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EX-31.2 - Behringer Harvard Short-Term Liquidating Trust | v178720_ex31-2.htm |
EX-32.1 - Behringer Harvard Short-Term Liquidating Trust | v178720_ex32-1.htm |
EX-31.1 - Behringer Harvard Short-Term Liquidating Trust | v178720_ex31-1.htm |
EX-21.1 - Behringer Harvard Short-Term Liquidating Trust | v178720_ex21-1.htm |
EX-10.44 - Behringer Harvard Short-Term Liquidating Trust | v178720_ex10-44.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2009
Commission
File Number: 000-51291
Behringer
Harvard Short-Term Opportunity Fund I LP
(Exact
Name of Registrant as Specified in Its Charter)
Texas
|
71-0897614
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(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer
Identification
No.)
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15601
Dallas Parkway, Suite 600, Addison, Texas 75001
(Address
of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (866) 655-1620
Securities
registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to
section 12(g) of the Act:
Units
of limited partnership interest
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No
x
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 website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.45 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 o No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act:
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o (Do not check if
a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
While
there is no established market for the registrant’s limited partnership
interests, the aggregate market value of limited partnership interests held by
nonaffiliates of the registrant as of June 30, 2009 (the last business day of
the registrant’s most recently completed second fiscal quarter) was
$101,988,240, assuming a market value of $9.44 per unit of limited partnership
interest.
As of
March 19, 2010, the registrant had 10,803,839 units of limited partnership
interest outstanding.
BEHRINGER
HARVARD SHORT-TERM OPPORTUNITY FUND I LP
FORM
10-K
Year
Ended December 31, 2009
Page
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PART
I
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Item
1.
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Business.
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4
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Item
1A.
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Risk
Factors.
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8
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Item
1B.
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Unresolved
Staff Comments.
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25
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Item
2.
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Properties.
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25
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Item
3.
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Legal
Proceedings.
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26
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Item
4.
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(Removed
and Reserved)
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26
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
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27
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Item
6.
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Selected
Financial Data.
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28
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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29
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk.
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42
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Item
8.
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Financial
Statements and Supplementary Data.
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42
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
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42
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Item
9A(T).
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Controls
and Procedures.
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43
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Item
9B.
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Other
Information.
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43
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PART
III
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||||
Item
10.
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Directors,
Executive Officers and Corporate Governance.
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44
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Item
11.
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Executive
Compensation.
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47
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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47
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence.
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48
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Item
14.
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Principal
Accounting Fees and Services.
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49
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PART
IV
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||||
Item
15.
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Exhibits,
Financial Statement Schedules.
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51
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Signatures
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52
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2
Forward-Looking
Statements
Certain
statements in this Annual Report on Form 10-K 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 Short-Term Opportunity Fund I LP (which may be referred to
herein as the “Partnership,” “we,” “us,” or “our”) and our subsidiaries,
including our ability to rent space on favorable terms, to address our debt
maturities and to fund our liquidity requirements, the value of our assets, our
anticipated capital expenditures, the amount and timing of anticipated future
cash distributions to our unitholders, the estimated per unit value of our
limited partnership units 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 unitholders 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 “Risk Factors” in this Annual Report on Form
10-K and the factors described below:
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·
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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;
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·
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the
availability of cash flow from operating activities for distributions and
capital expenditures;
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·
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our
level of debt and the terms and limitations imposed on us by our debt
agreements;
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·
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the
availability of credit generally, and any failure to refinance or extend
our debt as it comes due or a failure to satisfy the conditions and
requirements of that debt;
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·
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the
need to invest additional equity in connection with debt refinancings as a
result of reduced asset values and requirements to reduce overall
leverage;
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·
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future
increases in interest rates;
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·
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impairment
charges;
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·
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our
ability to retain our executive officers and other key personnel of our
advisor, our property manager and their
affiliates;
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·
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conflicts
of interest arising out of our relationships with our advisor and its
affiliates;
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·
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changes
in the level of financial assistance or support provided by our sponsor or
its affiliates: and
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·
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unfavorable
changes in laws or regulations impacting our business or our
assets.
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Forward-looking
statements in this Annual Report on Form 10-K 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 results. We intend for these
forward-looking statements to be covered by the applicable safe harbor
provisions created by Section 27A of the Securities Act and Section 21E of the
Exchange Act.
Cautionary
Note
The
representations, warranties and covenants made by us in any agreement filed as
an exhibit to this Annual Report on Form 10-K are made solely for the benefit of
the parties to the agreement, including, in some cases, for the purpose of
allocating risk among the parties to the agreement, and should not be deemed to
be representations, warranties or covenants to or with any other
parties. Moreover, these representations, warranties or covenants
should not be relied upon as accurately describing or reflecting the current
state of our affairs.
3
PART
I
Item
1. Business.
General
Description of Business
We are a
limited partnership formed in Texas on July 30, 2002. Our general
partners are Behringer Harvard Advisors II LP (“Behringer Advisors II”) and
Robert M. Behringer (collectively the “General Partners”). We were
funded through capital contributions from our General Partners and initial
limited partner on September 20, 2002 (date of inception) and offered our
limited partnership units pursuant to the public offering which commenced on
February 19, 2003 and terminated on February 19, 2005 (the “Offering”).
The Offering was a best efforts continuous offering and we admitted new
investors until the termination of the Offering. As of December 31,
2009, we had 10,803,839 limited partnership units outstanding. Our
limited partnership units are not currently listed on a national exchange, and
we do not expect any public market for the units to develop.
We have
used the proceeds from the Offering, after deducting offering expenses, to
acquire interests in twelve properties, including seven office building
properties, one shopping/service center, a hotel redevelopment with an adjoining
condominium development, two development properties and undeveloped
land. As of December 31, 2009, ten of the twelve properties we
acquired remain in our portfolio. As of December 31, 2009, we
wholly owned eight properties and we owned interests in two properties through
separate limited partnerships or joint venture arrangements. We are
not currently seeking to purchase additional properties for our
portfolio.
At a
special meeting of our limited partners held on August 29, 2008, the
Partnership’s limited partners approved the Partnership’s Second Amended and
Restated Agreement of Limited Partnership (the “Partnership Agreement”).
The Partnership Agreement was executed and adopted by the Partnership on
September 5, 2008.
The
following is a summary of the material amendments to the Partnership Agreement
that were executed and adopted by the Partnership. In addition to the
material amendments described below, certain non-material amendments and
conforming changes are reflected in the Partnership Agreement.
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·
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Remove
limitations contained in NASAA Guidelines with respect to the ability of
the Partnership to borrow funds from its general partners or their
affiliates.
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·
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To
allow the Partnership to own or lease property in a general partnership or
joint venture with an affiliate of its general partners that is not
publicly registered.
