periods.

Co-Investment Ventures

We are the general partner and/or managing member for each of the separate Co-Investment Ventures. Our Co-Investment Venture Partners include Milky Way Partners, L.P. (the “MW Co-Investment Partner”), the primary partner of which is the Korea Exchange Bank, as Trustee for and on behalf of National Pension Service (acting for and on behalf of the National Pension Fund of the Republic of Korea Government) (“NPS”), Stichting Depositary PGGM Private Real Estate Fund, a Dutch foundation acting in its capacity as depositary of and for the account and risk of PGGM Private Real Estate Funds, and its affiliates (“PGGM” or the “PGGM Co-Investment Partner”) and other real estate developers/owners. When applicable we will refer to the individual investments by referencing the individual Co-Investment Partner or the underlying multifamily community.   We refer to our Co-Investment Ventures or CO-JVs with the PGGM Co-Investment Partner as “PGGM CO-JVs” and those with the MW Co-Investment Partner as “MW CO-JVs.”  If a Co-Investment Venture makes an equity or debt investment in a separate entity with additional third parties, we refer to such a separate entity as a “Property Entity” and when applicable may name the multifamily community related to the Property Entity or CO-JV.

Prior to July 31, 2013, we had multiple Co-Investment Ventures with the BHMP Co-Investment Partner. PGGM held a 99% limited partner interest in the BHMP Co-Investment Partner and an affiliate of the Advisor held the 1% general partner interest. On July 31, 2013, we acquired the BHMP GP Interest from the affiliate of the Advisor for $23.1 million in a related party transaction (effectively increasing our ownership interest in each applicable Co-Investment Venture) and consolidated the BHMP Co-Investment Partner. Our acquisition of the BHMP GP Interest on July 31, 2013, resulted in the PGGM Co-Investment Partner becoming our partner in these Co-Investment Ventures as of July 31, 2013.  This transaction did not have a significant effect on the amount of noncontrolling interests in such Co-Investment Ventures because PGGM owns a 99% interest in the BHMP Co-Investment Partner. PGGM’s ownership interest in each applicable Co-Investment Venture was unchanged. Accordingly, we now consider PGGM to be our co-investment partner in these Co-Investment Ventures. We now refer to these Co-Investment Ventures as “PGGM CO-JVs” and to PGGM as the “PGGM Co-Investment Partner.” See more discussion of the acquisition of the BHMP GP Interest at “Overview - Commencement of Transition to Self-Management.”

The table below presents a summary of the number of multifamily investments we have through Co-Investment Ventures, listed by co-investment partner, and our effective ownership ranges based on our share of contributed capital in the multifamily investment.  This effective ownership is indicative of, but may differ from, percentages for distributions, contributions or financing requirements for each respective Co-Investment Venture.  Unless otherwise noted, all are reported on the consolidated basis of accounting.

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	September 30, 2013			December 31, 2012
	Number of Investments through			Number of Investments through
Co-Investment Partner	Co-Investment Ventures		Effective Ownership	Co-Investment Ventures		Effective Ownership
PGGM Co-Investment Partner (a)	14	(b)	51% to 74%	16	(b)	51% to 74%
MW Co-Investment Partner	14		55%	15		55%
Developers/owners	15		80% to 100% (c)	8		80% to 100% (c)
	43			39

(a) As discussed above, the BHMP Co-Investment Partner was our partner in these Co-Investment Ventures as of December 31, 2012.

(b)    Includes one unconsolidated investment.

(b) All of the developer’s initial contributed capital has been returned to the developer, and we have 100% of the contributed capital in eight and three of the investments through Co-Investment Ventures with developers/owners as of September 30, 2013 and December 31, 2012, respectively.

Structure of Co-Investment Ventures

Each of our individual joint ventures with the PGGM Co-Investment Partner and the MW Co-Investment Partner owns a subsidiary entity, a REIT, through which substantially all of the joint venture’s business is conducted.  Each subsidiary REIT also issues approximately $60,000 of non-voting preferred stock to unaffiliated holders as part of its qualification as a REIT for U.S. tax purposes.  Accordingly, the PGGM CO-JVs and the MW CO-JVs own 100% of the voting equity interests and in excess of 99% of the economic interests in the underlying multifamily investment.  Each PGGM CO-JV and MW CO-JV is a separate legal entity formed for the sole purpose of holding its respective investment and obtaining legally separated debt and equity financing.  Generally the governing documents of the PGGM CO-JV and MW CO-JV may require the subsidiary REIT to be operated in a manner that preserves its REIT status, and the subsidiary REIT to be disposed of via a sale of its capital stock rather than as an asset sale by that subsidiary REIT. The governing documents also contain buy/sell provisions, which if exercised by us, may require us to acquire the respective Co-Investment Partner’s ownership interest or if exercised by our respective Co-Investment Partner, may require us to sell our ownership interest in a PGGM CO-JV or MW CO-JV.  We have no ownership or other direct financial interests in either the PGGM Co-Investment Partner or the MW Co-Investment Partner, but as discussed under “Co-Investment Ventures” above, on July 31, 2013 we acquired the BHMP GP Interest.

Each PGGM CO-JV and MW CO-JV is managed by a subsidiary of ours.  As the manager, we have control rights over operating plans.  However, without the consent of all members of the PGGM CO-JV and MW CO-JV, we as the manager may not generally approve or disapprove on behalf of the PGGM CO-JV and MW CO-JV certain decisions affecting the PGGM CO-JV and MW CO-JV, such as (1) selling or otherwise disposing of the PGGM CO-JV’s or MW CO-JV’s investment or any other property having a value in excess of $100,000, (2) selling any additional interests in the PGGM CO-JV or MW CO-JV, or (3) incurring or materially modifying any indebtedness of the PGGM CO-JV or MW CO-JV in excess of $100,000 or causing the PGGM CO-JV and MW CO-JV to become liable for any debt, obligation or undertaking of any other individual or entity in excess of $100,000 other than in accordance with the operating plans.  Generally, if there are disagreements regarding these major decisions, then either member may exercise buy/sell rights.  The PGGM Co-Investment Partner and the MW Co-Investment Partner, as applicable, may remove the manager for cause and appoint a successor.

Distributions of net cash flow from the PGGM CO-JVs and MW CO-JVs are distributed to the members no less than quarterly in accordance with the members’ ownership interests.  PGGM CO-JV and MW CO-JV capital contributions and distributions are made pro rata in accordance with ownership interests.

Certain PGGM CO-JVs have made and may make equity and/or debt investments in Property Entities with third-party developers/owners.  These Property Entities own multifamily operating communities or development communities.  Each Property Entity is a separate legal entity for the sole purpose of holding its respective operating property or development project and obtaining legally separated debt and equity financing. These Property Entities are specifically structured but generally have structures in which the PGGM CO-JV is the managing member or general partner and the other owners have certain approval rights over protective decisions, which effectively require all owners to agree before these actions can be taken.  These decisions usually include actions pertaining to admittance or transfer of owners, sale of the property, and

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financing. The PGGM CO-JV generally provides the greater proportion of the equity capital, which generally ranges from 60% to 90%, but in some instances, can be 100% of the equity capital.  The third party equity owners in Property Entities have buy/sell rights with respect to the ownership interest in the Property Entities.

Apart from investments with the PGGM Co-Investment Partner and the MW Co-Investment Partner, we have 15 other Co-Investment Ventures directly with developers/owners, and we expect that we may enter into similar arrangements with other developers. These other Co-Investment Ventures are or are expected to be specifically structured but generally will have structures in which we are the managing member or general partner with sole control over setting operating budgets, selecting property management, financing and disposition of the multifamily community. The other owners, who are typically providing development and general contractor services through affiliated entities, are expected to generally have very limited approval rights, usually related to protective rights concerning admittance or transfer of owners, changes in the business purpose of the Co-Investment Venture and bankruptcy.  These developers will have initial capital contributions until certain milestones are achieved, at which point their initial capital contributions will be returned to them.  These developers will have a back-end interest, generally only attributable to distributions related to a property sale.  They will also have put options, generally one year after completion of the development, pursuant to which we would be required to acquire their back-end interest at a set price. These other Co-Investment Ventures will also include buy/sell provisions, generally available after the seventh year after completion of the development.  We expect to generally provide the greater proportion of the equity capital, and for the eight current Co-Investment Ventures we ultimately expect that 100% of the equity capital will be provided by us.

Co-Investment Venture Partners

PGGM is an investment vehicle for Dutch pension funds.  According to the sponsor of PGGM’s website as of May 2013, the sponsor of PGGM currently manages approximately 140 billion euro (approximately $189 billion, based on exchange rates as of September 30, 2013) in pension assets for over 2.5 million people.  PGGM has committed to invest up to $300 million in co-investments with us.  As of September 30, 2013, approximately $2.9 million of the $300 million commitment remains unfunded; however, in the event that certain investments are refinanced or new property debt is placed within two years from the date of acquisition, the amount of the unfunded commitment may be increased. 

The MW Co-Investment Partner is a partnership between Heitman Capital Management LLC (“Heitman”) and NPS.  NPS is the 99.9% limited partner and Heitman is indirectly the 0.1% general partner of the MW Co-Investment Partner, respectively. NPS is one of the largest pension funds in the world, which generally covers all citizens of South Korea ages 18 to 59.  NPS was established to provide pension benefits in contingency of old-age, disability or death of the primary income provider for a household with a view to contributing to the livelihood stabilization for the promotion of the welfare of South Korea.  According to the NPS website, as of July 2013, the NPS fund estimated its total value at 407 trillion won (approximately $379 billion, based on exchange rates as of September 30, 2013), and counted over 3.3 million people in its beneficiary base.  The 0.1% general partner of our MW Co-Investment Partner is Heitman, an international investment advisory firm. The MW Co-Investment Partner does not have a commitment for additional investments with us or our sponsor.  We entered into Co-Investment Ventures with the MW Co-Investment Partner in December 2011.  As of September 30, 2013, the MW Co-Investment Partner has invested $263.7 million in joint ventures with us.

For our Co-Investment Ventures with developers and the four Property Entities, the other equity owners are national or regional domestic developers.

As of September 30, 2013, we believe all of our Co-Investment Venture partners and Property Entity partners are in compliance with their contractual obligations, and we are not aware of factors that would indicate their inability to meet their obligations.

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Market Outlook

During the third quarter of 2013, market analysis was dominated by political deadlock, first over the shutdown of the government, and then a potential government default and their respective potential consequences to the U.S. economy. The temporary resolution in early fourth quarter to reopen the government and extend the debt ceiling seemed to assuage the broader markets, as the stock market declined only about 2%, far less than the prior government shutdown, and treasury rates were essentially unchanged from the end of the second quarter to the end of October 2013. However, the same cannot be said for the economy. Analysts project that when all costs are considered, the shutdown cost the economy tens of billions of dollars, potentially one-half to a full point of GDP. The economic reports for the third quarter, which were technically before the shutdown, reflected that employers added 148,000 new jobs during September 2013, down from the monthly average of about 200,000 for the first half of the year. Potentially more important, consumer confidence continued to slip, down almost a third in response to the shutdown and in decline for the last five surveys. Consumer and business confidence could be critical as the economy heads into the holiday shopping season. So far analysts are taking a wait and see approach, with many fourth quarter and 2014 projections down about 10%. It appears that the general consensus is that political uncertainty will continue to hold back what could otherwise be a stronger recovery, particularly in job growth, but on a net basis moderate, although uneven growth is expected. These assumptions are likely based on a continued level of “normal” political gridlock and that the Federal Reserve’s stimulation programs will continue to be in effect. Should either of these vary from the expectation, there could be material positive or negative effects on the economy.

While the U.S. economy continues on a modest recovery, the multifamily sector continues to have positive rent growth while maintaining good occupancy levels.From a demand perspective, 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, the 20 to 34 year old segment’s 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.  Also affecting home ownership is a national trend toward delayed marriage. Since 1990, the average age for first time marriages has increased by over 2 years. Given that first time home ownership often follows marriage, this delay is also delaying home ownership. As a result, single family home ownership, which had peaked at 69.2% in late 2004, has now reduced to approximately 65% as of June 30, 2013.  Historical home ownership figures from pre-1995 hovered around 64%.  While improvements in the single family housing sector should eventually affect this trend, we believe the overall positive effects of such an important component of the economy will be a net benefit to the multifamily sector.

On the supply side, after a substantial decline in new developments of multifamily communities from 2008, supply trends are increasing. For the third quarter of 2013, permitting and construction starts, the earliest indications of potential supply, are now slightly above historical averages and up about 19% and 33%, respectively, from 2012. However, completions, while increasing and up about 15% from the prior year, are still well below historical averages. Annual completions have been averaging an annualized pace of about 250,000 units and current trends are just now reaching 200,000 units. Since high quality multifamily developments can take 18 to 36 months or more to entitle, permit and construct, we believe there will continue to be increased supply, if there is adequate capital willing to invest in multifamily projects, and so there continues to be a window for accretive investments. We also believe that the new supply will affect certain markets, and sub markets, to a greater or lesser extent, where factors such as the strength of the local economy, population and job growth and absolute inventory level of units will allow certain markets to better absorb certain levels of supply. For the markets where we have significant development activity, the average employment growth is approximately 1% higher than the national average and average rent growth from the last year is approximately 1% higher than the national multifamily average. Markets where we have developments where average employment growth is below the national average are primarily in Washington, D.C. and Miami, Florida.

As a result of these factors, many analysts are still projecting continued multifamily rental growth, albeit at a slower pace due in part to the high correlation with job and income growth, particularly for the higher rent, high quality, highly amenitized investments that we focus on.  Some analysts’ reports are already starting to indicate for certain markets that renting is starting to lose its cost advantage over home ownership and that rental increases will eventually hit limits in relation to disposable income.  While the overall factors noted above should still position the multifamily sector to perform better in a slow growth environment, eventually the multifamily sector will need stronger employment, disposable consumer income and household formation to maintain rental growth.

For the Company, our emphasis on coastal and higher employment growth markets has resulted in our investments performing somewhat better than the national averages.  While national employment gains were less than expected, in our geographic markets, job growth for the most part was greater than the national average or was positive as compared to the prior year.  Through August 2013, 12 of our 17 major markets had annual employment growth greater than the national average of

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1.7%, and five markets had less growth than the national average.  Of the top five U.S. markets with the highest absolute increase in job growth, we had investments in four:  Houston, Dallas, Boston and Atlanta.

These positive employment results for our markets have been favorable contributors to our revenue growth.  The Company has equity interests in 29 communities that were stabilized and held for the comparable periods in 2013 and 2012.  These 29 communities produced year over year total revenue increases of approximately 7%.  Since September 30, 2012, we have increased our residential monthly rent per unit for these 29 stabilized communities by 5%, where the national average was approximately 3%.  We have been able to achieve these results, while still increasing occupancy, as occupancy increased for these 29 communities from 94% at September 30, 2012 to 96% at September 30, 2013. These properties exceeded the national occupancy rate by over 1% as of September 30, 2013.

Financing has also been a favorable factor for the multifamily sector. As of the end of October 2013, five and ten year treasury rates, key benchmarks for multifamily financings, are approximately 1.3% and 2.5%, respectively. While these are up about 0.50% to 1.0% from their recession lows, they are still over 1% below the average over the last 10 years. In addition to favorable general interest rates, GSEs have been a core source for multifamily financing, providing a favorable base level of support for the sector.  Further, the positive multifamily fundamentals, particularly in high quality, stabilized communities such as ours, have brought in other lending sources. In addition to GSEs, insurance companies and commercial banks have been aggressive lenders in our sector.  The Company has taken advantage of these financing opportunities in the last year. In 2012 we closed five loans with an average fixed interest rate of 2.9% and in 2013, we closed two loans with a weighted average fixed interest rate of 3.2%. As of September 30, 2013, our weighted average fixed interest rate was 3.7%, compared to 3.9% at December 31, 2012.

Although the current outlook on these financing trends appears relatively stable, there are risks.  Potential changes in the U.S. Federal Reserve’s monetary policy could further affect interest rates, while the U.S. political deadlock over the debt ceiling, tax policy and government spending levels can affect the overall level of domestic economic growth. Any of these domestic issues or the resurfacing of global issues could slow growth or push the U.S. into a recession, which could affect the amount of capital available or the costs charged for financings.  Specifically related to the multifamily sector, changes related to GSE’s and other regulatory restrictions could result in less multifamily debt capital and potentially higher borrowing costs.