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·
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To
allow the Partnership’s general partners and their affiliates to purchase
all or any portion of the interest of partners or joint venturers (other
than the Partnership) in a joint venture or partnership in which the
Partnership has an interest. If the Partnership’s general
partners or their affiliates make such a purchase, the terms of the
partnership or joint venture at or after such sale to the general partners
or their affiliates could not be amended in a way that would adversely
affect the Partnership or its limited
partners.
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·
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To
remove the NASAA Guidelines provisions that prohibit sales and leases of
Partnership property to the Partnership’s general partners and their
affiliates. There are however, safeguards for such transactions
in order to ensure that the sale price or lease terms are fair and
reasonable to the Partnership.
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·
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To
conform access to the Partnership’s books and records to Texas
law.
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·
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To
remove suitability requirement for transfers. Formerly, limited
partners were permitted to transfer their units only to persons or
entities that met the suitability standards under NASAA
Guidelines.
|
Our
Partnership Agreement provides that we will continue in existence until the
earlier of December 31, 2017 or termination of the Partnership pursuant to the
dissolution and termination provisions of the Partnership
Agreement.
Unit
Valuation
Our
Partnership Agreement requires that beginning with the fiscal year ended
December 31, 2009, the General Partners annually provide our limited partners
with an estimate of the amount a holder of limited partnership units would
receive if our properties were sold at their fair market values as of the close
of the fiscal year, and the proceeds from the sale of the properties (without
reduction for selling expenses), together with other funds of the Partnership,
were distributed in a liquidation. In 2005 and 2006, we sold two
properties and distributed $0.56 per unit with the result being that the
estimated value per share thereafter was adjusted from $10.00 to $9.44 to
reflect the special distribution of proceeds from those sales.
On
January 14, 2010 Behringer Advisors II, our co-general partner, adopted a new
estimated value per limited partnership unit as of December 31,
2009. As part of the valuation process, and as required by the
Partnership Agreement, the general partner has obtained the opinion of an
independent third party, Robert A. Stanger & Co., Inc., that the estimated
valuation is reasonable and was prepared in accordance with appropriate methods
for valuing real estate. Robert A. Stanger & Co., founded in
1978, is a nationally recognized investment banking firm specializing in real
estate, REIT’s and direct participation programs such as ours. The
new estimated valuation per limited partnership unit as of December 31, 2009 is
$6.45, adjusted from the previous estimated valuation of $9.44.
4
In
addition to meeting its obligation under the Partnership Agreement, the General
Partners understand that this estimated value per unit may be used by (i) broker
dealers who have customers who own our limited partnership units to assist in
meeting customer account statement reporting obligations under the National
Association of Securities Dealers (which is the former name of FINRA) Conduct
Rule 2340 as required by FINRA and (ii) fiduciaries of retirement
plans subject to the annual reporting requirements of ERISA to assist in the
preparation of their reports.
As with
any valuation methodology, the General Partner’s methodology is based upon a
number of estimates and assumptions that may not be accurate or
complete. Different parties with different assumptions and estimates
could derive a different estimated value per unit, and these differences could
be significant. The estimated value per unit does not represent the
fair value according to accounting principles generally accepted in the United
States of America (“GAAP”) of our assets less liabilities, nor does it represent
the amount our units would trade at on a national securities
exchange.
Generally,
we do not anticipate selling our assets until we feel it is the right time to
dispose of an asset, or we feel that the economy has improved, and we have the
opportunity to realize additional value. Our general partners intend
to use all reasonable efforts to realize value for our limited partners when
commercial real estate prices have normalized. Therefore, as we have
previously disclosed, we will not be liquidated in our original estimated time
frame, but rather in a time frame that our general partners believe will provide
more value to limited partners.
Our
office is located at 15601 Dallas Parkway, Suite 600, Addison, Texas 75001, and
our toll-free telephone number is (866) 655-1620. The name Behringer
Harvard is the property of Behringer Harvard Holdings, LLC (“Behringer
Holdings”) and is used by permission.
Disposition
Policies
We intend
to hold the various real properties in which we have invested until such time as
sale or other disposition appears to be advantageous to achieve our investment
objectives or until it appears that such objectives will not be
met. In deciding whether to sell properties, we will consider factors
such as potential capital appreciation, cash flow and federal income tax
considerations, including possible adverse federal income tax consequences to
our limited partners. We will also consider the current state of the
general economy, and whether waiting to dispose of a property will allow us to
realize additional value for our limited partners. We are currently
preparing and assessing properties for potential sale, although we do not have a
definite timetable. Our General Partners may exercise their
discretion as to whether and when to sell a property, and we will have no
obligation to sell properties at any particular time, except upon our
termination on December 31, 2017, or earlier if our General Partners
determine to liquidate us, or, if investors holding a majority of the units vote
to liquidate us in response to a formal proxy to liquidate. Instead
of causing us to liquidate, our General Partners, in their sole discretion, may
determine to offer to limited partners the opportunity to convert their units
into interests in another public real estate program sponsored by our General
Partners or their affiliates, through a plan of merger, plan of exchange or plan
of conversion, provided that the transaction is approved by holders of such
percentage of units as determined by our General Partners, but not less than a
majority and excluding those units held by our General Partners and their
affiliates. If such an opportunity is provided to our limited
partners, it may involve the distribution to limited partners of freely traded
securities that are listed on a securities exchange.
Cash flow
from operations will not be invested in the acquisition of
properties. However, at the discretion of our General Partners, cash
flow may be held as working capital reserves or used to make capital
improvements to existing properties. In addition, net sales proceeds
will not be reinvested but will be distributed to the partners. Thus,
we are intended to be self-liquidating in nature. Our Partnership
Agreement prohibits us from reinvesting proceeds from the sale or refinancing of
our properties anytime after February 19, 2010. Our General Partners
may also determine not to distribute net sales proceeds if such proceeds
are:
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·
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held
as working capital reserves; or
|
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·
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used
to make improvements to existing
properties.
|
We will
not pay, directly or indirectly, any commission or fee, except as specifically
permitted under Article XII of our Partnership Agreement, to our General
Partners or their affiliates in connection with the distribution of proceeds
from the sale, exchange or financing of our properties.
Although
not required to do so, we will generally seek to sell our real estate properties
for cash. We may, however, accept terms of payment from a buyer that
include purchase money obligations secured by mortgages as partial payment,
depending upon then-prevailing economic conditions customary in the area in
which the property being sold is located, credit of the buyer and available
financing alternatives. Some properties we sell may be sold on the
installment basis under which only a portion of the sale price will be received
in the year of sale, with subsequent payments spread over a number of years. In
such event, our full distribution of the net proceeds of any sale may be delayed
until the notes are paid, sold or financed.
5
Investment
Objectives and Criteria
Our
investment objectives are:
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·
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to
preserve, protect and return investor’s capital
contributions;
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·
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to
maximize cash distributions paid to
investors;
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·
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to
realize growth in the value of our properties upon the ultimate sale of
such properties; and
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·
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either
(1) to make an orderly disposition of the properties and distribute the
cash to the investors or (2) upon the approval of the majority of the
limited partners, for all the investors to exchange their units for
interests in another Behringer Harvard
program.
|
We cannot
assure investors that we will attain these objectives or that our capital will
not decrease. We may not change our investment objectives except with
the approval of limited partners holding a majority of our units (without regard
to units owned or controlled by our General Partners). In the event
that the holders of a majority of our units approve a merger or consolidation
with another partnership or corporation, in lieu of our liquidation, limited
partners who dissent from any such merger or consolidation will be entitled to
receive cash for their units based on the appraised value of our net
assets.
Our
General Partners make all decisions relating to the sale of our
properties.
Borrowing
Policies
We have
used debt secured by real estate as a means of providing additional funds for
the acquisition and development of properties. By operating on a
leveraged basis, we have had more funds available for investment in properties
and other investments. This has enabled us to make more investments
than would otherwise be possible, resulting in a more diversified
portfolio. Most of our borrowings are on a recourse basis to us,
meaning that the liability for repayment is not limited to any particular
asset. Furthermore, the use of leverage brings with it the risk of
default on the mortgage payments and a subsequent foreclosure of a particular
property.
There is
no limitation on the amount we may invest in any single improved property or
other asset or on the amount we can borrow for the purchase of any single
property or other investment. According to our Partnership Agreement, the total
amount of indebtedness that may be incurred by us can not exceed at any time the
sum of (1) 85% of the aggregate purchase price of all of our properties that
have not been refinanced, plus (2) 85% of the aggregate fair value of all of our
refinanced properties as determined by the lender on the date of
refinancing. We expect but cannot assure that, at any time, the total
amount of indebtedness incurred will not exceed 75% of our aggregate asset
value.
We will
refinance our properties during the term of a loan only in limited
circumstances, such as when a decline in interest rates makes it beneficial to
prepay an existing mortgage, when an existing mortgage matures or if an
attractive investment becomes available and the proceeds from the refinancing
can be used to purchase such investment. The benefits of the
refinancing may include an increased cash flow resulting from reduced debt
service requirements, an increase in cash distributions from proceeds of the
refinancing, and an increase in property ownership if refinancing proceeds are
reinvested in real estate.
Conflicts
of Interest
We are
subject to various conflicts of interest arising out of our relationship with
our General Partners and their affiliates, including conflicts related to the
arrangements pursuant to which our General Partners and their affiliates will be
compensated by us. All of our agreements and arrangements with our
General Partners and their affiliates, including those relating to compensation,
are not the result of arm’s-length negotiations. Some of the
conflicts of interest in our transactions with our General Partners and their
affiliates are described below.
Our
General Partners are Robert M. Behringer and Behringer Advisors
II. Mr. Behringer owns a controlling interest in Behringer Holdings,
a Delaware limited liability company that indirectly owns all of the outstanding
equity interests of Behringer Advisors II, our property managers and Behringer
Securities LP (“Behringer Securities”), the dealer manager for the
Offering. Mr. Behringer, Robert S. Aisner, Robert J. Chapman, Gerald
J. Reihsen, III, Gary S. Bresky and M. Jason Mattox are executive officers of
Harvard Property Trust, LLC (“HPT”), the sole general partner of Behringer
Advisors II, and Behringer Securities. In addition, Messrs.
Behringer, Reihsen, Bresky and Mattox are executive officers of Behringer
Securities.
Because
we were organized and will be operated by our General Partners, conflicts of
interest will not be resolved through arm’s-length negotiations but through the
exercise of our General Partners’ judgment consistent with their fiduciary
responsibility to the limited partners and our investment objectives and
policies. For a description of some of the risks related to these
conflicts of interest, see the Item 1A. “Risk Factors” section of this Annual
Report on Form 10-K. For a discussion of the conflict resolution
policies, see the Item 13. “Certain Relationships and Related Transactions and
Director Independence” section of this Annual Report on Form
10-K.
6
Interests
in Other Real Estate Programs
Our
General Partners and their affiliates are general partners, executive officers
or directors of other Behringer Harvard programs, including real estate programs
that have investment objectives similar to ours, and we expect that they will
organize other such programs in the future. Our General Partners and
such affiliates have legal and financial obligations with respect to these other
programs that are similar to their obligations to us. As general
partners, they may have contingent liabilities for the obligations of other
programs structured as partnerships as well as our obligations, which, if such
obligations were enforced against them, could result in substantial reduction of
their net worth.
Other
Activities of Our General Partners and Their Affiliates
We rely
on our General Partners and their affiliates for the day-to-day operation of our
business. As a result of their interests in other Behringer Harvard
programs and the fact that they have also engaged and will continue to engage in
other business activities, our General Partners and their affiliates will have
conflicts of interest in allocating their time between us and other Behringer
Harvard programs and other activities in which they are involved. In
addition, our Partnership Agreement does not specify any minimum amount of time
or level of attention that our General Partners must devote to
us. However, our General Partners believe that they and their
affiliates have sufficient personnel to discharge fully their responsibilities
to all of the Behringer Harvard programs and other ventures in which they are
involved.
In no
event may we:
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·
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make
loans to our General Partners or any of their affiliates;
or
|
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·
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enter
into agreements with our General Partners or their affiliates for the
provision of insurance covering us or any of our properties, except under
the limited circumstances permissible under the NASAA
Guidelines.
|
Competition
in Leasing Properties
Conflicts
of interest will exist to the extent that we own properties in the same
geographic areas where properties owned by our General Partners, their
affiliates or other Behringer Harvard programs are located. In such a
case, a conflict could arise in the leasing of our properties in the event that
we and another Behringer Harvard program were to compete for the same tenants in
negotiating leases, or a conflict could arise in connection with the resale of
properties in the event that we and another Behringer Harvard program were to
attempt to sell similar properties at the same time. Conflicts of
interest may also exist at such time as we or our affiliates managing properties
on our behalf seek to employ developers, contractors or building managers, and
other circumstances. Our General Partners will seek to reduce
conflicts relating to the employment of developers, contractors or building
managers by making prospective employees aware of all such properties seeking to
employ such persons. In addition, our General Partners will seek to
reduce conflicts that may arise with respect to properties available for sale or
rent by making prospective purchasers or tenants aware of all such
properties. However, these conflicts cannot be fully avoided in that
there may be established differing compensation arrangements for employees at
different properties or differing terms for resale or leasing of the various
properties.