In the event of changing financial market conditions, we believe the Company is reasonably positioned to execute our strategy.  As of September 30, 2013, we held cash and cash equivalents of approximately $148.9 million and had borrowing capacity from our line of credit of $138.1 million. Our cash position is over 15% of our total debt balance and greater than all of our variable rate debt. Should there be an increase in interest rates, approximately 95% of our share of debt is at fixed rates with average maturities of 4.2 years. In addition, the Company owns $162.7 million of LIBOR based interest rate caps providing protection for the notional amount for LIBOR Rates in excess of 2.0% to 4.0% for approximately three more years.  We believe these factors will give us flexibility to manage our interest rate exposure should interest rates in general increase, and our liquidity position may be a competitive advantage over other multifamily companies who are not so positioned.  However, with the volatility and uncertainty noted above, there is no assurance that our liquidity position would maintain our competitive position in all circumstances.  If interest rates significantly increase and remain higher for prolonged periods, we would expect to incur higher interest expenses on new or refinanced debt. Because the amount of debt is based, in part, on our ability to pay the debt service, higher interest rates could also reduce our overall debt leverage. In addition, our development strategy is dependent on the availability of development financing at reasonable interest rates.  While development financing is currently available, there is also no assurance such financing or the refinancing of the development debt would be available in the future.

Property Portfolio

We invest in a geographically diversified equity and debt multifamily portfolio which includes operating and development investments.  Our geographic regions are defined by state or by region. Our portfolio is comprised of the following geographic regions and MSAs (with respect to MSAs, we only identify the largest city for each MSA):

• Florida - Includes communities in Miami, FL MSA, and Orlando, FL MSA.

• Georgia - Includes communities in Atlanta, GA MSA.

• Mid-Atlantic includes the states of Virginia, Maryland and New Jersey.  Includes communities in Washington, DC MSA and Philadelphia, PA MSA.

• Mid-West includes the state of Illinois.  Includes a community in Chicago, IL MSA.

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• Mountain includes the states of Arizona, Colorado and Nevada.  Includes communities in Phoenix, AZ MSA, Denver, CO MSA, and Las Vegas, NV MSA.

• New England includes the states of Connecticut and Massachusetts.  Includes communities in New Haven, CT MSA and Boston, MA MSA.

• Northern California - Includes communities in San Francisco, CA MSA and Santa Rosa, CA MSA.

• Northwest includes the state of Oregon.  Includes a community in Portland, OR MSA.

• Southern California - Includes communities in Los Angeles, CA MSA and San Diego, CA MSA.

• Texas - Includes communities in Austin, TX MSA, Dallas, TX MSA, and Houston, TX MSA.

The table below presents physical occupancy and monthly rental rate per unit by geographic region for our consolidated and unconsolidated stabilized multifamily communities as of September 30, 2013 and December 31, 2012. Physical occupancy rates and monthly rental rates per unit as of December 31, 2012 exclude data for multifamily communities sold in 2013:

	September 30, 2013		Physical Occupancy Rates (a)				Monthly Rental Rate per Unit (b)
	Number of	Number of	September 30,		December 31,		September 30,		December 31,
Geographic Region	Communities	Units	2013		2012		2013		2012
Florida	2	704	92	%	94	%	$	1,523	$	1,490
Georgia	1	283	96	%	98	%	1,329		1,241
Mid-Atlantic	5	1,412	94	%	94	%	1,989		1,937
Mid-West	1	298	93	%	95	%	2,262		2,161
Mountain	5	1,594	93	%	93	%	1,362		1,312
New England	3	772	97	%	92	%	1,519		1,504
Northern California	4	751	95	%	94	%	2,326		2,188
Northwest	1	188	94	%	93	%	1,444		1,355
Southern California	4	889	97	%	96	%	2,015		1,946
Texas	6	1,947	95	%	95	%	1,472		1,346
Totals	32	8,838	95	%	94	%	$	1,691	$	1,628

(a)         Physical occupancy is defined as the residential units occupied for stabilized properties as of September 30, 2013 or December 31, 2012 divided by the total number of residential units.  Not considered in the physical occupancy rate is rental space designed for other than residential use, which is primarily retail space.  As of September 30, 2013, the total gross leasable area of retail space for all of these communities is approximately 160,000 square feet, which is approximately 2% of total rentable area.  As of September 30, 2013, all of the communities with retail space are stabilized, and approximately 80% of the 160,000 square feet of retail space was occupied.  The calculation of physical occupancy rates by geographic region and total average physical occupancy rates are based upon weighted average number of residential units.

(b)         Monthly rental revenue per unit has been calculated based on the leases in effect as of September 30, 2013 and December 31, 2012 for stabilized properties.  Monthly rental revenue per unit only includes base rents for the occupied units, including affordable housing payments and subsidies, and does not include other charges for storage, parking, pets, cleaning, clubhouse or other miscellaneous amounts. For the three months ended September 30, 2013 and 2012, these other charges were approximately $4.3 million and $4.1 million, respectively, approximately 8% of total revenues for both periods. For the nine months ended September 30, 2013 and 2012, these other charges were approximately $12.6 million and $11.6 million, respectively, approximately 8% of total revenues for both periods.The monthly rental revenue per unit also does not include unleased units or non-residential rental areas, which are primarily related to retail space.

During July 2013, we acquired one multifamily community in Northern California which is currently in lease up.

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The table below presents the number of communities and units by geographic region that are currently in development and in which we have an equity or debt investment, as of September 30, 2013 and December 31, 2012:

	September 30, 2013		December 31, 2012
	Number of	Number of	Number of	Number of
Geographic Region	Communities	Units	Communities	Units
Equity investments:
Florida	2	597	1	180
Georgia	1	327	—	—
Mid-Atlantic	2	827	—	—
Mountain	1	212	1	212
New England	2	578	2	578
Northern California	1	180	1	180
Southern California	2	557	—	—
Texas	7	1,883	6	1,519
Total equity investments	18	5,161	11	2,669
Debt investments:
Florida	1	321	—	—
Mountain	1	388	1	388
Southern California	—	—	1	113
Texas (a)	3	1,124	2	764
Total debt investments	5	1,833	4	1,265
Total developments	23	6,994	15	3,934

(a)         Includes an unconsolidated loan investment as of September 30, 2013 and December 31, 2012 and a loan investment in a multifamily community completed in 2012 and currently stabilized as of September 30, 2013.

Results of Operations

Because of our investment of proceeds from our Initial Public Offering, we have experienced significant increases in our total investments since our inception.  Also, as certain investments have been sold and the status of our lease up and development communities have progressed, their totals have fluctuated over time, changing the proportion of our stabilized multifamily communities or development communities to our total investments. Further, our transition to a self-managed company will affect our operations in future periods. The following information may be helpful in evaluating current and future fluctuations in our overall results of operations.

Real Estate Investment Activity

During 2012 and 2013, the Company has made significant new investments in multifamily communities, primarily investments in developments. As developments are made and progress through lease up, we have experienced changes in operating results. Further, as we have sold certain investments, investing the proceeds in developments, including debt investments in developments, the mix of our investments has changed, which also contributed to other fluctuations in operations.

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These portfolio changes have contributed to significant fluctuations in many of our financial results.  A summary of our investments in multifamily communities as of September 30, 2013, December 31, 2012, and September 30, 2012 is as follows:

	September 30, 2013	December 31, 2012	September 30, 2012
Reporting Classifications:
Consolidated investments	55	50	47
Investments in unconsolidated real estate joint ventures	1	1	1
Total investments	56	51	48
Investment Classifications:
Equity investments
Stabilized communities	32	36	36
Lease up (including developments in lease up)	3	—	—
Development (pre-development and under development and construction)	16	11	8
Total equity investments	51	47	44
Debt investments
Land loans	—	1	2
Mezzanine loans (including one stabilized community)	5	3	2
Total debt investments	5	4	4
Total investments	56	51	48

Transition to Self-Management

As discussed in “Overview — Commencement of Transition to Self-Management” above, on the Initial Closing, we entered into the Self-Management Transition Agreements and have begun our transition to become a fully integrated self-managed company. Generally, as result of these arrangements, we would expect to begin to have higher direct costs of administration, primarily related to compensation, office and transition costs, and reductions in management fees and expenses. Each of these is separately addressed below.

Prior to August 1, 2013, the Company had no employees and was supported solely by related party service and management agreements. Following the Initial Closing, the Company hired its first five employees, all executive positions which are under employment contracts. As we approach and reach the Self-Management Closing, we would expect to hire employees to fully staff our corporate and property management operations. Accordingly, beginning in the third quarter of 2013 and through the Self-Management Closing, we expect our compensation and related costs to increase, which amount will be offset by a decrease in certain fees and expense reimbursements paid to the Advisor of approximately $0.4 million per quarter. Thereafter, we expect to benefit from eliminated or reduced advisory and property management fees and cost reimbursements. Going forward, our new expenses are subject to the number of our properties, particularly as it relates to property management compensation, but also our administrative and operational requirements at that time.

We currently reimburse our Advisor for a portion of their office space and office support costs related to our operations. Upon the Self-Management Closing, our office costs will largely be a function of our new office arrangement, which may include arranging for the use of space from affiliates of our Advisor and may also include a lease for a new corporate headquarters, which may actually begin prior to the Self-Management Closing. Upon the Self-Management Closing, we also anticipate incurring costs for office equipment, supplies and related administrative expenses. These increases in costs could be recognized directly as general and administrative expenses or included in depreciation and amortization expense.

The Self-Management Transition Agreements provide for transition services and related costs, which are projected to be paid through September 30, 2014 to Behringer Harvard. These primarily include (1) transition services paid through September 30, 2014 totaling approximately $0.4 million per month for the period from the Initial Closing to September 30, 2014 and $1.25 million paid on the Self-Management Closing, (2) a reimbursement of $2.5 million for Behringer Harvard’s costs and expenses related to their negotiation of the Self-Management Transition Agreements paid at the Initial Closing, and (3) $3.5 million for certain intangible assets, rights and contracts paid at the Self-Management Closing. Accordingly, we expect a significant portion of these payments to be expensed during these periods with the amount per period dependent on the level and timing of each service and the accounting allocation to each period. Certain of these expenses could be direct transition expenses while others may be included as amortization or depreciation expense. For the three and nine months ended

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September 30, 2013, we also incurred, on our own account, approximately $0.3 million and $0.7 million, respectively, of transition costs, primarily related to legal and financial consulting costs.

Before entering into the Self-Management Transition Agreements, the Company was incurring approximately $1.8 million to $1.9 million in quarterly asset management expenses paid to the Advisor and its affiliates, and an additional quarterly reimbursement to the Advisor and its affiliates of approximately $0.4 million to $0.5 million. With the Self-Management Transition Agreements, we expect these expenses to be eliminated in connection with the Self-Management Closing. We expect a reduction of approximately $0.5 million per quarter through the Self-Management Closing, at which point we expect that all asset management fees will be eliminated. However, the expected amount of the decrease is based on current Company activity. Additionally, should the Company increase its real estate assets, either in cost or in appreciated value, the primary basis for the calculation of the asset management fee, and something which may occur, the actual amount of asset management fees through the Self-Management Closing could actually be higher, despite the reductions just discussed. Regardless of property activity, we would still expect the asset management fees to be eliminated upon the Self-Management Closing as a result of the Self-Managed Transition Agreements. As discussed above, we expect an increase in employee compensation expense, which will in part help us manage our assets, as a result of our entry into the Self-Management Transition Agreements.

Similarly, prior to entering into the Self-Management Transition Agreements, the Company was incurring approximately $2.0 million in quarterly property management fees paid to Behringer Harvard Multifamily Management Services, LLC (the “Property Manager” or “BHM Management”) and its affiliates. Upon the Self-Management Closing, we expect these costs to be eliminated similar to the asset management expense, but the full amount of the savings will be dependent on future operations. We will also benefit from the collection of property management fees which are attributable to the noncontrolling interest owners. In addition, the Company paid to the Property Manager and its affiliates reimbursement of expenses related to the property management agreement. These reimbursements to the Property Manager and its affiliates will also be eliminated upon the Self-Management Closing; however, many of these expenses will then become our responsibility, the largest portion being compensation for on-site property management personnel.

The items noted above will be included in our reported consolidated net income (loss). In addition, the purchase of the BHMP GP Interest, which will be eliminated in preparing our consolidated financial statements, is expected to have a positive impact on our net income (loss) attributable to noncontrolling interests. This is primarily related to the asset management fee income we will begin to receive. While this is eliminated in the consolidated net income (loss), this benefit will increase the net income (or reduce the net loss) attributable to common stockholders by approximately $0.2 million to $0.3 million per quarter, based on current operations.

The above discussions related to investment activity and the transition to self-management have affected the comparability of our financial statements as of and for the three and nine months ended September 30, 2013 as compared to the same period of 2012. We expect that these items and our transition to a self-managed company will also affect our trends in future periods. In the following sections, where we compare one period to another or comment on potential trends, we may refer to these items to explain the fluctuations.

Net Operating Income

In our review of operations, we define net operating income (“NOI”) as consolidated rental revenue, less consolidated property operating expenses, real estate taxes and property management fees.  We believe that NOI provides a supplemental measure of our operating performance because NOI reflects the operating performance of our properties and excludes items that are not associated with property operations of the Company, such as general and administrative expenses, asset management fees and interest expense.  NOI also excludes revenues not associated with property operations, such as interest income and other non-property related revenues.  In addition, we review our stabilized multifamily communities on a comparable basis between periods, referred to as “Same Store.”  Our Same Store multifamily communities are defined as those that are stabilized and comparable for both the current and the prior reporting year.  We consider a property to be stabilized upon the earlier of 90% occupancy or one year after completion.

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The table below reflects number of communities and units as of September 30, 2013 and 2012 and rental revenues, property operating expenses and NOI for the three and nine months ended September 30, 2013 and 2012 for our Same Store operating portfolio as well as other properties in continuing operations:

	For the Three Months Ended   September 30,						For the Nine Months Ended   September 30,
	2013		2012		Change		2013			2012			Change
Rental revenue
Same Store	$	44.2	$	41.7	$	2.5	$	130.3		$	121.8		$	8.5
2013 acquisitions	0.6		—		0.6		0.6			—			0.6
2012 acquisitions	3.4		2.7		0.7		9.8			4.6			5.2
Developments	0.2		—		0.2		0.2			—			0.2
Total rental revenue	48.4		44.4		4.0		140.9			126.4			14.5
Property operating expenses, including real estate taxes
Same Store	17.4		16.8		0.6		51.0			48.2			2.8
2013 acquisitions	0.6		—		0.6		0.6			—			0.6
2012 acquisitions	1.4		1.1		0.3		4.0			1.9			2.1
Developments	0.2		—		0.2		0.4			0.4			—
Total property operating expenses, including real estate taxes	19.6		17.9		1.7		56.0			50.5			5.5
NOI
Same Store	26.8		24.9		1.9		79.3			73.6			5.7
2013 acquisitions	—		—		—		—			—			—
2012 acquisitions	2.0		1.6		0.4		5.8			2.7			3.1
Developments	—		—		—		(0.2		)	(0.4		)	0.2
Total NOI	$	28.8	$	26.5	$	2.3	$	84.9		$	75.9		$	9.0
	September 30,
	2013		2012		Change
Number of Communities
Same Store	29		29		—
2013 acquisitions	1		—		1
2012 acquisitions	3		2		1
Total Number of Communities	33		31		2
Number of Units
Same Store	8,019		8,019		—
2013 acquisitions	202		—		202
2012 acquisitions	819		389		430
Total Number of Units	9,040		8,408		632

See reconciliation of NOI to income from continuing operations at “Non-GAAP Performance Financial Measures — NOI.”

The three months ended September 30, 2013 as compared to the three months ended September 30, 2012

Rental Revenues. Rental revenues for the three months ended September 30, 2013 were approximately $48.4 million compared to $44.4 million for the three months ended September 30, 2012.  Same Store revenues, which accounted for approximately 91% of total rental revenues for 2013 increased approximately 6% or $2.5 million.  A portion of this increase related to an approximate 4% increase in monthly rental rates per units for our Same Store communities as of September 30,

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2013 compared to September 30, 2012, adding approximately $1.7 million to Same Store rental revenue for the three months ended September 30, 2013 from the prior period in September 30, 2012. The remaining increase in Same Store revenues of approximately $0.8 million million related to increased occupancy for the Same Store communities. The remaining increase of $1.5 million in total rental revenue for the three months ended September 30, 2013 as compared to comparable period of 2012 is attributable to our 2013 acquisition as well as our 2012 acquisitions which reported rental revenues for a full quarter in 2013.

Property Operating and Real Estate Tax Expenses. Property operating and real estate tax expenses for the three months ended September 30, 2013 and 2012 were approximately $19.6 million and $17.9 million, respectively.  Same Store property operating expenses and real estate taxes, which accounted for approximately 89% of total property operating expenses and real estate taxes for 2013, increased approximately $0.6 million.  Increases in Same Store real estate taxes of approximately $0.2 million were driven by increased tax values on our multifamily communities.  Other increases included Same Store property management fees of $0.1 million which are directly related to increased Same Store rental revenue.  Our 2013 acquisition as well as our 2012 acquisitions which were held for a full quarter in 2013 accounted for $1.1 million of the increase in total property operating and real estate tax expenses.

Asset Management Fees. Asset management fees for the three months ended September 30, 2013 increased by $0.1 million compared to the same period of 2012. Increase in our gross real estate costs and investment values, the primary input to the calculation of asset management fees, resulted in an approximate increase of $0.4 million. Prior to July 1, 2013, the Advisor waived the difference between asset management fees calculated on the basis of appraised value of our investments and asset management fees calculated on the basis of cost of our investments. Effective July 1, 2013, the Advisor is no longer waiving this difference. Offsetting the increase for the three months ended September 30, 2013, we received a reduction of $0.3 million from Behringer Harvard related to the transfer of the executives from Behringer Harvard to the Company and the associated reduction in the duties of Behringer Harvard.  

General and Administrative Expenses. General and administrative expenses increased by $0.2 million for the three months ended September 30, 2013 compared to the same period of 2012. During the three months ended September 30, 2013, we incurred compensation expenses of approximately $1.1 million related to the five executives who became employees of the Company effective July 1, 2013. During the three months ended September 30, 2012, we incurred approximately $1.2 million of strategic review expenses, primarily including investment bankers, legal and costs of the Company’s special committee of the board of directors, comprised of all of the Company’s independent directors (the “Special Committee”). We did not incur strategic review expenses during the three months ended September 30, 2013.

Acquisition Expenses. Generally, acquisition costs related to developments are capitalized and other acquisition costs, primarily related to operating properties or businesses, are expensed. For the three months ended September 30, 2013, we expensed acquisition costs of $3.7 million, approximately $2.5 million of which related to our acquisition of a multifamily operating community in San Francisco, California. The remaining $1.2 million related to the acquisition of the BHMP GP Interest from Behringer Harvard. We did not incur any acquisition expenses for the three months ended September 30, 2012. The majority of the acquisition expenses were fees and expenses due to our Advisor.  As we make additional consolidated investments in operating properties, we expect acquisition expenses to continue to have a significant effect on our operating results. See the section below entitled “Non-GAAP Performance Financial Measures — Funds from Operations and Modified Funds from Operations” for additional discussion.

Transition Expenses. During the three months ended September 30, 2013, we incurred $8.2 million of transition expenses related to our transition to becoming a self-managed company. See further discussion above under “Transition to Self-Management.” Approximately $7.7 million of the transition expenses relate to amounts paid and/or due to Behringer Harvard in connection with the self-management transaction. In addition, we incurred other legal, financial advisors, consultants and costs of the Special Committee of $0.5 million for the three months ended September 30, 2013. We did not incur any transition expenses for the three months ended September 30, 2012.

Interest Expense. For the three months ended September 30, 2013 and 2012, we incurred total interest charges of $8.7 million and $8.5 million, respectively. We capitalize interest related to our development activity and accordingly, recognized net interest expense for the three months ended September 30, 2013 and 2012 of approximately $5.9 million and $7.8 million, respectively. The decrease was principally due to a $2.1 million increase in capitalized interest as a result of increased development activity. For the three months ended September 30, 2013 and 2012, we capitalized interest expense of $2.8 million and $0.7 million, respectively.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended September 30, 2013 and 2012 was approximately $22.1 million and $21.2 million, respectively.  Depreciation and amortization primarily includes depreciation of our consolidated multifamily communities and amortization of acquired in-place leases and other

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contractual intangibles.  The increase is principally the result of the $0.7 million of depreciation expense related to the San Francisco multifamily operating community acquired in 2013 and $0.6 million increase in amortization expense related to the intangible assets acquired upon the acquisition of the BHMP GP Interest. See the section below entitled “Non-GAAP Performance Financial Measures — Funds from Operations and Modified Funds from Operations” for additional discussion.

Income (Loss) from Discontinued Operations. Income (loss) from discontinued operations for the three months ended September 30, 2013 and 2012 include the operating results of the four multifamily communities sold in 2013, and Mariposa Lofts Apartments (“Mariposa”) sold in 2012. The gain of $12.7 million for the three months ended September 30, 2013 represents the gain recognized from the sale of Grand Reserve Orange.  Other income related to these communities during the applicable periods was not significant.  There were no other property dispositions during the three months ended September 30, 2013 or 2012.

The nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012

Rental Revenues. Rental revenues for the nine months ended September 30, 2013 were approximately $140.9 million compared to $126.4 million for the nine months ended September 30, 2012.  Same Store revenues, which accounted for approximately 92% of total rental revenues for 2013, increased approximately 7% or $8.5 million.  The majority of the increase in Same Store revenues is related to increased occupancy for the Same Store communities. The remaining increase of $6.0 million in total rental revenue for the nine months ended September 30, 2013 as compared to comparable period of 2012 is attributable to our 2013 acquisition as well as our 2012 acquisitions which reported rental revenues for the full period in 2013.

Property Operating and Real Estate Tax Expenses. Property operating and real estate tax expenses for the nine months ended September 30, 2013 and 2012 were approximately $56.0 million and $50.5 million, respectively.  Same Store property operating expenses and real estate taxes, which accounted for approximately 91% of total property operating expenses and real estate taxes for 2013, increased approximately $2.8 million.  Increases in Same Store real estate taxes of approximately $1.1 million were driven by increased tax values on our multifamily communities.  Other increases included Same Store property management fees of $0.5 million which are directly related to increased Same Store rental revenue.  Our 2013 acquisition as well as our 2012 acquisitions which were held for the full period in 2013 accounted for $2.7 million of the increase in total property operating and real estate tax expenses.

Asset Management Fees. Asset management fees for the nine months ended September 30, 2013 increased by $0.6 million compared to the same period of 2012. Increase in our gross real estate costs and investment values, the primary input to the calculation of asset management fees, resulted in an approximate increase of $0.9 million. Prior to July 1, 2013, the Advisor waived the difference between asset management fees calculated on the basis of appraised value of our investments and asset management fees calculated on the basis of cost of our investments. Effective July 1, 2013, the Advisor is no longer waiving this difference. Offsetting the increase, for the nine months ended September 30, 2013, we received a reduction of $0.3 million from Behringer Harvard related to the transfer of the executives from Behringer Harvard to the Company and the associated reduction in the duties of Behringer Harvard.  

General and Administrative Expenses. General and administrative expenses decreased approximately $0.5 million for the nine months ended September 30, 2013 compared to the same period of 2012. During the nine months ended September 30, 2013, we incurred compensation expenses of approximately $1.1 million related to the five executives who became employees of the Company effective July 1, 2013. During the nine months ended September 30, 2012, we incurred approximately $2.0 million of strategic review expenses, primarily including investment bankers, legal and costs of the Special Committee. We did not incur strategic review expenses during the nine months ended September 30, 2013.

Acquisition Expenses. Generally, acquisition costs related to developments are capitalized and other acquisition costs, primarily related to operating properties or businesses, are expensed. For the nine months ended September 30, 2013, $3.7 million of acquisition costs were expensed with approximately $2.5 million related to our acquisition of a multifamily operating community in San Francisco, California, and the remaining $1.2 million related to the acquisition of the BHMP GP Interest from Behringer Harvard. Acquisition expenses for the nine months ended September 30, 2012 were principally related to our 2012 acquisitions of two multifamily operating communities.  The majority of these acquisition expenses were fees and expenses due to our Advisor.  As we make additional consolidated investments in operating properties, we expect acquisition expenses to continue to have a significant effect on our operating results. See the section below entitled “Non-GAAP Performance Financial Measures — Funds from Operations and Modified Funds from Operations” for additional discussion.

Transition Expenses. During the nine months ended September 30, 2013, we incurred $8.6 million of transition expenses related to our transition to becoming a self-managed company. Approximately $7.7 million of the transition expenses relate to amounts paid and/or due to Behringer Harvard in connection with the self-management transaction. In addition, we

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incurred other legal, financial advisors, consultants and costs of the Special Committee of $0.9 million. See further discussion above under “Transition to Self-Management.” We did not incur any transition expenses for the nine months ended September 30, 2012.

Interest Expense. For the nine months ended September 30, 2013 and 2012, we incurred total interest charges of $25.3 million for both periods. We capitalize interest related to our development activity and accordingly, recognized net interest expense for the nine months ended September 30, 2013 and 2012 of approximately $18.6 million and $23.7 million, respectively. The decrease was principally due to a $5.1 million increase in capitalized interest as a result of increased development activity. For the nine months ended September 30, 2013 and 2012, we capitalized interest expense of $6.7 million and $1.6 million, respectively.

Depreciation and Amortization. Depreciation and amortization expense for the nine months ended September 30, 2013 and 2012 was approximately $63.3 million and $78.5 million, respectively.  Depreciation and amortization primarily includes depreciation of our consolidated multifamily communities and amortization of acquired in-place leases and other contractual intangibles.  The decrease is principally the result of the $19.6 million decrease in lease intangible amortization expense, which due to its relatively short life (usually less than one year) was fully amortized in prior periods.  The decrease was partially offset by a $2.7 million increase in depreciation expense related to our acquisitions of multifamily operating communities acquired in 2013 and 2012, and $0.6 million increase in amortization expense related to the intangible assets acquired upon the acquisition of the BHMP GP Interest and increased depreciation expense related to new capital improvements placed in service subsequent to September 30, 2012.  See the section below entitled “Non-GAAP Performance Financial Measures — Funds from Operations and Modified Funds from Operations” for additional discussion.

Income (Loss) from Discontinued Operations. The income (loss) from discontinued operations relates to the sales of four multifamily communities in 2013 and Mariposa in 2012.  The operations of the four multifamily communities for the nine months ended September 30, 2013 and 2012 and the operations of Mariposa for the nine months ended September 30, 2012 have been reported as discontinued operations in the consolidated statements of operations.  The gain of $50.9 million for the nine months ended September 30, 2013 represents the total gain recognized from the sales of the four multifamily communities.  The gain of $13.3 million for the nine months ended September 30, 2012 represents the gain recognized from the sale of Mariposa.  Other income related to these communities during the applicable periods was not significant.  There were no other property dispositions during the nine months ended September 30, 2013 or 2012.

We review our investments for impairments in accordance with accounting principles generally accepted in the United States of America (“GAAP”). For the three and nine months ended September 30, 2013 and 2012, we have not recorded any impairment losses. However, this conclusion could change in future periods based on changes in market conditions, primarily market rents, occupancy, the availability and terms of capital, investor demand for multifamily investments and U.S. economic trends. 

Significant Balance Sheet Fluctuations

The discussion below relates to significant fluctuations in certain line items of our consolidated balance sheets from December 31, 2012 to September 30, 2013.

Total real estate, net increased approximately $187.0 million principally as a result of $256.8 million of expenditures related to our development portfolio during 2013 and the acquisition of a multifamily community in San Francisco for $108.7 million. These increases were partially offset by sales of four multifamily communities carried at a combined net book value of $150.8 million in 2013 and depreciation expense of $60.8 million for the nine months ended September 30, 2013. See “Liquidity and Capital Resources — Long-Term Liquidity, Acquisition and Property Financing” for further information regarding our development portfolio.

Cash and cash equivalents decreased $301.8 million principally as a result of the cash portion of expenditures related to the development program of $259.5 million, acquisitions of noncontrolling interests of $48.5 million, advances on notes receivable of $29.1 million, $25.6 million related to the transition costs of the Initial Closing, and common stock redemption payments of $15.9 million.  This decrease was partially offset by the receipt of our share of the net sales proceeds of $174.5 million from the sales of real estate during the nine months ended September 30, 2013.

Mortgages and notes payable decreased approximately $36.0 million principally related to the sales real estate during the nine months ended September 30, 2013.

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Cash Flow Analysis

Similar to our discussion above related to “Results of Operations,” many of our cash flow results are affected by our 2012 and 2013 acquisition activity and the transition of many of our multifamily communities from lease up to stabilized operations, along with changes in the number of our developments.  We anticipate investing offering proceeds from our Initial Public Offering (which closed on September 2, 2011) in multifamily investments.  We currently expect developments to constitute one of our primary investment focuses.  Due to the longer periods required to deploy funds during a development and the timing of possible construction financing, we expect that the investment period could extend through parts of 2013 and 2014; however, once the offering proceeds are invested, we expect a decline in our acquisition and development activity.  Accordingly, our sources and uses of funds may not be comparable in future periods.

For the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012

Cash flows provided by operating activities for the nine months ended September 30, 2013 were $57.1 million as compared to cash flows provided by operating activities of $45.0 million for the same period in 2012.  The increase in cash provided by operating activities is partially due to the $9.0 million increase in NOI from both our Same Store operating properties and our 2013 and 2012 acquisitions.  The increase in NOI is primarily attributable to increased monthly rental revenue per unit and increased occupancy for the nine months ended September 30, 2013 compared to the same period of 2012.  Also, interest expense included in operating activities decreased approximately $5.1 million due to amounts capitalized in our development program.  A substantial portion of our other GAAP expenses are due to non-cash charges, primarily related to depreciation and amortization.  Our amortization of intangible non-cash charges decreased by $21.2 million for the nine months ended September 30, 2013 as compared to the same period in 2012, principally as a result of the relatively short life of lease intangibles (usually less than one year), which were fully amortized in prior periods.  The decrease was partially offset by $0.7 million of depreciation expense related to the 2013 acquisition of a multifamily operating community in San Francisco, California, depreciation expense related to new capital improvements placed in service subsequent to September 30, 2012, and $0.6 million increase in amortization expense related to the intangible assets acquired upon the acquisition of the BHMP GP Interest.  Additionally, cash flow from operating activities decreased by approximately $1.7 million as a result of transition expenses paid during 2013 related to our transition to self-management. We expect that other non-cash charges will continue to be significant determinates for net cash provided by operating activities.  We also expect that acquisition expenses will be a larger factor in our net cash flows provided by operating activities as we invest the remaining cash from our Initial Public Offering.

Cash flows used in investing activities for the nine months ended September 30, 2013 were $246.2 million compared to cash flow used by investing activities of $181.8 million during the comparable period of 2012.  The increase in cash used in investing activities was principally due to the increase of $189.9 million in expenditures related to our development portfolio during the nine months ended September 30, 2013 as compared to the same period of 2012.  Additionally, during the nine months ended September 30, 2013, we acquired a multifamily operating community in San Francisco, California for $108.0 million and the BHMP GP Interest for $23.1 million, as compared to the acquisitions of two multifamily operating communities during the same period of 2012 for $67.6 million. These decreases in cash used in investing activities was partially offset by the increase of $181.6 million in proceeds from the sale of real estate for the nine months ended September 30, 2013, compared to the same period of 2012. During 2013, we sold four multifamily operating communities and during 2012, we sold one multifamily operating community. We expect capital expenditures related to our development program to be a significant use of cash during the remainder of 2013 and during 2014.

Cash flows used in financing activities for the nine months ended September 30, 2013 were $112.7 million compared to cash flows used in financing activities of $36.1 million for the nine months ended September 30, 2012.  During the nine months ended September 30, 2013, we repaid mortgages payable of $71.7 million related to our sales of real estate and received mortgage proceeds of $41.4 million related to financing.  During the nine months ended September 30, 2012, we obtained financing proceeds from two new loans for $33.7 million. We also refinanced three loans, obtaining long term fixed rate financing, paying principal of $162.4 million and receiving new principal of $162.8 million.  During the nine months ended September 30, 2013, we distributed $45.3 million to noncontrolling interests as compared to $23.4 million for the comparable period of 2012.  

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Liquidity and Capital Resources

The Company has cash and cash equivalents of $148.9 million as of September 30, 2013.  We intend to deploy these funds for additional investments in multifamily communities, primarily development investments, to refinance existing mortgage and construction financings which may benefit from the lower interest environment, to fund costs associated with our transition to a self-managed company, and, to the extent necessary, for distributions to our common stockholders. We anticipate supplementing our investable cash with real estate financing, our credit facility, and possibly Co-Investment Ventures, other equity and debt offerings. Our investments may include wholly owned and joint venture equity interests in operating or development multifamily communities and loans secured directly or indirectly by multifamily communities.  Once we have deployed these proceeds, we would expect a significant reduction in the use of funds for acquisitions, developments, other real estate and real estate-related investments.