Affiliated
Property Managers
Our
properties are managed and leased by HPT Management Services LLC, Behringer
Harvard Short-Term Management Services, LLC or Behringer Harvard Real Estate
Services, LLC, our affiliated property managers, or their affiliates
(individually or collectively referred to as “Property Manager”). The agreements
with our Property Manager expire in June 2010, but automatically extend for
successive seven year terms. We can terminate the agreements only in
the event of gross negligence or willful misconduct on the part of the Property
Manager. HPT Management Services LLC and Behringer Harvard Real
Estate Services, LLC also serve, and will continue to serve, as property manager
for properties owned by affiliated real estate programs, some of which may be in
competition with our properties. Management fees to be paid to our
Property Manager are based on a percentage of the rental income received by the
managed properties.
Regulations
Our
investments are subject to various federal, state and local laws, ordinances and
regulations, including, among other things, zoning regulations, land use
controls, environmental controls relating to air and water quality, noise
pollution and indirect environmental impacts such as increased motor vehicle
activity. We believe that we have all permits and approvals necessary
under current law to operate our investments.
Environmental
As an owner of real estate, we are
subject to various environmental laws of federal, state and local governments.
Compliance with existing laws has not had a material adverse effect on our
financial condition or results of operations, and management does not believe it
will have such an impact in the future. However, we cannot predict
the impact of unforeseen environmental contingencies or new or changed laws or
regulations on properties in which we hold an interest.
7
Significant
Tenants
As of
December 31, 2009, two tenants accounted for 10% or more of the aggregate annual
rental revenues of our consolidated properties. Tellabs, Inc., who
designs, develops, deploys, and supports telecommunications networking products
for telecommunications service providers worldwide, accounted for approximately
$2.4 million or 27% of our rental revenues for the ended December 31,
2009. Additionally, Avelo Mortgage, a subsidiary of Goldman Sachs,
accounted for approximately $2.0 million or 23% of our aggregate rental revenue
for the year ended December 31, 2009.
Leasing
Our
portfolio of office properties was approximately 31% percent leased at both
December 31, 2009 and 2008 and approximately 59% leased at December 31,
2007. Approximately 360,000 rentable square feet expired or
terminated early at three of our office buildings during the year ended December
31, 2008. We successfully executed a long-term direct lease for
approximately 90,000 rentable square feet during the year ended December 31,
2008. We are continuing marketing efforts to re-lease all of our
vacant spaces. Lease expirations of approximately 13,000 rentable
square feet are scheduled during the year ended December 31, 2010.
We
implemented a leasing program beginning in the second quarter of 2009 for the
unsold condominium units at Hotel Palomar and Residences. As of
December 31, 2009, we had leased approximately 81% of the units available for
leasing. Although our strategy for the project continues to be to
sell the units, we will be generating rental income by leasing the units until
the condominium market improves.
Employees
We have
no employees. Affiliates of Behringer Advisors II perform a full
range of real estate services for us, including property management, accounting,
legal, asset management and investor relations.
We are
dependent on our affiliates for services that are essential to us, including
disposition decisions, property management and leasing services and other
general and administrative responsibilities. In the event that these
companies were unable to provide these services to us, we would be required to
obtain such services from other sources.
Financial
Information About Industry Segments
Our current business consists only of
owning, managing, operating, leasing, developing, and disposing of real estate
assets. We internally evaluate all of our real estate assets as one
industry segment, and, accordingly, we do not report segment
information.
Available
Information
We
electronically file an annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and all amendments to those reports with the
Securities and Exchange Commission (“SEC”). Copies of our filings
with the SEC may be obtained from the web site maintained for us by our advisor
at http://www.behringerharvard.com
or at the SEC’s web site at http://www.sec.gov. Access
to these filings is free of charge. We are not incorporating our
website or any information from the website into this Form 10-K.
Item
1A. Risk
Factors.
Risks
Related to an Investment in Behringer Harvard Short-Term Opportunity Fund I
LP
The
factors described below represent our principal risks. Other factors
may exist that we do not consider to be significant based on information that is
currently available or that we are not currently able to
anticipate.
There
is no public trading market for our units, therefore it will be difficult for
limited partners to sell their units.
There is
no public trading market for the units, and we do not expect one to ever
develop. Our Partnership Agreement restricts our ability to
participate in a public trading market or anything substantially equivalent to
one by providing that any transfer that may cause us to be classified as a
publicly traded partnership as defined in Section 7704 of the Internal Revenue
Code shall be deemed void and shall not be recognized by us. Because
classification of the Partnership as a publicly traded partnership may
significantly decrease the value of the units, our General Partners intend to
use their authority to the maximum extent possible to prohibit transfers of
units that could cause us to be classified as a publicly traded
partnership. For these reasons, it will be difficult for our limited
partners to sell their units.
8
Our
units have limited transferability and lack liquidity.
Except
for certain intra-family transfers, limited partners are limited in their
ability to transfer their units. Our Partnership Agreement and
certain state regulatory agencies have imposed restrictions relating to the
number of units limited partners may transfer. Accordingly, it will
be difficult for limited partners to sell their units promptly or at
all. Limited partners may not be able to sell their units in the
event of an emergency, and if they are able to sell their units, they may have
to sell them at a substantial discount. It is also likely that the
units would not be accepted as the primary collateral for a loan.
Robert
M. Behringer has a dominant role in determining what is in our best interests
and therefore we will not have the benefit of independent consideration of
issues affecting our Partnership operations.
Mr.
Behringer is one of our general partners. Our other general partner
is Behringer Advisors II. Behringer Advisors II is managed by its
general partner, HPT, for which Mr. Behringer serves as Chief Executive
Officer and sole manager. Therefore, Mr. Behringer has a
dominant role in determining what is in the best interests of us and our limited
partners. Since no person other than Mr. Behringer has any direct
control over our management, we do not have the benefit of independent
consideration of issues affecting our Partnership
operations. Therefore, Mr. Behringer alone will determine the
propriety of his own actions, which could result in a conflict of interest when
he is faced with any significant decision relating to our Partnership
affairs.
The
prior performance of real estate investment programs sponsored by affiliates of
our General Partners may not be an indication of our future
results.
Investors
should not rely upon the past performance of other real estate investment
programs sponsored by Mr. Behringer, our individual general partner, or his
affiliates to predict our future results. To be successful in this
market, we must, among other things:
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attract,
integrate, motivate and retain qualified personnel to manage our
day-to-day operations; and
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continue
to build and expand our operations structure to support our
business.
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We cannot
guarantee that we will succeed in achieving these goals, and our failure to do
so could cause investors to lose all or a portion of their
investment.
If
we lose or are unable to obtain key personnel, our ability to implement our
investment strategies could be delayed or hindered.