Generally, operating cash needs, including any related acquisition and financing costs, include our operating expenses, general administrative expenses, and asset management fees.  We expect to meet these requirements from our share of the operations of our existing investments and anticipated new investments.  However, as we currently intend to focus on development investments, which require time to develop, permit, construct and lease up, there will be a delay before development investments are providing positive cash flows.

Based on our current distribution levels and anticipated redemptions of our common stock, our current operating cash flow, net of the cash requirements noted above, is insufficient to meet our total distributions and redemptions, and we will be dependent on our current cash balances, the continued level of DRIP participation and on the returns from our anticipated investments to increase our operating cash flow. There is no assurance that we will be able to achieve these required returns. During these periods, as we invest and attempt to produce stabilized cash flows, we may use portions of the remaining proceeds from our Initial Public Offering to fund redemptions and the distributions paid to our common stockholders, which could reduce the amount available for new investments.  During this period, we may also decide to temporarily invest any uninvested proceeds in investments at lower returns than our targeted investments in multifamily and real estate-related investments.  These lower returns may affect our ability to make distributions or the amount actually disbursed.  We may also refinance or dispose of our investments and use the proceeds to reinvest in new investments, re-lever debt, or use for other obligations, including distributions on our common stock.

We expect to utilize our cash balances, cash flow from operating activities and our credit facility predominantly for the uses described above.  Accordingly, we expect our cash and cash equivalent balances to decrease as we execute our strategy.

Short-Term Liquidity

Currently, our primary indicators of short-term liquidity are our cash and cash equivalents and our credit facility.  As of September 30, 2013, our cash and cash equivalents balance was $148.9 million, compared to $450.6 million as of December 31, 2012. The decrease is primarily due to the acquisitions and development expenditures of $259.5 million, acquisition costs of noncontrolling interests of $48.5 million, advances on notes receivable of $29.1 million, and transition costs of $25.6 million for the nine months ended September 30, 2013. These decreases were partially offset by our share of the sales proceeds of $174.5 million from the sale of four multifamily communities in 2013.

Our consolidated cash and cash equivalent balance of $148.9 million as of September 30, 2013 includes approximately $15.2 million held by individual Co-Investment Ventures.  These funds are held for the benefit of the individual Co-Investment Ventures, including amounts available for distributions to us and other owners.

Our cash and cash equivalents are invested in bank demand deposits and money market accounts and a high grade money market fund.  We manage these credit exposures by diversifying our investments over several financial institutions.  However, because of the degree of our cash balances, a substantial portion of our holdings are in excess of U.S. federally insured limits. Further, beginning in 2013, certain non-interest bearing deposits, which were fully federally insured, are now subject to the same $250,000 insurance limit as other deposits, further increasing the amount of our deposits that are in excess of U.S. federal insured limits and requiring us to rely more on the credit worthiness of our deposit holders and our diversification strategy.

With the termination of our Initial Public Offering on September 2, 2011, we are more dependent on our cash flow from operating activities and the other sources discussed herein.  Cash flow from operating activities was $57.1 million for the nine months ended September 30, 2013 compared to $45.0 million for the comparable period in 2012.  As most of our investments are accounted for under the consolidated method of accounting, we now show our cash flow from operating activities gross, where equity accounting, which prior to 2012 was our primary method of accounting for our investments,

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generally only includes distributions from investees as distributed.  Included in our distributions to noncontrolling interests are discretionary distributions related to ordinary operations (i.e., excluding distributions related to capital activity, primarily debt financings).  Distributions related to operating activities were $19.0 million and $14.1 million for the nine months ended September 30, 2013 and 2012, respectively.

With our positive consolidated cash flow from operating activities, we are able to fund operating costs of our multifamily communities, interest expense, general and administrative costs and asset management fees. Our residents generally pay rents monthly which generally coincides with the payment cycle for our operating interest and general and administrative expenses.  Real estate taxes and insurance costs, the most significant exception to our 30 day payment cycle, are either paid from lender escrows, which are funded by us monthly, or from elective internal cash reserves.  Further, we expect our share of operating cash flows to benefit from our recent acquisitions and anticipated lease up of our development properties.  Accordingly, we do not expect to have to rely on other funding sources to meet our recurring operating, financing and administrative expenses.

We expect to fund our transition expenses through Self-Management Closing from existing cash balances (including cash available as a result of reduced fees and expense reimbursements related to our advisory and property management agreements). Thereafter, we expect to fund our increased general and administrative expenses, primarily increased staff and facility expenses, from the elimination or reductions of advisory and property management fees and cash flows from operating activities.

Because we evaluate the performance and returns of our investments loaded for all acquisition costs, including acquisition fees paid to our Advisor, we have and expect to primarily fund acquisition expenses from the remaining proceeds of our Initial Public Offering and property related debt financing.  However, acquisition costs are a use of operating cash, and in accordance with GAAP, acquisition expenses are a deduction to cash flow from operating activities. Accordingly, as our acquisition activity continues, we expect our GAAP reported cash flow from operating activities to be affected by the magnitude of our acquisitions.

The regular annual distribution rate on our common stock is currently 3.5% (based on a purchase price of $10.00 per share), which was set by our board of directors in the second quarter of 2012. Prior April 1, 2012, our previous regular annual distribution rate was 6.0%. The current distribution rate, if continued going forward, would reduce our distributions payable in 2013 as compared to 2012 and preserve cash for other uses, including investments in multifamily communities. We expect to fund distributions from multiple sources including (1) cash flow from our current investments and investments anticipated from the remaining proceeds of our Initial Public Offering, (2) the remaining proceeds of our Initial Public Offering, (3) financings and (4) dispositions.  In addition, to the extent that stockholders elect to reinvest their regular distributions under our DRIP, less cash is needed to fund distributions.  During 2013 and 2012, the percentage of our regular distributions that has been reinvested has averaged approximately 53% and 55%, respectively.

Our board of directors has modified and reinstated our share redemption program (“SRP”) effective March 1, 2013.  (See Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” for a description of our SRP.) Our SRP was suspended effective June 18, 2012, and we did not redeem any shares in the second, third and fourth quarters of 2012.  Prior to the suspension, we fulfilled all redemption requests properly submitted and approved through the first quarter of 2012, paying out $15.5 million in redemptions during 2012 (through the suspension date).

The SRP currently provides a limit of $7.0 million of redemptions per quarter. At that funding limit, this amount generally corresponds to the average participation in our DRIP, substantially netting out the funding requirement. However, the board of directors may modify the funding limit in its discretion. For the third quarter of 2013, the board of directors approved redemptions equal to the $7.0 million funding limit and in the second quarter of 2013, the board directors increased the funding limit for that quarter to $8.9 million. Accordingly, there is no assurance that the board of directors will not modify the redemption funding limit or that the redemptions or the level of stockholder participation in the DRIP will continue in the future in the same relative ranges.

After the September 2013 redemption payments made in accordance with the SRP, the Company has unfulfilled redemption requests of approximately $21.9 million, representing 2.6 million shares at an average price of $8.53 per share. The liquidity required to meet the share redemption requests could affect amounts available for investment, or if borrowings are used to fund the redemptions, the amount and term of our debt financing. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” for further discussion of our SRP.

We have a $150.0 million credit facility which we intend to use to provide greater flexibility in our cash management and to provide funding on an interim basis for our other short-term needs.  The credit facility matures on April 1, 2017, when

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all unpaid principal and interest is due, and provides for fees based on unutilized amounts and minimum usage.  The loan requires minimum borrowing of $10.0 million and monthly interest-only payments and monthly or annual payment of fees.  Draws under the credit facility are secured by a pool of certain wholly owned multifamily communities, and we may add and remove multifamily communities from the collateral pool, pursuant to the requirements under the credit facility agreement.  The aggregate borrowings under the credit facility are limited to 70% of the value of the collateral pool, which may be different than the carrying value for financial statement reporting.  We may elect to add multifamily communities to the collateral pool in order to increase amounts available for borrowing.  Conversely, dispositions of multifamily communities in the collateral pool that are not replaced would result in decreases in amounts available for borrowing or require repayment of outstanding draws to comply with borrowing limits.

The credit facility agreement contains customary provisions with respect to events of default, covenants and borrowing conditions.  In particular, the credit facility agreement requires us to maintain a consolidated net worth of at least $150.0 million, liquidity of at least $15.0 million and net operating income of the collateral pool to be no less than 155% of the facility debt service cost.  Certain prepayments may be required upon a breach of covenants or borrowing conditions.  We believe we are in compliance with all provisions as of September 30, 2013.

If circumstances provide us with incentives to acquire investments in all-cash transactions, we may draw on the credit facility for the funding.  We may also use the credit facility for interim construction financing, which could then be repaid from permanent financing at stabilization of each development.  When we have excess cash, we have the option to pay down the facility, which we have done beginning in the second half of 2011. As required by most credit facility lenders, our credit facility provides for a minimum balance, which for our facility is $10.0 million.  The total borrowings we are eligible to draw depend upon the value of the collateral we have pledged.  As of September 30, 2013, we may make additional draws of approximately $138.1 million.  Future borrowings under the credit facility are subject to periodic revaluations, either increasing or decreasing available borrowings.

The carrying amount of the credit facility and the average interest rate for different periods is summarized as follows (amounts in millions):

	September 30, 2013				For the Three Months Ended   September 30, 2013						For the Nine Months Ended   September 30, 2013
	Balance Outstanding		Interest Rate		Average Balance Outstanding		Average Interest Rate (a)		Maximum Balance Outstanding		Average Balance Outstanding		Interest Rate (a)		Balance Outstanding
Borrowings	$	10.0	2.26	%	$	10.0	2.27	%	$	10.0	$	10.0	2.28	%	$	10.0

(a)The average rate is based on month-end interest rates for the period.

As we utilize our cash balances as described in this section, we expect to use the credit facility more frequently.

Long-Term Liquidity, Acquisition and Property Financing

Currently, our primary funding source for investments is the remaining proceeds we received from our Initial Public Offering, joint venture arrangements, debt financings and dispositions. Our Initial Public Offering terminated on September 2, 2011, with gross and net proceeds from our Initial Public Offering of $1.46 billion and $1.30 billion, respectively.  As our Initial Public Offering is closed, we are dependent on the short-term and long-term liquidity sources discussed in this section.

As discussed above, we expect to use a substantial portion of our cash for additional investments in multifamily communities, primarily developments, and to a lesser extent multifamily operating and debt investments.  The actual amount invested will depend on the extent we are able to supplement these funds with other long-term sources as discussed below or the extent to which we utilize funds for distributions and redemptions related to our common stock or other uses. If our primary investments are developments, the time period to invest the funds and achieve a stabilized return could be longer.  Accordingly, our cash requirements during this period may reduce the amounts otherwise available for investment.

We may make equity or debt investments in individual multifamily communities, portfolios or mergers with other real estate companies.  The advantage of portfolio or merger acquisitions is that larger amounts of capital can be deployed more quickly.

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We may also increase the number and diversity of our investments by entering into Co-Investment Ventures, as we have done with our existing partners. As of September 30, 2013, approximately $2.9 million of PGGM’s $300 million commitment remains unfunded; however, in the event that certain investments are refinanced or new property debt is placed within two years from the date of the acquisition, the amount of unfunded commitment could potentially be increased by approximately $9.0 million.  PGGM is an investment vehicle for Dutch pension funds.  According to the sponsor of PGGM’s website, PGGM’s sponsor currently manages approximately 140 billion euro (approximately $189 billion, based on exchange rates as of September 30, 2013) in pension assets for over 2.5 million people as of May 2013.  Accordingly, we believe PGGM has adequate financial resources to meet its funding commitments and its PGGM CO-JV obligations.

As of September 30, 2013, if PGGM’s remaining funding commitment is drawn on, our corresponding share would be approximately $3.6 million.  We anticipate using the remaining proceeds of our Initial Public Offering and other sources described in this section to fund any amounts required.

 The MW Co-Investment Partner does not have any commitment for any additional investments.

As of September 30, 2013, we have 15 Co-Investment Ventures with partners other than the PGGM Co-Investment Partner and the MW Co-Investment Partner.  These other Co-Investment Ventures were established for the development of multifamily communities, where the other Co-Investment Venture partners are providing development services for a fee and a back-end interest in the development but are not expected to be a significant source of capital.  As of September 30, 2013, other than the developments described below, we do not have any firm commitments to fund any other Co-Investment Ventures.

We make debt investments in multifamily developments for the interest earnings and/or to have options to participate in the equity returns of the development.  As of September 30, 2013, we have four wholly owned debt investments and one unconsolidated debt investment through a PGGM CO-JV.  There is $8.0 million remaining to be funded on the wholly owned debt investments. The unconsolidated debt investment is fully funded. We believe each of the borrowers is in compliance with our debt agreements.

For each equity investment, we will also evaluate the use of new or existing debt, including our $150.0 million credit facility. Accordingly, depending on how the investment is structured, we may utilize financing at our company level (primarily related to our wholly owned investments), at the Co-Investment Venture level or at the Property Entity level, where both have third party partners.  For wholly owned acquisitions, we may acquire communities with all cash and then once a sufficient portfolio of unsecured communities is in place, obtain unsecured financing. We may also use our credit facility to fully or partially fund development costs, which we may later finance with construction or permanent financing.

Company level debt is defined as debt that is a direct or indirect obligation of the Company or its wholly owned subsidiaries.  If property debt is used, we expect it to be secured by the property (either individually or pooled for the credit facility), including rents and leases. Co-Investment Venture level debt is defined as debt that is an obligation of the Co-Investment Venture and is not an obligation or contingency for us but does allow us to increase our access to capital. Lenders for these Co-Investment Venture mortgages and notes payable have no recourse to us other than carve-out guarantees for certain matters such as environmental conditions, misuse of funds and material misrepresentations.  As of September 30, 2013, all but one of our loans, other than borrowings under our credit facility, are individually secured property debt. We have guaranteed 25% of the principal on one construction loan with a total commitment of $26.2 million. As of September 30, 2013, no amounts have been drawn under this construction loan.

Even with the recent increase in interest rates in relation to historical averages, favorable long-term, fixed rate financing terms remain available for high quality multifamily communities. As of September 30, 2013, the weighted average interest rate on our company level and Co-Investment Venture level communities fixed interest rate financings was 3.9% and 3.7%, respectively.  During 2013, we and Co-Investment Ventures closed mortgage financings of $50.0 million at a weighted average interest rate of 3.2%.  As of September 30, 2013, the remaining maturity term on our company level and Co-Investment Venture level fixed interest rate financings was approximately five years.

Based on current market conditions and our investment and borrowing policies, we would expect our share of operating property debt financing to be approximately 50% to 60% following the investment of the proceeds raised from the Initial Public Offering and upon stabilization and permanent financing of our portfolio.  As part of the PGGM CO-JV and MW CO-JV governing agreements, the PGGM CO-JVs and MW CO-JVs shall not have individual or aggregate permanent financing leverage greater than 65% of the Co-Investment Venture’s property fair values unless the respective Co-Investment Partner approves a greater leverage rate.  Our other Co-Investment Ventures also restrict overall leverage, ranging between 55% and 70%.

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We also anticipate using construction financing for our developments as an additional source of capital. These financings may be structured as conventional construction loans or so-called construction to permanent loans. Conventional construction loans are usually floating rate with terms of three to four years, with extension options of one to two years. These loan amounts usually range between 50% and 70% of total costs. Construction to permanent loans are usually fixed rate and for a longer term of seven to ten years.  Accordingly, these loans are best suited when we are looking to lock in long term financing rates. Both types of development financing require granting the lender a full security interest in the development property and may require that we provide recourse guarantees to the lender regarding the completion of the development within a specified time and cost and a repayment of all or a portion of the financing. We expect to obtain construction financing separately for each development, generally when we have entered into general contractor construction contracts and obtained necessary local permits. As of September 30, 2013, we have closed four conventional construction loans and expect to close additional loans which may include different structures. See the development tables below for additional discussion of our existing development activity.

As of September 30, 2013, the total carrying amount of all of our debt and our approximate pro rata share is summarized as follows (amounts in millions; LIBOR at September 30, 2013 was 0.18%):

	Total Carrying Amount		Weighted Average Interest Rate	Maturity Dates	Our Approximate Share (a)
Company Level
Permanent mortgage - fixed interest rate	$	30.3	3.86%	2018	$	30.3
Permanent mortgage - variable interest rate	24.0		Monthly LIBOR + 2.45%	2014 (b)	24.0
Construction loans - fixed interest rate (c)	—		4.31%	2023	—
Construction loans - variable interest rates (c)	3.7		Monthly LIBOR + 2.25%	2016 to 2017 (b)	3.7
Credit facility	10.0		Monthly LIBOR + 2.08%	2017	10.0
Total Company Level	68.0				68.0
Co-Investment Venture Level - Consolidated:
Permanent mortgages - fixed interest rates	853.3		3.68%	2015 to 2020	470.0
Permanent mortgage - variable interest rate	12.3		Monthly LIBOR + 2.35%	2017	6.8
Construction loans - fixed interest rate (c)	12.6		4.00%	2018	11.3
	878.2				488.1
Plus: Unamortized adjustments from business combinations	7.4
Total Co-Investment Venture Level - Consolidated	885.6
Total all levels	$	953.6			$	556.1

(a) Our approximate share for Co-Investment Ventures and Property Entities is calculated based on our share of contributed capital, as applicable.  These amounts are the contractual amounts and exclude unamortized adjustments from business combinations.  This effective ownership is indicative of, but may differ from, percentages for distributions, contributions or financing requirements.

(b) Includes loan(s) with one or two-year extension options for a fee of generally 0.25% of outstanding principal.

(c) The construction loans relate to four multifamily community developments with combined committed financing of $132.9 million and total estimated costs of $241 million. Draws under the commitment are generally available after we have funded a certain amount of equity, approximately 40% to 50% of the total costs, and are limited to prescribed percentages of the final cost, approximately 50% to 60% of the total costs. See the section below for additional information on our development activity.

Certain of these debts contain covenants requiring the maintenance of certain operating performance levels.  As of September 30, 2013, we believe the respective borrowers were in compliance with these covenants.  The above table does not include debt of Property Entities in which a Co-Investment Venture has not made an equity investment.

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As of September 30, 2013, contractual principal payments for our mortgages and notes payable for each of the five subsequent years and thereafter are as follows (in millions):

Years	Company Level		Consolidated Co-Investment Venture Level		Our Share
October through December 2013	$	—	$	1.1	$	0.6
2014	$	24.0	$	5.6	$	27.1
2015	$	0.2	$	83.6	$	46.2
2016	$	4.3	$	135.8	$	79.0
2017	$	10.6	$	219.9	$	130.1
Thereafter	$	28.9	$	432.2	$	273.1

We would expect to refinance these borrowings at or prior to their respective maturity dates and to refinance the conventional construction loans with longer term, permanent mortgages upon stabilization of the development.  There is no assurance that at those times market terms would allow financings at comparable interest rates or leverage levels. In addition, we would anticipate that for some of these communities, lower leverage levels may be necessary or beneficial and may require additional equity or capital contributions from us or the Co-Investment Venture partners. We expect to use proceeds from our Initial Public Offering or other sources discussed in this section to fund any such additional capital contributions.

GSEs have been an important financing source for multifamily communities.  The U.S. government continues to discuss potential restructurings of the GSEs including partial or full privatizations.  As a possible first step to these actions, in August 2012 the U.S. government imposed minimum distribution requirements for the GSEs, generally equal to their reported net income.  This has had and is expected to continue to have the effect of limiting the growth of GSE operations by restricting the reinvestment of their retained earnings.  As the U.S. Congress moves to the middle of the two year election cycle, possibly the most likely period for any legislation, additional changes may also be enacted in the future, which could include a restructuring or elimination of GSEs.  Accordingly, we have and will continue to maintain other lending relationships.  As of September 30, 2013, approximately 73% of all permanent financings currently outstanding by us, the Co-Investment Ventures and Property Entities were originated by GSEs as compared to 69% at September 30, 2012.  Recently, other loan providers, primarily insurance companies and to a lesser extent banks collateralized mortgages (“CMBs”), have been a significant source for multifamily community financing, and we expect this trend to continue.  Accordingly, if the GSEs are restructured, we believe there are or will be sufficient other lending sources to provide financing to the multifamily sector; however in such an event, the cost of financing could increase.

Additional sources of long-term liquidity may be increased leverage on our existing investments.  As of September 30, 2013, the leverage on our portfolio, as measured by GAAP cost, was approximately 46%. Through refinancings, we may be able to generate additional liquidity by increasing this leverage to our target leverage of 50-60%.  In certain circumstances we could be charged with prepayment penalties in executing this strategy. In addition, as of September 30, 2013, two wholly owned multifamily communities and one of our Co-Investment Ventures has multifamily communities with combined total carrying values of approximately $185.6 million which were not encumbered by any secured debt.

We may use our credit facility to provide bridge or long-term financing for our wholly owned communities.  Where the credit facility is used as bridge financing, we would use proceeds on a temporary basis until we could secure permanent financing. The proceeds of such permanent financing would then be available to repay borrowings under the credit facility. However, the credit facility may be used on a longer term basis, similar to permanent financing.

Other potential future sources of capital may include proceeds from arrangements with other joint venture partners, proceeds from the sale of our investments, if and when they are sold, and undistributed cash flow from operating activities.  We may also sell our debt or equity securities.  We anticipate that within four to six years after the termination of our Initial Public Offering we will begin the process of either listing our common stock on a national securities exchange or liquidating our assets, depending on the then current market conditions.

Dispositions may be a source of capital which may be recycled into investments in multifamily communities with higher long-term growth potential or into other investments with more favorable earnings prospects.  We may also use sales proceeds for other uses, including distributions on or redemptions of our common stock.  Any such dispositions will be on a selective basis as opportunities present themselves, where we believe current investments have achieved attractive pricing and alternative multifamily investments may provide for higher total returns. Other selection factors may include the age of the community, where we would look to dispose of properties before major improvements are required, increasing risk of

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competition, changing sub-market fundamentals, and compliance with applicable federal REIT tax requirements.  For all PGGM CO-JVs and MW CO-JVs, we need approval from the other partner to dispose of an investment.  In March 2012, we completed the disposition of Mariposa, generating cash proceeds of $23.9 million and gain on sale of $13.3 million.  In 2013, we completed the dispositions of Johns Creek, Cyan, Halstead, and Grand Reserve Orange generating combined cash proceeds of $205.5 million and gains on sale of $50.9 million.

In March 2012, our board of directors declared a $0.06 per share special cash distribution related to the sale of Mariposa.  (See “Distribution Policy — Distribution Activity — Special Cash Distribution” section below.)  Special cash distributions are in the discretion of our board of directors and, accordingly, there is no assurance the board will declare any special distributions in the future.

Our development investment activity includes both equity and loan investments (including one unconsolidated loan investment through a PGGM CO-JV). Equity investments are structured on our own account or with Co-Investment Venture partners.  Loan investments include mezzanine loans.

We classify our development investments as follows:

• Lease up - A multifamily community is considered in lease up when the community has begun leasing. A certificate of occupancy may be obtained as units are completed, and accordingly lease up may occur prior to final completion of the building. A multifamily community is considered complete when substantially constructed and capable of generating all significant revenue sources.

• Under development and construction - A multifamily community is considered under development and construction once we have signed a general contractors agreement and vertical construction has begun and ends once lease up has started.

• Pre-development - A multifamily community is considered in pre-development during finalization of budgets, permits and plans and ends once a general contractor agreement has been signed and vertical construction has begun.

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The following table, which may be subject to finalization of budgets, permits and plans, summarizes our equity multifamily development investments as of September 30, 2013 (amounts in millions):  

		Effective		Total Costs Incurred as of			Total		Estimated		Committed		Estimated Quarter	Occupancy as of
Community	Location	Ownership (a)	Units	September 30, 2013 (b)			Estimated Costs		Percent Complete (c)		Development Financing (d)		(“Q”) of Completion	September 30, 2013
Lease up:
Wholly Owned:
Allegro Phase II	Addison, TX	100%	121	$	15.2		$	16.4	93	%	$	—	4Q 2013	66%
The Franklin Delray	Delray Beach, FL	100%	180	33.3			33.7		99	%	—		4Q 2013	27%
Under development and construction:
Co-Investment Ventures:
4110 Fairmount	Dallas, TX	100%	299	28.6			47.8		60	%	26.2		3Q 2014	N/A
Arpeggio Victory Park	Dallas, TX	100%	377	39.0			62.0		63	%	31.3		3Q 2014	N/A
Allusion West University	Houston, TX	100%	231	26.9			43.8		61	%	21.9		4Q 2014	N/A
Blue Sol	Costa Mesa, CA	100%	113	22.7			38.6		59	%	—		4Q 2014	N/A
Seven RIO	Austin, TX	90%	220	20.1			60.7		33	%	—		4Q 2014	N/A
21 Lawrence	Denver, CO	100%	212	17.5			50.8		34	%	—		1Q 2015	N/A
Audubon	Wakefield, MA	100%	186	17.9			51.8		35	%	—		1Q 2015	N/A
Muse Museum District	Houston, TX	100%	270	23.0			51.2		45	%	—		2Q 2015	N/A
Water Street	Cambridge, MA	80%	392	38.7			192.3		20	%	—		3Q 2015	N/A
Alexan	Dallas, TX	90%	365	27.1			87.4		31	%	53.5		1Q 2016	N/A
Pre-development:
Co-Investment Ventures:
Peachtree (e)	Atlanta, GA	80%	327	10.1			67.7		15	%	—		4Q 2015	N/A
Brickell (e)	Miami, FL	80%	417	25.2			97.2		26	%	—		4Q 2015	N/A
Mission Gorge (e)	San Diego, CA	90%	444	35.3			118.1		30	%	—		1Q 2016	N/A
Tysons Corner (e)	Tysons Corner, VA	90%	461	36.9			212.2		17	%	—		1Q 2016	N/A
Shady Grove (e)	Rockville, MD	90%	366	19.2			88.9		22	%	—		3Q 2016	N/A
Renaissance Phase II	Concord, CA	55%	180	9.2			50.7		18	%	—		3Q 2016	N/A
Total equity investments			5,161	445.9			$	1,371.3	33	%	$	132.9
Less: Construction in progress transferred to operating real estate				(37.5		)
Total equity investment per consolidated balance sheet				$	408.4

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(a) Our effective ownership represents our share of contributed capital and may change over time as certain milestones related to budgets, plans and completion are achieved.  This effective ownership is indicative of, but may differ from, percentages for distributions, contributions or financing requirements.

(b) Our share of total estimated costs is generally the same as total estimated costs except for developments where the Co-Investment Partner has also invested. Our share of total estimated costs (calculated as described in (a)) as of September 30, 2013 is approximately $1.3 billion.

(c) Estimated percent complete is calculated as total costs incurred as a percentage of total estimated costs.

(d) Committed development financing includes the total amount of construction or other loans secured by the development. Draws under the commitment are generally available after we have funded a certain amount of equity, approximately 45% of the total costs, and are limited to proscribed percentages of the final cost, approximately 55% of the total costs. As of September 30, 2013, no amounts have been drawn under these construction loans. See section above for additional information regarding our development financing.

(e) If the development achieves certain milestones primarily related to approved budgets less than maximum amounts, we will reimburse the Co-Investment Venture partner for their equity ownership and we will be responsible for all of the development costs. The Co-Investment Venture partner would then be entitled to back end interests based the development achieving certain total returns.

We have commenced development activities for all of the developments in which we currently have an equity interest.  As of September 30, 2013, we have entered into construction and development contracts with $595.4 million remaining to be paid.  These construction costs are expected to be paid during the completion of the development and construction period, generally within 24 months.  These construction contracts provide for guaranteed maximum pricing from the general contractor or cost overrun guarantees from the developer partners for a portion but not all of the construction and development costs, which will serve to provide some protection to us from pricing increases or cost overruns.  We expect to enter into additional construction contracts on similar terms during the remainder of 2013 and into 2014 on our existing developments and additional developments in our pipeline.

Developments classified as pre-development, where we have not entered into final construction contracts, are further subject to market conditions. Depending on such factors as anticipated supply, projected rents and the state of the local economy, the cost and completion projections could be adjusted, including adjusting the plans and cost or deferring the development until market fundamentals are more favorable.

Based on current market information, we believe construction financing is available for each of these current developments; however, with our liquidity position, we may elect to wait until the communities are stabilized to obtain financing, particularly for smaller developments.  In February 2013, we obtained a $21.9 million, 30-day LIBOR plus 2.25%, three year term construction loan related to the Allusion West University development.  In April 2013, we obtained a $26.2 million, 30-day LIBOR plus 2.25%, four year term construction loan related to the 4110 Fairmount development. In June 2013, we obtained a $31.3 million construction to permanent loan with a fixed interest rate of 4.31% and a ten year term related to the Arpeggio development. In August 2013, we obtained a $53.5 million construction to permanent loan with a fixed interest rate of 4.00% and a five year term related to the Alexan development. We are currently in discussions with lenders on obtaining other construction financing.  We believe other construction financings would be obtained at 50-60% of cost and at floating rates in the range of 200 basis points to 275 basis points over 30-day LIBOR.  (As of September 30, 2013, 30-day LIBOR was 0.18%.)  There is no assurance that any of these terms would still be available at the time of any future financing.  We expect to utilize the liquidity sources noted above to fund the non-financed portions of the developments.

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The following table summarizes our debt investments in developments as of September 30, 2013: 

					Amounts Advanced at		Fixed			Effective
Community	Location	Units	Total Commitment		September 30, 2013		Interest Rate		Maturity Date	Ownership (a)
Mezzanine loans:
Consolidated:
The Domain	Houston, TX	320	$	10.5	$	10.5	14.0	%	April 2014 (b)	100	%
Jefferson at One Scottsdale	Scottsdale, AZ	388	22.7		22.7		14.5	%	December 2015 (b)	100	%
Kendall Square	Miami Dade County, FL	321	12.3		12.3		15.0	%	January 2016 (b)	100	%
Jefferson Center	Richardson, TX	360	15.0		7.0		15.0	%	September 2016	100	%
		1,389	60.5		52.5		14.5	%
Unconsolidated:
Jefferson Creekside	Allen, TX	444	14.1		14.1		14.5	%	August 2015 (b)	55	%
Total loans		1,833	$	74.6	$	66.6	14.5	%

(a) Effective ownership represents our current ownership percentage in the loan.

(b) The maturity date may be extended for one year at the option of the borrower after meeting certain conditions, generally with the payment of an extension fee of 0.50% of the applicable loan balance.

Due to their recent construction, recurring property capital expenditures for our multifamily communities are not expected to be significant in the near term. For recent stabilized acquisitions, we substantially funded our share of any deferred maintenance at the time of the acquisition.  As of September 30, 2013, the remaining amounts of deferred maintenance for these recent acquisitions are not significant.  For the remainder of our multifamily communities, we would expect recurring capital expenditures to be funded from the Co-Investment Ventures or our cash flow from operating activities. For non-recurring capital expenditures, we would look to the capital sources noted above. We currently expect our annual recurring and non-recurring non-development capital expenditures, based on our current stabilized multifamily communities, to be in the range of $6.0 million to $15.0 million for the next three to five years.

Distribution Policy

Distributions are authorized at the discretion of our board of directors based on its analysis of our prior performance, 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, dispositions, general financial condition and other factors that our board of directors deems relevant.  The board’s decision will be influenced, in part, by its obligation to ensure that we maintain our status as a REIT.  Distributions may also be paid in anticipation of cash flow that we expect to receive during a later period as we invest the remaining proceeds from our Initial Public Offering.

We currently expect to substantially deploy our remaining proceeds from our Initial Public Offering during 2014. With our focus on development investments, there may be a further period to receive the income from such investments.  During this period, we may use portions of the remaining proceeds from our Initial Public Offering and other sources to fund a portion of the distributions paid to our common stockholders, which could reduce the amount available for new investments.  There is no assurance that these future investments will achieve our targeted returns necessary to maintain our current level of distributions. However, as development, lease up or redevelopment projects are completed and begin to generate income, we would expect to have additional funds available to distribute to our stockholders.

Accordingly, we cannot assure as to when we will consistently generate sufficient cash flow solely from operating activities to fully fund distributions.  Many of the factors that can affect the availability and timing of cash distributions to stockholders are beyond our control, and a change in any one factor could adversely affect our ability to pay future distributions. There can be no assurance that future cash flow will support paying our currently established distributions or maintaining distributions at any particular level or at all.