Our
success depends to a significant degree upon the continued contributions of
certain key personnel of the general partner of Behringer Advisors II, HPT,
including Mr. Behringer, who would be difficult to replace. Although
HPT has employment agreements with its key personnel, these agreements are
terminable at will, and we cannot guarantee that such persons will remain
affiliated with HPT or us. If any of HPT’s key personnel were to
cease employment, our operating results could suffer. We believe that
our future success depends, in large part, upon HPT’s ability to hire and retain
highly skilled managerial, operational and marketing
personnel. Competition for such personnel is intense, and we cannot
assure limited partners that HPT will be successful in attracting and retaining
such skilled personnel. Further, our General Partners intend to
establish strategic relationships with firms that have special expertise in
certain services or as to real properties in certain geographic
regions. Maintaining such relationships will be important for us to
effectively compete. We cannot assure limited partners that our
General Partners will be successful in attracting and retaining such
relationships. If we lose or are unable to obtain the services of key
personnel or do not establish or maintain appropriate strategic relationships,
our ability to implement our strategies could be delayed or
hindered.
Our
General Partners have a limited net worth consisting of assets that are not
liquid, which may adversely affect the ability of our General Partners to
fulfill their financial obligations to us.
The net
worth of our General Partners consists primarily of interests in real estate,
retirement plans, partnerships and closely-held
businesses. Accordingly, the net worth of our General Partners is
illiquid and not readily marketable. This illiquidity, and the fact
that our General Partners have commitments to other Behringer Harvard programs,
may adversely affect the ability of our General Partners to fulfill their
financial obligations to us.
Our
rights and the rights of our limited partners to recover claims against our
General Partners are limited.
Our
Partnership Agreement provides that our General Partners will have no liability
for any action or failure to act that the General Partners in good faith
determine was in our best interest, provided their action or failure to act did
not constitute negligence or misconduct. As a result, we and our
limited partners may have more limited rights against our General Partners than
might otherwise exist under common law. In addition, we may be
obligated to fund the defense costs incurred by our General Partners in some
cases.
9
Our
units are generally not suitable for IRAs and other retirement plans subject to
ERISA.
Because
our intended operations will likely give rise to unrelated business taxable
income (“UBTI”), our units are generally not an appropriate investment vehicle
for IRAs and retirement plans subject to ERISA.
Risks
Related to Our Business in General
Recent
market disruptions will likely impact most aspects of our operating results and
operating condition.
The
global financial markets have undergone pervasive and fundamental disruptions.
The disruption has had and may continue to have an adverse impact on the
availability of credit to businesses, generally, and has resulted in and could
lead to further weakening of the U.S. and global economies. Our
business will likely be affected by market and economic challenges experienced
by the U.S. economy or real estate industry as a whole or by the local economic
conditions in the markets in which our properties are located, including the
current dislocations in the credit markets and general global economic
recession. Availability of debt financing secured by commercial real
estate has declined, as a result of tightened underwriting
standards. These conditions have and may continue to materially
affect the value of our investment properties, and will likely continue to
affect our ability to pay distributions, the availability or the terms of
financing that we have or may anticipate utilizing, and our ability to make
principal and interest payments on, or refinance, any outstanding debt when
due. These challenging economic conditions will also continue to
impact the ability of certain of our tenants to enter into new leasing
transactions or satisfy rental payments under existing
leases. Specifically, the current conditions, or similar conditions
existing in the future, may have the following consequences:
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the
financial condition of our tenants, which include financial, legal and
other professional firms, may be adversely affected, which may result in
us having to increase concessions, reduce rental rates or make capital
improvements in order to maintain occupancy levels or to negotiate for
reduced space needs, which could result in a decrease in our occupancy
levels;
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significant
job losses in the financial and professional services industries have
occurred and may continue to occur, which may decrease demand for our
office space and result in lower occupancy levels, which could result in
decreased revenues and which could diminish the value of our properties,
which depend, in part, upon the cash flow generated by our
properties;
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credit
spreads for major sources of capital may continue to widen, resulting in
lenders increasing the cost for debt
financing;
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our
ability to borrow on terms and conditions that we find acceptable, or at
all, may be limited, which could reduce our ability to refinance existing
debt, reduce our returns from our acquisition and development activities
and increase our future interest
expense;
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reduced
values of our properties may limit our ability to dispose of assets at
attractive prices or to obtain debt financing secured by our properties
and may reduce the availability of unsecured
loans;
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the
value and liquidity of our short-term investments and cash deposits could
be reduced as a result of the dislocation of the markets for our
short-term investments, increased volatility in market rates for such
investments or other factors; and
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one
or more counterparties to our derivative financial instruments could
default on their obligations to us, or could fail, increasing the risk
that we may not realize the benefits of these
instruments.
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Further,
in light of the current economic conditions, we cannot provide assurance that we
will be able to resume distributions at the previous 3% annualized rate or that
the amount of distributions will increase over time.
We have incurred indebtedness and
other borrowings, which may increase our business risks.
We have
acquired and developed real properties by using either existing financing or
borrowing new funds. In addition, we have incurred or increased our
debt by obtaining loans secured by some or all of our real
properties. We have incurred debt on a particular real property if we
believe the property’s projected cash flow is sufficient to service the mortgage
debt. Incurring debt increases the risk of loss since defaults on
indebtedness secured by a property may result in foreclosure actions initiated
by lenders and our loss of the property securing the loan which is in
default. For tax purposes, a foreclosure of any of our properties
would be treated as a sale of the property for a purchase price equal to the
outstanding balance of the debt secured by the mortgage. If the
outstanding balance of the debt secured by the mortgage exceeds our tax basis in
the property, we would recognize taxable income on foreclosure, but would not
receive any cash proceeds. We may give full or partial guarantees to
lenders of mortgage debt to the entities that own our
properties. When we give a guaranty on behalf of an entity that owns
one of our properties, we will be responsible to the lender for satisfaction of
the debt if it is not paid by such entity. If any mortgages contain
cross-collateralization or cross-default provisions, there is a risk that more
than one real property may be affected by a default. If any of our
properties are foreclosed upon due to a default, our ability to pay cash
distributions to our limited partners will be adversely affected. Our
approach to investing in properties utilizing leverage in order to accomplish
our investment objectives may present more risks to investors than comparable
real estate programs which have a longer intended duration and which do not
utilize borrowing to the same degree.
10
Our
indebtedness adversely affects our financial health and operating
flexibility.
At
December 31, 2009, we had notes payable of approximately $156.0 million in
principal amount, of which $140.8 million was secured by
properties. As a result of this indebtedness, we are required to use
a material portion of our cash flow to service principal and interest on our
debt, which will limit the cash flow available to operate our
properties.