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During periods when our operating cash flow has not generated sufficient operating cash flow to fully fund the payment of distributions on our common stock, we have paid and may in the future pay some or all of our distributions from sources other than operating cash flow.  As noted above, we may use portions of the remaining proceeds from our Initial Public Offering to fund a portion of the distributions paid to our common stockholders, which could reduce the amount available for new investments. We may also refinance or dispose of our investments and use the proceeds to fund distributions on our common stock or reinvest the proceeds in new investments to generate additional operating cash flow.  In addition, from time to time, our Advisor has agreed to waive or defer all or certain fees, expenses or incentives due to it, which has made more cash available for distributions.  Our Advisor may, but is under no obligation to, waive or defer such fees in the future.  The participation in our DRIP will also reduce the cash portion of our distributions. There is no assurance that these sources will be available in future periods, which could result in temporary or permanent adjustments to our distributions.

Distribution Activity

Special Cash Distribution

As discussed above under “Overview — Distributions — Special Cash Distribution,” in March 2012 our board of directors authorized a special cash distribution related to the sale of Mariposa in the amount of $0.06 per share of common stock payable to stockholders of record on July 6, 2012.  The total special cash distribution of approximately $10.0 million was accrued during the three months ended March 31, 2012, and was paid on July 11, 2012.  There were no special cash distributions during the nine months ended September 30, 2013.

Regular Distributions

The following table shows the regular distributions paid and declared for the nine months ended September 30, 2013 and 2012 and cash flow from operating activities over the same periods (in millions, except per share amounts):

	Distributions Paid in Cash (a)		Distributions Reinvested (DRIP)		Total Distributions		Funds from Operations (b)		Cash Flow from Operating Activities (c)		Total Distributions Declared (d)		Declared Distributions Per Share (d)
2013
Third Quarter	$	7.1	$	7.8	$	14.9	$	0.6	$	13.5	$	14.9	$	0.088
Second Quarter	7.1		7.8		14.9		14.0		23.1		14.7		0.087
First Quarter	6.8		7.7		14.5		13.7		20.5		14.5		0.086
Total	$	21.0	$	23.3	$	44.3	$	28.3	$	57.1	$	44.1	$	0.261
2012
Third Quarter	$	6.6	$	8.0	14.6		$	10.2	$	16.9	$	14.7	$	0.088
Second Quarter	8.1		10.0		18.1		6.7		16.6		14.4		0.087
First Quarter	10.9		13.9		24.8		9.1		11.5		24.8		0.150
Total	$	25.6	$	31.9	$	57.5	$	26.0	$	45.0	$	53.9	$	0.325

(a)         Regular distributions accrue on a daily basis and are paid in the following month.

(b)         Funds from operations (“FFO”) represents our net income (loss) adjusted primarily for depreciation and amortization expense and excludes gains on sale of real estate.  For a reconciliation of our net income (loss) to FFO, see “Non-GAAP Performance Financial Measures — Funds from Operations and Modified Funds from Operations” below.

(c) Cash flow from operating activities has not been reduced by distributions to noncontrolling interests for operating activities of $19.0 million and $14.1 million for the nine months ended September 30, 2013 and 2012, respectively. See paragraph below for additional discussion.

(d)          Represents distributions accruing during the period.

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Cash flow from operating activities exceeded regular distributions by $12.8 million for the nine months ended September 30, 2013 while regular distributions exceeded cash flow from operating activities by $12.5 million for the nine months ended September 30, 2012.  By reporting our investments on the consolidated method of accounting, our cash flow from operating activities includes not only our share of cash flow from operating activities but also the share related to noncontrolling interests.  Accordingly, our reported cash flow from operating activities includes cash flow attributable to our consolidated joint venture investments.  During the nine months ended September 30, 2013, we distributed an estimated $19.0 million of cash flow from operating activities to these noncontrolling interests, effectively reducing the share of cash flow from operating activities available to us to approximately $38.1 million, which was less than our regular distributions by $6.2 million.  For the nine months ended September 30, 2012, we distributed an estimated $14.1 million of cash flow from operating activities to noncontrolling interests, effectively reducing the share of cash flow from operating activities to approximately $30.9 million, which was less than our regular distributions by $26.6 million.  Further, our regular distributions exceeded our funds from operations by $16.0 million and $31.6 million for the nine month periods ended September 30, 2013 and 2012, respectively.  The improvement in the difference between our cash flow from operating activities, both as reported and adjusted, and from our funds from operations are due to improved operations in our multifamily communities and the decrease in the regular distribution rate as discussed above. Our distribution rate was reduced from 6.0% to 3.5% (based on $10 per share) effective April 1, 2012.

During the nine months ended September 30, 2013 and 2012, our regular cash distributions in excess of our cash flow from operations, as adjusted, were funded from the DRIP and our available cash.  The primary sources of our available cash were the remaining proceeds from our Initial Public Offering and dispositions.  We terminated our Initial Public Offering in September 2011, raising net proceeds in 2011 of $539.6  million.  As of December 31, 2011, December 31, 2012 and September 30, 2013 we had cash and cash equivalents balances of $655.5 million, $450.6 million and $148.9 million, respectively, a significant portion of which were remaining proceeds from the Initial Public Offering. 

Over the long-term, as we continue to invest the remaining proceeds from our Initial Public Offering in income producing multifamily communities and as our development investments are completed and leased up, we expect that more of our distributions (except with respect to distributions related to sales of our assets, which may include special distributions) will be paid from our share of cash flow from operating activities.  However, operating performance and property dispositions cannot be accurately predicted due to numerous factors, including our ability to invest capital at favorable accretive yields, the financial performance of our investments, including our developments once operating, spreads between capitalization and financing rates, and the types and mix of assets available for investment.  As a result, future distribution rates may change over time and future distributions declared and paid may continue to exceed cash flow from operating activities.

Off-Balance Sheet Arrangements

We generally do not use or seek out off-balance sheet arrangements. Currently, off-balance sheet arrangements are limited to investments in unconsolidated real estate joint ventures by us or through consolidated Co-Investment Ventures.  As of September 30, 2013, we had one investment of $14.5 million in an unconsolidated joint venture which was made through the Custer CO-JV.  In August 2012, the Custer CO-JV made a commitment to fund up to $14.1 million under a mezzanine loan to the Custer Property Entity, a development with an unaffiliated third party developer, to develop a 444 unit multifamily community in Allen, Texas, a suburb of Dallas.  The mezzanine loan has an interest rate of 14.5% and matures in 2015, subject to extension options by the borrower. As of September 30, 2013, the total commitment has been advanced under the mezzanine loan.  The Custer CO-JV does not have an equity investment in the development.  This CO-JV is a separate legal entity formed for the sole purpose of holding its respective joint venture investment with no other significant operations.  Our effective ownership in the Custer CO-JV is 55%.  Distributions are made pro rata in accordance with ownership interests.  The Custer CO-JV has no debt, and its sole operating asset is the mezzanine loan. 

We have no other 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.

Contractual Obligations

All of our Co-Investment Ventures include buy/sell provisions. Under most of these provisions and during specific periods, a partner could make an offer to purchase the interest of the other partner and the other partner would have the option to accept the offer or purchase the offering partner’s interest at that price.  As of September 30, 2013, no buy/sell arrangements exist; however, we may need additional liquidity sources in order to meet our obligations under any future buy/sell arrangements.

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Most of our other Co-Investment Ventures with developers/owners include put provisions for the other Co-Investment Venture partner.  The put provisions are available generally one year after substantial completion of the project for a specified purchase price which at September 30, 2013, have a contractual total of approximately $28.5 million for all of the Co-Investment Ventures.  The put provisions are recorded as redeemable noncontrolling interests in our consolidated balance sheets at the point they become probable of redemption, and as of September 30, 2013, we have recorded approximately $13.1 million as redeemable noncontrolling interests.  These other Co-Investment Ventures also include buy/sell provisions, generally available after the seventh year after completion of the development.  Separate from put provisions, we have recorded in our September 30, 2013 consolidated balance sheets redeemable noncontrolling interests of $6.4 million which are probable of being redeemed at their stated amounts if the developments achieve certain milestones primarily related to approved budgets at less than the maximum amounts.

The multifamily communities in which we have investments may have commitments to provide affordable housing. Under these arrangements, we generally receive from the resident a below-market rent, which is determined by a local or national authority. In certain arrangements, a local or national housing authority makes payments covering some or substantially all of the difference between the restricted rent paid by residents and market rents. In connection with our acquisition of The Gallery at NoHo Commons, we assumed an obligation to provide affordable housing through 2048. As partial reimbursement for this obligation, the California housing authority will make level annual payments of approximately $2.0 million through 2028 and no reimbursement for the remaining 20-year period. We may also be required to reimburse the California housing authority if certain operating results are achieved on a cumulative basis during the term of the agreement. At the acquisition, we recorded a liability of $14.0 million based on the fair value of terms over the life of the agreement.  We will record rental revenue from the California housing authority on a straight-line basis, deferring a portion of the collections as deferred lease revenues. As of September 30, 2013 and December 31, 2012, we have approximately $16.0 million and $17.5 million, respectively, of carrying value for deferred lease revenues related to The Gallery at NoHo Commons.

Estimated Per Share Value

On March 1, 2013, our board of directors established an estimated per share value of the Company’s common stock effective as of March 1, 2013 equal to $10.03 per share.  See Item 5 of our Annual Report on Form 10-K, filed with the SEC on March 1, 2013, for additional information on this estimated per share value. We expect our board of directors to update the estimated per share value no later than 18 months from March 1, 2013 and do not anticipate publishing any new estimated per share value prior to the board of directors establishing such per share value. Prior to such updated estimated per share value, we provide the following cautions and limitations:

The estimated value of our shares was calculated as of a specific date.  The estimated value of our shares is expected to fluctuate over time in response to, including but not limited to, changes in multifamily capitalization rates, rental and growth rates, progress and market conditions related to developments, financing interest rates, returns on competing investments, changes in administrative expenses and other costs affecting working capital, amounts of distributions on our common stock, redemptions of our common stock, changes in the amount of common shares outstanding, the proceeds obtained for any common stock transactions and local and national economic factors. Further, as we are still investing proceeds from our Initial Public Offering and completing our developments, the composition of our portfolio and the related multifamily fundamentals could change over time.

While the Company believes the methodologies utilized in calculating its estimated per share value were standard in the multifamily real estate sector to determine fair value, the estimated values may or may not represent fair value determined in accordance with GAAP.  The estimated value should not be considered as an alternative to total stockholders’ equity calculated in accordance with GAAP.

As with any valuation methodology, the methodologies used to determine the estimated value per share are based upon a number of estimates and assumptions that may prove later to be inaccurate or incomplete. Further, different market participants using different assumptions and estimates could derive different estimated values or estimated values per share. The estimated value per share may also not represent the amount that our shares would trade at on a national exchange, the amount realized in the sale or liquidation of the Company or what a common stockholder would realize in a sale of shares.

There is no assurance that our methodologies used to estimate value per share would be acceptable to FINRA or in compliance with ERISA guidelines with respect to their reporting requirements.

Accordingly, stockholders and others are cautioned in the use of our estimated per share value in future periods; any such use should be reviewed in connection with other GAAP measurements presented subsequent to March 1, 2013.

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Non-GAAP Performance Financial Measures

In addition to our net income (loss) which is presented in accordance with GAAP, we also present certain supplemental non-GAAP performance measurements.  These measurements are not to be considered more relevant or accurate than the performance measurements presented in accordance with GAAP.  In compliance with SEC requirements, our non-GAAP measurements are reconciled to net income, the most directly comparable GAAP performance measure.  As with other non-GAAP performance measures, neither the SEC nor any other regulatory body has passed judgment on these non-GAAP performance measures.

Net Operating Income and Same Store Net Operating Income

We define NOI as consolidated rental revenue, less consolidated property operating expenses, real estate taxes and property management fees.  We believe that NOI provides a supplemental measure of our operating performance because NOI reflects the operating performance of our properties and excludes items that are not associated with property operations of the Company, such as general and administrative expenses, asset management fees and interest expense.  NOI also excludes revenues not associated with property operations, such as interest income and other non-property related revenues.  NOI may be helpful in evaluating all of our multifamily operations and providing comparability to other real estate companies.

We define Same Store NOI as NOI for our stabilized multifamily communities that are comparable between periods.  We view Same Store NOI as an important measure of the operating performance of our properties because it allows us to compare operating results of properties owned for the entirety of the current and comparable periods and therefore eliminates variations caused by acquisitions or dispositions during the periods under review.

NOI and Same Store NOI should not be considered a replacement for GAAP net income as they exclude certain income and expenses that are material to our operations.  Additionally, NOI and Same Store NOI may not be useful in evaluating net asset value or impairments as they also exclude certain GAAP income and expenses and non-comparable properties.  Investors are cautioned that NOI and Same Store NOI should only be used to assess the operating performance trends for the properties included within the definition.

The following table presents a reconciliation of our income (loss) from continuing operations to NOI and Same Store NOI for our multifamily communities for the three and nine months ended September 30, 2013 and 2012 (in millions):

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	For the Three Months Ended   September 30,						For the Nine Months Ended   September 30,
	2013			2012			2013			2012
Loss from continuing operations	$	(14.1	)	$	(5.0	)	$	(15.5	)	$	(37.2	)
Adjustments to reconcile loss from continuing operations to NOI:
Asset management fees	1.9			1.7			5.5			4.9
General and administrative expenses	3.7			3.5			7.9			8.3
Acquisition expenses	3.7			—			3.7			2.5
Transition expenses	8.1			—			8.6			—
Investment and development expenses	0.3			—			0.3			—
Interest expense	5.9			7.8			18.6			23.7
Depreciation and amortization	22.0			21.2			63.2			78.5
Interest income	(2.3		)	(1.8		)	(6.4		)	(5.9		)
Gain on revaluation of equity on a business combination	—			(1.7		)	—			(1.7		)
Loss on early extinguishment of debt	—			0.2			—			0.5
Equity in (income) loss of investments in unconsolidated real estate joint ventures	(0.4		)	0.1			(0.8		)	1.3
Other (income) expense	—			0.5			(0.2		)	1.0
NOI	28.8			26.5			84.9			75.9
Less non-comparable:
Revenue	(4.2		)	(2.7		)	(10.6		)	(4.6		)
Operating expenses	2.2			1.1			5.0			2.3
Same Store NOI	$	26.8		$	24.9		$	79.3		$	73.6

Funds from Operations and Modified Funds from Operations

Funds from operations (“FFO”) is a non-GAAP performance financial measure that is widely recognized as a measure of REIT operating performance.  We use FFO as currently defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be net income (loss), computed in accordance with GAAP excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property (including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets, impairment write-downs of depreciable real estate or of investments in unconsolidated real estate partnerships, joint ventures and subsidiaries that are driven by measurable decreases in the fair value of depreciable real estate assets, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and noncontrolling interests.  We believe that FFO is helpful to our investors and our management as a measure of operating performance because it excludes real estate-related depreciation and amortization, impairments of depreciable real estate, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, highlights the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities (including capitalized interest and other costs during the development period), general and administrative expenses, and interest costs, which may not be immediately apparent from net income.  Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate and intangibles diminishes predictably over time independent of market conditions or the physical condition of the asset.  Since real estate values have historically risen or fallen with market conditions (which includes property level factors such as rental rates, occupancy, capital improvements, status of developments and competition, as well as macro-economic factors such as economic growth, interest rates, demand and supply for real estate and inflation), 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, is helpful for our investors in understanding our performance.  Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, acquisition expenses, lower yields on cash held in accounts, income from portfolio properties, operating costs during the lease up of developments, interest rates on acquisition financing and operating expenses.  In addition, FFO will be affected by the types of investments in our and our Co-Investment Ventures’ portfolios, which include, but are not limited to, equity and mezzanine, mortgage and bridge loan investments in existing operating properties and properties in various stages of development and the accounting treatment of the investments in accordance with our accounting policies.

Since FFO was promulgated, GAAP has adopted several new accounting pronouncements, such that management, investors and analysts have considered the presentation of FFO alone to be insufficient. In addition, real estate companies that

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are experiencing significant acquisition activity, particularly during their initial life cycle, have not reached sustainable operations and are significantly affected by acquisition activity.  While other start-up entities may also experience significant acquisition activity, other industries’ acquisitions tend to be more asset focused. Under GAAP, most acquisition costs related to acquisitions of a controlling interest in real estate are expensed, while asset acquisition costs or costs related to investments in noncontrolling interests are capitalized.