Our level
of debt and the limitations imposed on us by our debt agreements could have
significant adverse consequences to us and the value of our units, regardless of
our ability to refinance or extend our debt, including:
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limiting
our ability to borrow additional amounts for working capital, capital
expenditures, debt service requirements, execution of our business plan or
other purposes;
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limiting
our ability to use operating cash flow in other areas of our business
because we must dedicate a substantial portion of these funds to service
our debt;
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increasing
our vulnerability to general adverse economic and industry
conditions;
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limiting
our ability to capitalize on business opportunities and to react to
competitive pressures and adverse changes in government
regulation;
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limiting
our ability to fund capital expenditures, tenant improvements and leasing
commissions; and
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limiting
our ability or increasing the costs to refinance our
indebtedness.
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We
may not be able to refinance or repay our indebtedness.
We have
debt that we may not be able to refinance or repay. As of December 31, 2009,
$32.1 million of principal payments and notes payable matures within the next
twelve months. Of that amount, only $5.5 million of the notes payable
agreements contain a provision to extend the maturity date for at least one
additional year if certain conditions are met. Due to (1) potentially
reduced values of our investments, (2) our debt level, (3) limited access to
commercial real estate mortgages in the current market and (4) material changes
in lending parameters, including tightened loan-to-value standards, we will face
significant challenges refinancing our current debt on acceptable terms if at
all. Our indebtedness also requires us to use a material portion of
our cash flow to service principal and interest on our debt, which limits the
cash flow available for other business expenses or opportunities.
We may
not have the cash necessary to repay our debt as it
matures. Therefore, failure to refinance or extend our debt as it
comes due, or a failure to satisfy the conditions and requirements of that debt,
could result in an event of default that could potentially allow lenders to
accelerate that debt. If our debt is accelerated, our assets may not
be sufficient to repay the debt in full, and our available cash flow may not be
adequate to maintain our current operations. If we are unable to
refinance or repay our debt as it comes due and maintain sufficient cash flow,
our business, financial condition and results of operations will be materially
and adversely affected. Furthermore, even if we are able to obtain
extensions on our existing debt, those extensions may include operational and
financial covenants significantly more restrictive than our current debt
covenants. Any extensions will also require us to pay certain fees
to, and expenses of, our lenders. Any fees and cash flow restrictions
will affect our ability to fund our ongoing operations from our operating cash
flows.
Recent
disruptions in the financial markets and adverse economic conditions could
adversely affect our ability to secure debt financing on attractive terms,
dispose of our properties and have affected the value of our
investments.
The
commercial real estate debt markets continue to experience volatility as a
result of certain factors, including the tightening of underwriting standards by
lenders and credit rating agencies and the significant inventory of unsold
collateralized mortgage backed securities in the market. Credit spreads
for major sources of capital have widened significantly as investors have
demanded a higher risk premium. This is resulting in lenders increasing
the cost for debt financing. An increase in the overall cost of
borrowings, either by increases in the index rates or by increases in lender
spreads, may result in our investment operations generating lower overall
economic returns and a reduced level of cash flow. We expect this
potential impact to be more pronounced upon refinancing any fixed rate
indebtedness. As a result of current economic conditions, potential
purchasers may be unable to obtain financing on acceptable terms, thereby
delaying our ability to dispose of our properties In addition, the
recent dislocations in the debt markets have reduced the amount of capital that
is available to finance real estate, which, in turn: (1) leads to a decline
in real estate values generally; (2) slows real estate transaction
activity; (3) reduces the loan to value upon which lenders are willing to
extend debt; and (4) results in difficulty in refinancing debt as it
becomes due. If the current debt market environment persists, it may be
difficult for us to refinance our debt coming due.
Further,
the recent market volatility will likely make the valuation of our investment
properties more difficult. There may be significant uncertainty in the
valuation, or in the stability of the value, of our properties that could result
in a substantial decrease in the value of our properties. As a result, we
may not be able to recover the carrying amount of our properties, and we may be
required to recognize impairment charges, which will reduce our reported
earnings.
11
The
pervasive and fundamental disruptions that the global financial markets have
undergone have led to extensive and unprecedented governmental
intervention. Such intervention has in certain cases been implemented on
an “emergency” basis, suddenly and substantially eliminating market
participants’ ability to continue to implement certain strategies or manage the
risk of their outstanding positions. In addition, these interventions have
typically been unclear in scope and application, resulting in confusion and
uncertainty, which in itself has been materially detrimental to the efficient
functioning of the markets as well as previously successful investment
strategies. Among measures proposed by legislators have been moratoriums
on loan payments, limits on the ability of lenders to enforce loan provisions,
including the collection of interest at rates agreed in the loan documents, and
involuntary modification of loan agreements. It is impossible to predict
what, if any, additional interim or permanent governmental restrictions may be
imposed or the effect of such restrictions on us and our results of
operations. There is likely to be increased regulation of the financial
markets.
If
debt is unavailable at reasonable rates, we may not be able to refinance our
properties.
When we
place debt on properties, we run the risk of being unable to refinance the
properties when the loans come due, or of being unable to refinance on favorable
terms. If interest rates are higher when the properties are
refinanced, we may not be able to finance the properties and our income could be
reduced. If this occurs, it may prevent us from borrowing more
money.
The
aggregate amount we may borrow is limited under our Partnership Agreement, which
may hinder our ability to secure additional funding when it is
needed.
Our
Partnership Agreement limits the aggregate amount we may borrow to the sum of
(1) with respect to loans insured, guaranteed or provided by the federal
government or any state or local government or agency, 100% of the aggregate
purchase price of all of our properties which have not been refinanced plus 100%
of the aggregate fair market value of all of our refinanced properties and (2)
with respect to other loans, the sum of 85% of the aggregate purchase price of
all of our properties which have not been refinanced plus 85% of the aggregate
fair market value of all of our refinanced properties. That
limitation could have adverse business consequences such as: (1) causing
operational problems if there were cash flow shortfalls for working capital
purposes; and (2) resulting in the loss of a property if, for example,
financing were necessary to repay a default on a mortgage.
Future
financing could be impacted by negative capital market conditions.
Recently,
the U.S. credit markets and the sub-prime residential mortgage market have
experienced severe dislocations and liquidity disruptions. Sub-prime mortgage
loans have experienced increasing rates of delinquency, foreclosure and loss.
These and other related events have had a significant impact on the capital
markets associated not only with sub-prime mortgage-backed securities,
asset-backed securities and collateralized debt obligations, but also with the
U.S. housing, credit and financial markets as a whole. Consequently,
there is greater uncertainty regarding our ability to access the credit market
in order to attract financing on reasonable terms. Our ability to borrow funds
to refinance current debt, including any financing provided by our sponsor,
Behringer Holdings, could be adversely affected by our inability to secure
permanent financing on reasonable terms, if at all.