Accordingly, in addition to FFO, we use modified funds from operations (“Modified Funds from Operations” or “MFFO”) as currently defined by the Investment Program Association (“IPA”).  The IPA’s Guideline 2010-01, “Supplemental Performance Measure for Publicly Registered, Non-Listed REITs:  Modified Funds from Operations” defines MFFO as FFO further adjusted for the following items:

(1) acquisition fees and expenses;

(2) straight-line rent amounts, both income and expense;

(3) amortization of above or below market intangible lease assets and liabilities;

(4) amortization of discounts and premiums on debt investments;

(5) gains or losses from the early extinguishment of debt;

(6) gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivatives holdings except where the trading of such instruments is a fundamental attribute of our operations;

(7) gains or losses related to fair value adjustments for derivatives not qualifying for hedge accounting, including interest rate and foreign exchange derivatives;

(8) gains or losses related to consolidation from, or deconsolidation to, equity accounting;

(9) gains or losses related to contingent purchase price adjustments; and

(10) adjustments related to the above items for unconsolidated entities in the application of equity accounting.

In October 2011, NAREIT clarified its definition of FFO to exclude impairment charges related to depreciable property and investments in unconsolidated real estate partnerships and joint ventures.  Although IPA has not formally modified its definition of MFFO, with this clarification, we have deleted impairment charges as an adjustment to MFFO.  As we have not recognized any impairment charges, this change in definition has not affected our historical reporting of FFO or MFFO.

We believe that MFFO is helpful in assisting management assess the sustainability of operating performance in future periods and, in particular, after our investment stage is completed, primarily because it excludes acquisition expenses that affect property operations only in the period in which the property is acquired.  Although MFFO includes other adjustments, the exclusion of acquisition expense and other adjustments related to business combinations are generally the most significant adjustments to us at the present time, as we are currently in our acquisition stage.  Thus, MFFO provides helpful information relevant to evaluating our operating performance in periods in which there is no acquisition or business combination activity and to compare our operating performance to other real estate companies that are not incurring acquisition expenses.

As explained below, management’s evaluation of our operating performance excludes the items considered in the calculation based on the following economic considerations:

• Acquisition expenses. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analyses differentiate costs to acquire the investment from the operations derived from the investment. Both of these acquisition costs have been and are expected to be funded from the proceeds of the primary portion of our Initial Public Offering and other financing sources and not from operations.  We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of our real estate investments and is consistent with management’s analysis of the investing and operating performance of our properties.  Acquisition expenses include those paid to our Advisor or third parties.

• Gains or losses related to fair value adjustments for derivatives not qualifying for hedge accounting and gains or losses related to contingent purchase price adjustments.  Each of these items relates to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding, which may not be directly attributable to our current operating performance. As these gains or losses relate to underlying long-term assets and liabilities, where we are not speculating or trading assets, management believes MFFO provides useful supplemental information by focusing on the changes in our core operating fundamentals rather than changes that may reflect anticipated gains or losses.

• Adjustments for amortization of above or below market intangible lease assets.  Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of

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intangibles diminishes predictably over time and that these charges be recognized currently in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of the real estate.

• Adjustments for straight-line rents and amortization of discounts and premiums on debt investments.  In the proper application of GAAP, rental receipts and discounts and premiums on debt investments are allocated to periods using various systematic methodologies. This application will result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance.

• Adjustment for gains or losses related to early extinguishment of hedges, debt, consolidation or deconsolidation and contingent purchase price.  Similar to extraordinary items excluded from FFO, these adjustments are not related to our continuing operations.  By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.

Many of these adjustments are similar to adjustments required by SEC rules for the presentation of pro forma business combination disclosures, particularly acquisition expenses, gains or losses recognized in business combinations and other activity not representative of future activities.  However, investors are cautioned that neither FFO nor MFFO is a pro forma measurement.

By providing MFFO, we believe we are presenting useful information that also assists investors and analysts to better assess the sustainability of our operating performance after our acquisition stage is completed.  We also believe MFFO is a recognized measure of sustainable operating performance by the real estate industry.  MFFO is useful in comparing the sustainability of our operating performance after our acquisition stage is completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities or as affected by other MFFO adjustments.  However, investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our acquisition stage is completed, as it excludes acquisition costs that have a negative effect on our operating performance and the reported book value of our common stock and stockholders’ equity during the periods in which properties are acquired.

FFO or MFFO should not be considered as an alternative to net income (loss), nor as an indication of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to fund distributions.  In particular, as we are currently in the acquisition phase of our life cycle, acquisition costs and other adjustments which are increases to MFFO are, and may continue to be, a significant use of cash, an expense in the determination of our GAAP net income, and a use of our cash flow from operating activities.  FFO and MFFO are also not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO and MFFO.  Although the Company has not historically incurred any impairment charges, investors are cautioned that we may not recover any impairment charges in the future.  MFFO also excludes rental revenue adjustments and unrealized gains and losses related to certain other fair value adjustments.  Although the related holdings are not held for sale or used in trading activities, if the holdings were sold currently, it could affect our operating results and any fair value losses may not be recoverable from future operations.  Accordingly, both FFO and MFFO should be reviewed in connection with other GAAP measurements.  Our FFO and MFFO as presented may not be comparable to amounts calculated by other REITs.

The following table presents our calculation of FFO and MFFO, net of noncontrolling interests, and provides additional information related to our operations (in millions, except per share amounts):

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	For the Three Months Ended   September 30,						For the Nine Months Ended   September 30,
	2013			2012			2013			2012
Net income (loss) attributable to common stockholders	$	(0.5	)	$	(3.9	)	$	30.8		$	(10.7	)
Real estate depreciation and amortization (a)	13.8			14.1			40.6			50.0
Gain on sale of real estate	(12.7		)	—			(43.1		)	(13.3		)
FFO attributable to common stockholders	0.6			10.2			28.3			26.0
Gain on revaluation of equity on a business combination	—			(0.9		)	—			(0.9		)
Acquisition expenses (b)	3.7			—			3.7			2.5
Straight-line rents	0.1			0.1			0.4			0.3
Loss on early extinguishment of debt	—			0.1			—			0.3
Loss on derivative fair value adjustment	0.2			0.3			—			0.7
Amortization of premium on debt investment	—			(0.1		)	—			(0.3		)
MFFO attributable to common stockholders	$	4.6		$	9.7		$	32.4		$	28.6
GAAP weighted average common shares	168.9			166.4			168.6			165.8
Net income (loss) per common share	$	—		$	(0.02	)	$	0.19		$	(0.06	)
FFO per common share	$	0.01		$	0.06		$	0.17		$	0.16
MFFO per common share	$	0.03		$	0.06		$	0.19		$	0.17

(a)         The real estate depreciation and amortization amount includes our share of consolidated real estate-related depreciation and amortization of intangibles, less amounts attributable to noncontrolling interests, and our similar estimated share of unconsolidated Co-Investment Venture depreciation and amortization, which is included in earnings of unconsolidated real estate joint venture investments.

(b)         Acquisition expenses include our share of expenses incurred by us, less amounts attributable to noncontrolling interests, and our unconsolidated investments in real estate joint ventures, including amounts incurred with our Advisor. Acquisition expenses also include operating expenses that were identified or given credit by the seller in the acquisition but are expensed in accordance with GAAP.

The following additional information is presented in evaluating the presentation of net income (loss) attributable to common stockholders in accordance with GAAP and our calculations of FFO and MFFO:

• During the three months ended September 30, 2013 and 2012, we capitalized interest of $2.8 million and $0.7 million, respectively, on our real estate developments.  During the nine months ended September 30, 2013 and 2012, we capitalized interest of $6.7 million and $1.6 million, respectively, on our real estate developments.These amounts are included as an addition in presenting net income (loss), FFO and MFFO attributable to common stockholders.

• During the three and nine months ended September 30, 2013, we incurred $8.2 million and $8.6 million, respectively, of transition expenses related to our transition to self-management, primarily including legal, financial advisors, consultants and costs of the Special Committee, general transition services (primarily related to staffing, information technology and facilities), and payments to the Advisor in connection with the transition to self-management. We did not incur any similar costs for the same periods in 2012.

• During the three and nine months ended September 30, 2012, we incurred $1.2 million and $2.0 million, respectively, of strategic review expenses, primarily including financial advisors, legal and costs of the Special Committee.

As noted above, we believe FFO is helpful to investors as measures of operating performance and MFFO is useful to investors to assess the sustainability of our operating performance after our acquisition stage is completed.  FFO and MFFO are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures and principal payment of debt related to investments in unconsolidated real estate joint ventures, are not deducted when calculating FFO and MFFO.

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We believe the current definition of MFFO is consistent with industry standards for our operations and provides useful information to investors and management, subject to the limitations described above. However, MFFO is not a replacement for financial information presented in conformity with GAAP and should be reviewed in connection with other GAAP measurements.

Critical Accounting Policies and Estimates

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

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these judgments, assumptions and estimates for changes which would affect the reported amounts. These estimates are based on management’s historical industry experience and on various other judgments and assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these judgments, assumptions and estimates. Our significant judgments, assumptions and estimates include the evaluation and consolidation of variable interest entities (“VIEs”), the allocation of the purchase price of acquired properties, income recognition for investments in unconsolidated real estate joint ventures, the evaluation of our real estate-related investments for impairment, the classification and income recognition for noncontrolling interests and the determination of fair value.

Principles of Consolidation and Basis of Presentation

Our consolidated financial statements include our consolidated accounts and the accounts of our wholly owned subsidiaries.  We also consolidate other entities in which we have a controlling financial interest or entities where we are determined to be the primary beneficiary.  VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability.  The primary beneficiary is required to consolidate a VIE for financial reporting purposes.  The determination of the primary beneficiary requires management to make significant estimates and judgments about our rights, obligations, and economic interests in such entities as well as the same of the other owners.  For entities in which we have less than a controlling financial interest or entities with respect to which we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting.  Accordingly, our share of the net earnings or losses of these entities is included in consolidated net income.  All significant inter-company accounts and transactions have been eliminated in consolidation.

Real Estate and Other Related Intangibles

Acquisitions

For real estate properties acquired by us or our Co-Investment Ventures classified as business combinations, we determine the purchase price, after adjusting for contingent consideration and settlement of any pre-existing relationships.  We record the tangible assets acquired, consisting of land, inclusive of associated rights, and buildings, any assumed debt, identified intangible assets and liabilities, asset retirement obligations and noncontrolling interests based on their fair values.  Identified intangible assets and liabilities primarily consist of the fair value of in-place leases and contractual rights.  Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interest 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 interest in the acquiree are less than the fair value of the identifiable net assets acquired.

The fair value of any tangible assets acquired, expected to consist of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, buildings and improvements.  Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods.  When we acquire rights to use land or improvements through contractual rights rather than fee simple interests, we determine the value of the use of these assets based on the relative fair value of the assets after considering the contractual rights and the fair value of similar assets. Assets acquired under these contractual rights are classified as intangibles and amortized on a straight-line basis over the shorter of the contractual term or the estimated useful life of the asset. Contractual rights related to land or air rights that are substantively separated from depreciating assets are amortized over the life of the contractual term or, if no term is provided, are classified as indefinite-lived intangibles.  Intangible assets are evaluated at each reporting period to determine whether the indefinite and finite useful lives are appropriate.

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We determine the value of 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 and 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 leasable area considering current market conditions.  In estimating fair value of in-place leases, we consider items such as real estate taxes, insurance, leasing commissions, tenant improvements and other operating expenses to execute similar deals as well as projected rental revenue and carrying costs during the expected lease up period.  The estimate of the fair value of tenant relationships also includes our estimate of the likelihood of renewal. We amortize the value of in-place leases acquired to expense over the remaining term of the leases. The value of tenant relationship intangibles will be amortized to expense over the initial term and any anticipated renewal periods, but in no event will the amortization period for intangible assets exceed the remaining depreciable life of the building. 

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

We determine the value of other contractual rights based on our evaluation of the specific characteristics of the underlying contracts and by applying a fair value model to the projected cash flows or usage rights that considers the timing and risks associated with the cash flows or usage. We amortize the value of finite contractual rights over the remaining contract period. Indefinite-lived contractual rights are not amortized but are evaluated for impairment.

We determine the fair value of assumed debt by calculating the net present value of the scheduled debt service 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.

Developments

We capitalize project costs related to the development and construction of real estate (including interest and related loan fees, property taxes, insurance, and other direct costs associated with the development) as a cost of the development.  Indirect project costs that relate to several developments are capitalized and allocated to the developments to which they relate.  Indirect costs, not clearly related to development and construction, are expensed as incurred.  For each development, capitalization begins when we determine that the development is probable and significant development activities are underway.  We suspend capitalization at such time as significant development activity ceases, but future development is still probable.  We cease capitalization when the developments or other improvements, including any portion, are completed and ready for their intended use, or if the intended use changes such that capitalization is no longer appropriate.  Developments or improvements are generally considered ready for intended use when the certificates of occupancy have been issued and the units become ready for occupancy.

Noncontrolling Interests

Redeemable noncontrolling interests are comprised of our consolidated Co-Investment Venture partners’ interests in multifamily communities where we believe it is probable that we will be required to purchase the partner’s noncontrolling interest.  We record obligations under the redeemable noncontrolling interests initially at the higher of a) fair value, increased or decreased for the noncontrolling interest’s share of net income or loss and equity contributions and distributions or b) the redemption value.  The redeemable noncontrolling interests are temporary equity not within our control, and presented in our consolidated balance sheet outside of permanent equity between debt and equity.  The determination of the redeemable classification requires analysis of contractual provisions and judgments of redemption probabilities.

The calculation of the noncontrolling interest’s share of net income or loss is based on the economic interests held by all of the owners.

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Investment Impairments

If events or circumstances indicate that the carrying amount of the property may not be recoverable, we make an assessment of the property’s recoverability by comparing the carrying amount of the asset to our estimate of the undiscounted future operating cash flows, expected to be generated over the life of the asset including its eventual disposition.  If the carrying amount exceeds the aggregate undiscounted future operating cash flows, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property.  In addition, we evaluate indefinite-lived intangible assets for possible impairment at least annually by comparing the fair values with the carrying values.  Fair value is generally estimated by valuation of similar assets.

For real estate we own through an investment in an unconsolidated real estate joint venture or other similar real estate investment structure, at each reporting date we compare the estimated fair value of our real estate investment to the carrying value.  An impairment charge is recorded to the extent the fair value of our real estate investment is less than the carrying amount and the decline in value is determined to be other than a temporary decline.  We did not record any impairment losses for the three and nine months ended September 30, 2013 and 2012.

Fair Value

In connection with our GAAP assessments and determinations of fair value for many real estate assets and liabilities, noncontrolling interests and financial instruments, there are generally not available observable market price inputs for substantially the same items.  Accordingly, we make assumptions and use various estimates and pricing models, including, but not limited to, estimated cash flows, costs to lease properties, useful lives of the assets, costs of replacing certain assets, discount and interest rates used to determine present values, market capitalization rates, sales of comparable investments, rental rates, and equity valuations. Many of these estimates are from the perspective of market participants and will also be obtained from independent third-party appraisals. However, we are responsible for the source and use of these estimates. A change in these estimates and assumptions could be material to our results of operations and financial condition.

Inflation

The real estate market has not been affected significantly by inflation in the past several years due to a relatively low inflation rate.  The majority of our fixed-lease terms are less than 12 months and reset to market if renewed.  The majority of our leases also contain protection provisions applicable to reimbursement billings for utilities.  Should inflation return, due to the short-term nature of our leases, multifamily investments are considered good inflation hedges.

Inflation may affect the costs of developments we invest in, primarily related to construction commodity prices, particularly lumber, steel and concrete. Inflation for these materials has also recently been low due to lower overall construction as a result of the effects of the U.S. and global recessions. However, inflation could be become an issue due to current U.S. monetary policies or accelerated growth in American, Chinese or other global construction activities. We intend to mitigate these inflation consequences through guaranteed maximum construction contracts, developer cost overrun guarantees and pre-buying materials when reasonable to do so. Increases in construction prices could lower our return on the developments and reduce amounts available for other investments.

REIT Tax Election

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code and have qualified as a REIT since the year ended December 31, 2007.  To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subject to federal income tax at the corporate level.  We are organized and operate in such a manner as to qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to remain qualified as a REIT.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve the financing objectives, we borrow primarily at fixed rates or variable rates with what we believe are the lowest margins available and in some cases, the ability to convert variable rates to fixed rates either directly or through interest rate hedges.  With regard to variable rate financing, we manage 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, which to date have included interest rate caps.

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As of September 30, 2013, we had approximately $896.2 million of outstanding consolidated mortgage debt at a weighted average fixed interest rate of approximately 3.7%, $40.0 million of variable rate consolidated mortgage debt at a variable interest rate of monthly LIBOR plus 2.4%, and the outstanding amount under our credit facility was $10.0 million with a weighted average of monthly LIBOR plus 2.08%.  As of September 30, 2013, we have four consolidated notes receivable with a carrying value of approximately $52.4 million, a weighted average fixed interest rate of 14.5%, and a weighted average remaining maturity of 2.0 years.

Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt or fixed rate real estate notes receivable unless such instruments are traded or are otherwise terminated prior to maturity. However, interest rate changes will affect the fair value of our fixed rate instruments. As we do not expect to trade or sell our fixed rate debt instruments prior to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed rate instruments, would have a significant impact on our operations.

Conversely, movements in interest rates on variable rate debt, loans receivable and real estate-related securities would change our future earnings and cash flows, but not significantly affect the fair value of those instruments.  As of September 30, 2013, we did not have any loans receivable or real estate-related securities with variable interest rates.  We are exposed to interest rate changes primarily as a result of our variable rate debt used to acquire or hold our consolidated multifamily communities and our consolidated cash investments. We quantify our exposure to interest rate risk based on how changes in interest rates affect our net income.  We consider changes in the 30-day LIBOR rate to be most indicative of our interest rate exposure as it is a function of the base rate for our credit facility and is reasonably correlated to changes in our earnings rate on our cash investments. We consider increases of 0.5% to 2.0% in the 30-day LIBOR rate to be reflective of reasonable changes we may experience in the current interest rate environment. The table below reflects the annual effect of an increase in the 30-day LIBOR to our net income related to our significant variable interest rate exposures for our wholly owned assets and liabilities as of September 30, 2013 (amounts in millions, where positive amounts reflect an increase in income and bracketed amounts reflect a decrease in income):

	Increases in Interest Rates
	2.0%			1.5%			1.0%			0.5%
Variable rate mortgage debt and credit facility interest expense	$	(1.0	)	$	(0.8	)	$	(0.5	)	$	(0.3	)
Interest rate caps	0.1			—			—			—
Cash investments	3.0			2.2			1.5			0.7
Total	$	2.1		$	1.4		$	1.0		$	0.4

There is no assurance that we would realize such income or expense as such changes in interest rates could alter our asset or liability positions or strategies in response to such changes. The table also does not reflect changes in operations related to any unconsolidated investments in real estate joint ventures, where we may not have control over financing matters and substantial portions of variable rate debt related to multifamily development projects where interest is capitalized.

As of September 30, 2013, we have four separate interest rate caps with a total notional amount of $162.7 million.  Each of these interest rate caps has a single 30 day LIBOR cap rate.  If during its term future market LIBOR interest rates exceed the 30 day LIBOR cap rate, we will be due a payment equal to the excess LIBOR rate over the cap rate multiplied by the notional amount.  In no event will we owe any future amounts in connection with the interest rate caps.  Accordingly, interest rate caps can be an effective instrument to mitigate increases in short-term interest rates without incurring additional costs while interest rates are below the cap rate.  Although not specifically identified to any specific interest rate exposure, we plan to use these instruments related to our developments, credit facility and variable rate mortgage debt.  Because the counterparties providing the interest rate cap agreements are major financial institutions which have investment grade ratings by the Standard & Poor’s Ratings Group, we do not believe there is significant exposure at this time to a default by a counterparty provider. 

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A summary of our interest rate caps as of September 30, 2013 is as follows (amounts in millions):

		LIBOR		Maturity	Carrying and
Notional Amount		Cap Rate		Date	Estimated Fair Value
$	50.0	2.5	%	April 2016	$	0.1
50.0		2.5	%	April 2016	0.1
50.0		2.0	%	April 2016	0.1
12.7		4.0	%	March 2017	—
$	162.7				$	0.3

We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations as of September 30, 2013.

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of September 30, 2013, 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, 2013 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 management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

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

Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1.  Legal Proceedings.

We are not party to, and none of our communities are subject to, any material pending legal proceeding nor are we aware of any such legal or regulatory proceedings contemplated by governmental authorities.

Item 1A.  Risk Factors.

There have been no material changes to the risk factors contained in Part I, Item 1A set forth in our Annual Report on Form 10-K, filed with the SEC on March 1, 2013 and Part II, Item 1A set forth in our Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2013.

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

Use of Proceeds from Registered Securities

On September 2, 2008, our Registration Statement on Form S-11 (File No. 333-148414), covering our Initial Public Offering of up to 200 million shares of common stock, was declared effective under the Securities Act. Our Initial Public Offering commenced on September 5, 2008 and was terminated on September 2, 2011.  We offered a maximum of 200 million shares in our Initial Public Offering at an aggregate offering price of up to $2 billion, or $10.00 per share, with discounts available to certain categories of purchasers.  Behringer Securities LP, an affiliate of our Advisor, was the dealer manager of the Initial Public Offering.  We sold approximately 146.4 million shares of our common stock in our Initial Public Offering on a best efforts basis pursuant to the offering for gross offering proceeds of approximately $1.46 billion.

We incurred expenses of approximately $157.1 million in connection with the issuance and distribution of the registered securities pursuant to the Initial Public Offering, all of which was paid to our Advisor and its affiliates, and includes commissions and dealer manager fees paid to Behringer Securities which reallowed all of the commissions and a portion of the dealer manager fees to soliciting dealers.

The net offering proceeds to us from the Initial Public Offering, after deducting the total expenses incurred described above, were $1.30 billion.  From the commencement of the Initial Public Offering through September 30, 2013, we had used approximately $1.2 billion of such net proceeds to invest in real estate and real estate-related investments, net of related debt.  Of the amount used for these investments, approximately $49.6 million was paid to the Advisor as acquisition and advisory fees and acquisition expense reimbursements. Not included in our amount invested are commitments related to our developments which as of September 30, 2013 had not yet been incurred.

Recent Sales of Unregistered Securities

In connection with the entry into the Master Modification Agreement and the Initial Closing, on July 31, 2013, we issued 10,000 shares of a new Series A non-participating, voting, cumulative, 7.0% convertible preferred stock, par value $0.0001 per share (the “Series A Preferred Stock”), to Behringer Harvard Multifamily REIT I Services Holdings, LLC, a Texas limited liability company (“Services Holdings”). As part of the consideration for issuing the Series A Preferred Stock, Services Holdings paid us $1.00 and our Advisor surrendered all existing 1,000 convertible shares of non-participating, non-voting stock, par value $0.0001 per share, of the Company, which we immediately canceled. We issued these shares of Series A Preferred Stock in a private transaction exempt from the registration requirements under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) of the Securities Act.

The shares of Series A Preferred Stock entitle the holder to one vote per share on all matters submitted to the holders of the common stock, a liquidation preference equal to $10.00 per share before the holders of common stock are paid any liquidation proceeds, and 7.0% cumulative cash dividends on the liquidation preference and any accrued and unpaid dividends.

As determined and limited pursuant to the Articles Supplementary establishing the Series A Preferred Stock, the Series A Preferred Stock will automatically convert into shares of our common stock upon any of the following triggering events: (a) in connection with a listing of our common stock on a national exchange, (b) upon a change of control of the Company or (c) upon election by the holders of a majority of the then outstanding shares of Series A Preferred Stock on or before July 31, 2018. Notwithstanding the foregoing, if a listing occurs prior to December 31, 2016, such listing (and the related triggering event) will be deemed to occur on December 31, 2016 and if a change of control transaction occurs prior to December 31, 2016, such

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change of control transaction will not result in a change of control triggering event. Upon a triggering event, all of the shares of Series A Preferred Stock will, in total, generally convert into an amount of shares of our common stock equal in value to 15% of the excess of (i) (a) the value per share of our common stock at the time of the applicable triggering event, as determined pursuant to the Articles Supplementary establishing the Series A Preferred Stock and assuming no shares of the Series A Preferred Stock are outstanding, multiplied by the number of shares of common stock outstanding on July 31, 2013, plus (b) the aggregate value of distributions (including distributions constituting a return of capital) paid through such time on the shares of common stock outstanding on July 31, 2013 over (ii) the aggregate issue price of those outstanding shares plus a 7% cumulative, non-compounded, annual return on the issue price of those outstanding shares. In the case of a triggering event based on a listing or change of control only, this amount will be multiplied by another 1.15 to arrive at the conversion value.

Share Redemption Program

As we previously announced in the periodic report on Form 8-K filed with the SEC on June 22, 2012 in connection with the Company’s consideration of a strategic review, the Company came into possession of material non-public information.  Based on the advice of outside legal counsel, our board of directors decided that suspending our share redemption program (“SRP”) was in the best interests of the Company and its stockholders.  Accordingly, effective as of June 18, 2012, our board of directors indefinitely suspended our SRP effective for redemptions being sought for the second quarter of 2012.  However, in connection with its determination of the estimated value of our shares, our board of directors modified and reinstated our SRP, which permits our stockholders to sell their shares back to us subject to the significant conditions and limitations of the program.  The modified and reinstated SRP was effective as of March 1, 2013 and the first time period redemptions were considered under the modified and reinstated SRP was at the end of the second quarter of 2013 with respect to redemptions to be made in the third quarter of 2013. No redemptions were made during the second quarter of 2013.

The following is a summary of the significant terms of the SRP:

• For redemptions sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility (“Exceptional Redemptions”), the purchase price per share redeemed under our SRP will equal the lesser of: (i) the current estimated share value pursuant to our valuation policy and (ii) the average price per share the original purchaser or purchasers of shares paid to us for all of their shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock) (the “Original Share Price”) less the aggregate of any special distributions so designated by our board of directors, distributed to stockholders prior to the redemption date and declared from the date of first issue of such redeemed shares (the “Special Distributions”).  Exceptional Redemptions will generally have priority over Ordinary Redemptions (as defined below).

• For redemptions other than those sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility (“Ordinary Redemptions”), the purchase price per share redeemed under our SRP will equal the lesser of (i) 85% of the current estimated share value pursuant to our valuation policy and (ii) the Original Share Price less any Special Distributions.

• A quarterly funding limit has been established of $7 million per quarter (which our board of directors may increase or decrease from time to time).

• If we do not redeem all shares presented for redemption during any period in which we are redeeming shares, then all shares will generally be redeemed on a pro rata basis during the relevant period.  With respect to any pro rata treatment, requests for Exceptional Redemptions will be considered first, as a group, with any remaining available funds allocated pro rata among requests for Ordinary Redemptions.  Generally, no outstanding requests for Ordinary Redemptions will be satisfied until all outstanding requests for Exceptional Redemptions are satisfied in full.

• There is now no time limitation for those seeking an Exceptional Redemption.

• The effective date of any redemption will be the fifth business day following the date the board of directors approves the redemption.

Other significant terms of the SRP are summarized below:

Notwithstanding the redemption prices established above, our board of directors may determine, whether pursuant to formulae or processes approved by our board of directors or otherwise set by our board of directors, the redemption price of the shares, which may differ between Ordinary Redemptions and Exceptional Redemptions; provided, however, that we must provide at least 30 days’ notice to stockholders before applying the new price.

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The SRP is generally available only for stockholders who have held their shares for at least one year. Any shares approved for redemption will be redeemed on a periodic basis as determined from time to time by our board of directors, and no less frequently than annually.  In addition to the $7 million per quarter funding limit discussed above, which the board of directors may modify, we will not redeem, during any twelve-month period, more than 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption.

Our board of directors reserves the right in its sole discretion at any time and from time to time to (1) waive the one-year holding requirement in the event of other exigent circumstances such as bankruptcy, a mandatory distribution requirement under a stockholder’s IRA or with respect to shares purchased under or through our DRIP, (2) reject any request for redemption, (3) change the purchase price for redemptions, (4) limit the funds to be used for redemptions hereunder or otherwise change the redemption limitations or (5) amend, suspend (in whole or in part) or terminate the SRP. If we suspend our SRP (in whole or in part), except as otherwise provided by the board of directors, until the suspension is lifted, we will not accept any requests for redemption in respect of shares to which such suspension applies in subsequent periods and any such requests and all pending requests that are subject to the suspension will not be honored or retained, but will be returned to the requestor. Our Advisor and its affiliates will defer their own redemption requests, if any, until all other requests for redemption have been satisfied in any particular period. If a request for an Exceptional Redemption is made, we will waive the one-year holding requirement (1) upon the request of the estate, heir or beneficiary of a deceased stockholder or (2) upon the qualifying disability of a stockholder or upon a stockholder’s confinement to a long-term care facility, provided that the condition causing such disability or need for long-term care was not preexisting on the date that such person became a stockholder.

During the third quarter ended September 30, 2013, we redeemed and purchased shares as follows:

	Total Number of Shares Redeemed	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Be Purchased Under the Plans or Programs (a)
July	904,393	$	9.88	904,393	—
August	—	—		—	—
September	780,569	8.97		780,569	—
	1,684,962	$	9.46	1,684,962	—

(a) A description of the maximum number of shares that may generally be purchased under our share redemption program is included in the narrative preceding this table. Our board of directors increased the $7.0 million per quarter funding limit to $8.9 million with respect to requests redeemed in July.

Since the Company reinstated the SRP, because of the SRP’s funding limits, the Company has not been able to satisfy all properly submitted redemption requests and has been satisfying requests for Ordinary Redemptions on a pro rata basis. With respect to the second and third quarters of 2013, requests to redeem approximately 2.5 million and 2.6 million shares, respectively, were not satisfied.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.   Mine Safety Disclosures.

Not applicable

Item 5.  Other Information.

None.

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Item 6.  Exhibits.

Exhibit Number	Description
3.1	Articles of Restatement, incorporated by reference to Exhibit 3.1.2 to the Company’s Form 8-K filed on September 8, 2008
3.2	Articles Supplementary, incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed on August 6, 2013
3.3	Fourth Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to the Company's Form 8-K filed on March 1, 2010
4.1	Third Amended and Restated Distribution Reinvestment Plan, incorporated by reference to Exhibit 4.4 to the Company’s Form 10-K filed on March 29, 2012
4.2	Third Amended and Restated Share Redemption Program, incorporated by reference to Exhibit 4.4 to the Company's Form 10-K filed on March 1, 2013
4.3	Statement regarding Restrictions on Transferability of Shares of Common Stock, incorporated by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-11/A filed on May 9, 2008
10.1*	Master Modification Agreement, dated as of July 31, 2013, by and among Behringer Harvard Multifamily REIT I, Inc., Behringer Harvard Multifamily OP I LP, REIT TRS Holding, LLC, Behringer Harvard Multifamily REIT I Services Holdings, LLC, Behringer Harvard Multifamily Advisors I, LLC, Behringer Harvard Multifamily Management Services, LLC and Behringer Harvard Institutional GP LP +
10.2*	Fifth Amended and Restated Advisory Management Agreement, dated as of July 31, 2013, by and between Behringer Harvard Multifamily REIT I, Inc. and Behringer Harvard Multifamily Advisors I, LLC +
10.3*	Second Amended and Restated Property Management Agreement, dated as of July 31, 2013, between Behringer Harvard Multifamily REIT In, Inc., Behringer Harvard Multifamily OP I LP and Behringer Harvard Multifamily Management Services, LLC
10.4*	Registration Rights Agreement, dated as of July 31, 2013, among Behringer Harvard Multifamily REIT I, Inc. and the Shareholders from time to time party thereto
10.5*	Amended and Restated License Agreement, dated July 31, 2013, by and between Behringer Harvard Holdings, LLC and Behringer Harvard Multifamily REIT I, Inc.
10.6*	Transition Services Agreement, dated July 31, 2013, by and between Behringer Harvard Multifamily REIT I, Inc., REIT TRS Holding, LLC and Behringer Harvard Multifamily REIT I Services Holdings, LLC
10.7*	Employment Agreement, effective as of August 1, 2013, with Daniel J. Rosenberg
10.8*	Employment Agreement, effective as of August 1, 2013, with Howard Garfield
10.9*	Employment Agreement, effective as of August 1, 2013, with Margaret Daly
10.10*	Employment Agreement, effective as of August 1, 2013, with Mark T. Alfieri
10.11*	Employment Agreement, effective as of August 1, 2013, with Ross Odland
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002**
99.1	Second Amended and Restated Policy for Estimation of Common Stock Value, incorporated by reference to Exhibit 99.1 to the Company’s Form 10-K filed on March 29, 2012
101*	The following information from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Stockholders’ Equity and (iv) Consolidated Statements of Cash Flows

* Filed or furnished herewith

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

⁺ Confidential treatment has been requested for certain portions of this exhibit. These portions have been omitted from this Quarterly Report and submitted separately to the Securities and Exchange Commission pursuant to a Confidential Treatment Request under Rule 24b-2 of the Exchange Act.

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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 MULTIFAMILY REIT I, INC.
Dated: November 7, 2013		/s/ Howard S. Garfield
		Howard S. Garfield
		Chief Financial Officer
		(Principal Financial Officer)

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