The
distributions we pay to our limited partners are not necessarily indicative of
our current or future operating results and there can be no assurance that we
will be able to achieve expected cash flows necessary to continue to pay or
maintain cash distributions at any particular level, or that distributions will
increase over time.
There are
many factors that can affect the availability and timing of cash distributions
to limited partners. Distributions will be based principally on cash
available from our properties, real estate securities and other
investments. We expect to distribute net cash from operations and net
proceeds from the sales of properties to limited partners. However,
our General Partners, in their discretion, may defer fees payable by us to the
General Partners, allowing for more cash to be available to us for distribution
to our limited partners. In addition, our General Partners may make
supplemental payments to us or our limited partners, or otherwise support our
operations to the extent not prohibited under the NASAA Guidelines, which would
permit distributions to our limited partners in excess of net cash from
operations. The amount of cash available for distributions will be
affected by many factors, such as our operating expense levels, as well as many
other variables. Actual cash available for distributions may vary
substantially from estimates. We declared monthly distributions at an
annualized rate of 3% through the second quarter of 2009. In light of
cash needs required to meet maturing debt obligations and our ongoing operating
capital needs, our General Partners determined it necessary to discontinue
payment of monthly distributions beginning with the 2009 third
quarter. We do not anticipate that payment of distributions will
resume in the near-term. Such distributions, or lack
thereof, are not necessarily indicative of current or future operating
results and we can give no assurance that we will be able to resume
distributions at the prior rate or that distributions will increase over
time. Nor can we give any assurance that rents or other income from
our investments will increase, that the investments we make will increase in
value or provide constant or increased distributions over time, or that mortgage
loans or our investments in securities will increase our cash available for
distributions to limited partners. Our actual results may differ
significantly from the assumptions used by our General Partners in establishing
the distribution rate to limited partners.
12
Many of
the factors that can affect the availability and timing of cash distributions to
limited partners are beyond our control, and a change in any one factor could
adversely affect our ability to pay future distributions. For
instance:
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If
one or more tenants defaults or terminates its lease, there could be a
decrease or cessation of rental payments, which would mean less cash
available for distributions.
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Cash
available for distributions would be reduced if we are required to spend
money to correct defects or to make improvements to
properties.
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Cash
available to make distributions may decrease if the assets we acquire have
lower yields than expected.
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If
we borrow funds from third parties, more of our cash on hand will be
needed to make debt payments, and cash available for distributions may
therefore decrease.
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In
addition, our General Partners, in their discretion, may retain any portion of
our cash on hand for working capital. We cannot assure limited
partners that sufficient cash will be available to pay distributions to
them.
Gains
and distributions upon resale of our properties are uncertain.
Although
gains from the sales of properties typically represent a substantial portion of
any profits attributable to a real estate investment, we cannot assure investors
that we will realize any gains on the resales of our properties. In
addition, the amount of taxable gain allocated to investors with respect to the
sale of a Partnership property could exceed the cash proceeds received from such
sale.
Proceeds
from the sale of a property will generally be distributed to
investors. The General Partners, in their sole discretion, may
determine not to make such distribution if such proceeds are used
to:
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create
working capital reserves; or
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make
capital improvements to our existing
properties.
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The
provisions of the Texas Business Organizations Code applicable to limited
partnerships do not grant limited partners any voting rights, and limited
partners’ rights are limited under our Partnership Agreement.
A vote of
a majority of the units of limited partnership interest is sufficient to take
the following actions:
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to
amend our Partnership Agreement;
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to
dissolve and terminate the
Partnership;
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to
remove our General Partners; and
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to
authorize a merger or a consolidation of the
Partnership.
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These are
the only significant voting rights granted to our limited partners under our
Partnership Agreement. Therefore, limited partners’ voting rights in
our operations are limited.
Our
General Partners will make all decisions with respect to our management and
determine all of our major policies, including our financing, growth, investment
strategies and distributions. Our General Partners may revise these
and other policies without a vote of the limited partners. Therefore,
limited partners will be relying almost entirely on our General Partners for our
management and the operation of our business. Our General Partners
may only be removed under certain conditions, as set forth in our Partnership
Agreement. If our General Partners are removed, they will receive
payment equal to the fair market value of their interests in us as agreed upon
by our General Partners and us, or by arbitration if we are unable to
agree.
Payment
of fees to our General Partners and their affiliates will reduce cash available
for distribution.
Our
General Partners and their affiliates will perform services for us in connection
with the management and leasing of our properties and the administration of our
other investments. They will be paid substantial fees for these
services, which will reduce the amount of cash available for distribution to
limited partners.
13
The
failure of any bank in which we deposit our funds could reduce the amount of
cash we have available to pay distributions and make additional
investments.
We have diversified our
cash and cash equivalents between several banking institutions in an attempt to
minimize exposure to any one of these entities. We have cash and cash
equivalents and restricted cash deposited in interest bearing transaction
accounts at certain financial institutions in excess of federally insured
levels. If any of the banking institutions in which we have deposited
funds ultimately fails, we may lose our deposits over the federally insured
levels. The loss of our deposits could reduce the amount of cash we have
available to distribute and could result in a decline in the value of your
investment.
Financing
arrangements involving balloon payment obligations may adversely affect our
operations.
Our
fixed-term financing arrangements generally require us to make “balloon”
payments at maturity. During the interest only period, the amount of
each scheduled payment is less than that of traditional amortizing
loans. The principal balance of the loan will not be reduced (except
in the case of prepayments) because there are no scheduled monthly payments of
principal during this period. Our ability to make a balloon payment
at maturity is uncertain and may depend upon our ability to obtain additional
financing or our ability to sell the property. At the time the
balloon payment is due, we may or may not be able to refinance the balloon
payment on terms as favorable as the original loan or sell the property at a
price sufficient to make the balloon payment. The effect of a
refinancing or sale could affect the rate of return to unitholders and the
projected time of disposition of our assets. In addition, payments of
principal and interest made to service our debts may adversely affect our
operations. Any of these results would have a significant, negative
impact on your investment.
Increases
in interest rates could increase the amount of our debt payments and adversely
affect our operating cash flow.
We borrow
money that bears interest at a variable rate. In addition, from time
to time we may pay loans or refinance our properties in a rising interest rate
environment. Accordingly, increases in interest rates would increase
our interest costs, which could have a material adverse effect on our operating
cash flow. In addition, if rising interest rates cause us to need
additional capital to repay indebtedness in accordance with its terms or
otherwise, we may be required to liquidate one or more of our investments in
properties at times which may not permit realization of the maximum return on
such investments.
To
hedge against interest rate fluctuations, we may use derivative financial
instruments that may be costly and ineffective and may reduce the overall
returns on your investment.
From time
to time we may use derivative financial instruments to hedge exposures to
changes in interest rates on loans secured by our assets. Derivative
instruments may include interest rate swap contracts, interest rate cap or floor
contracts, futures or forward contracts, options or repurchase agreements.
Our actual hedging decisions will be determined in light of the facts and
circumstances existing at the time of the hedge and may differ from time to
time. There is no assurance that our hedging strategy will achieve
our objectives.
To the
extent that we use derivative financial instruments to hedge against interest
rate fluctuations, we are exposed to credit risk, basis risk and legal
enforceability risks. In this context, credit risk is the failure of
the counterparty to perform under the terms of the derivative
contract. If the fair value of a derivative contract is positive, the
counterparty owes us, which creates credit risk for us. Basis risk
occurs when the index upon which the contract is based is more or less variable
than the index upon which the hedged asset or liability is based, thereby making
the hedge less effective. Finally, legal enforceability risks
encompass general contractual risks including the risk that the counterparty
will breach the terms of, or fail to perform its obligations under, the
derivative contract. We may be unable to manage these risks
effectively.
We
may enter into derivative contracts that could expose us to contingent
liabilities in the future.
Our
derivative financial instruments may require us to fund cash payments upon the
early termination of a derivative agreement caused by an event of default or
other early termination event. The amount due would be equal to the unrealized
loss of the open swap positions with the respective counterparty and could also
include other fees and charges. In addition, some of these derivative
arrangements may require that we maintain specified percentages of cash
collateral with the counterparty to fund potential liabilities under the
derivative contract. We may have to make cash payments in order to maintain the
required percentage of collateral with the counterparty. These economic losses
would be reflected in our results of operations, and our ability to fund these
obligations would depend on the liquidity of our respective assets and access to
capital at the time. Our due diligence may not reveal all of an entity’s
liabilities and may not reveal other weaknesses in the entity’s
business.
Lenders
may require us to enter into restrictive covenants that may have an adverse
effect on our operations.
In
connection with obtaining certain financing, a lender could impose restrictions
on us that affect our ability to incur additional debt and our operating
policies. Loan documents we enter into may contain customary negative
covenants that may limit our ability to further leverage the property, to
discontinue insurance coverage, replace our General Partners or impose other
limitations. Any such restriction or limitation may have an adverse
effect on our operations.
14
Your
investment return may be reduced if we are required to register as an investment
company under the Investment Company Act.
We are
not registered, and do not intend to register, as an investment company under
the Investment Company Act of 1940, as amended, based on exclusions that we
believe are available to us. If we were obligated to register as an
investment company, we would have to comply with a variety of substantive
requirements under the Investment Company Act imposing, among other
things:
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limitations
on capital structure;
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restrictions
on specified investments;
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prohibitions
on transactions with affiliates;
and
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compliance
with reporting, record keeping, voting, proxy disclosure and other rules
and regulations that would significantly change our
operations.
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In order
to be excluded from regulation under the Investment Company Act, we must engage
primarily in the business of acquiring and owning real estate assets or real
estate-related assets. We rely on exemptions or exclusions provided by the
Investment Company Act for the direct ownership, or the functional equivalent
thereof, of certain qualifying real estate assets or by engaging in business
through one or more majority-owned subsidiaries, as well as other exemptions or
exclusions. The position of the SEC staff generally requires us to
maintain at least 55% of our assets directly in qualifying real estate interests
in order for us to maintain our exemption. Mortgaged-backed
securities may or may not constitute qualifying real estate assets, depending on
the characteristics of the mortgage-backed securities, including the rights that
we have with respect to the underlying loans.
To
maintain compliance with the Investment Company Act exemption, we may be unable
to sell assets we would otherwise want to sell and may need to sell assets we
would otherwise wish to retain. In addition, we may have to acquire
additional income or loss generating assets that we might not otherwise have
acquired or may have to forgo opportunities to acquire interests in entities
that we would otherwise want to acquire and would be important to our investment
strategy.
If we
were required to register as an investment company but failed to do so, we would
be prohibited from engaging in our business, and criminal and civil actions
could be brought against us. In addition, our contracts would be
unenforceable unless a court required enforcement, and a court could appoint a
receiver to take control of us and liquidate our business.
Risks
Related to Investments in Real Estate
Our
operating results will be affected by economic and regulatory changes that may
have an adverse impact on the real estate market in general, and we cannot
assure investors that we will be profitable or that we will realize growth in
the value of our real estate properties.
Our
operating results will be subject to risks generally incident to the ownership
of real estate, including:
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changes
in general economic or local
conditions;
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changes
in supply of or demand for similar or competing properties in an
area;
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ability
to collect rent from tenants;
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increasing
vacancy rates or ability to rent space on favorable
terms;
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changes
in interest rates and availability of permanent mortgage funds that may
render the sale of a property difficult or
unattractive;
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the
illiquidity of real estate investments
generally;
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changes
in tax, real estate, environmental and zoning laws;
and
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periods
of high interest rates and tight money
supply.
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For these
and other reasons, we cannot assure investors that we will be profitable or that
we will realize growth in the value of our real estate properties.
15
We
have acquired a large percentage of our properties in the Southwest United
States, particularly in the Dallas, Texas metropolitan area. As a
result of this limited diversification of the geographic locations of our
properties, our operating results will be affected by economic changes that have
an adverse impact on the real estate market in that area.
Many of the properties that we have
acquired using the proceeds of the Offering are located in the Southwest United
States, more specifically, in the Dallas, Texas metropolitan
area. Consequently, because of the lack of geographic diversity among
our current assets, our operating results and ability to pay distributions are
likely to be impacted by economic changes affecting the real estate market in
the Dallas, Texas area. An investment in our units will be subject to
greater risk to the extent that we lack a geographically diversified portfolio
of properties.
We
may be unable to secure funds for future tenant improvements, which could
adversely impact our ability to pay cash distributions to our limited
partners.
When
tenants do not renew their leases or otherwise vacate their space, it is usual
that, in order to attract replacement tenants, we will be required to expend
substantial funds for tenant improvements and tenant refurbishments to the
vacated space. If we have insufficient working capital reserves, we
will have to obtain financing from other sources. We generally
maintain initial working capital reserves of 1% of the contract price of the
properties we own. If these reserves or any reserves otherwise
established are insufficient to meet our cash needs, we may have to obtain
financing from either affiliated or unaffiliated sources to fund our cash
requirements. We cannot assure investors that sufficient financing
will be available or, if available, will be available on economically feasible
terms or on terms acceptable to us. Our Partnership Agreement imposes
certain limits on our ability to borrow money. Any borrowing will
require us to pay interest expense, and therefore our financial condition and
our ability to pay cash distributions to our limited partners may be adversely
affected.
We
may be unable to sell a property if or when we decide to do so, which could
adversely impact our ability to pay cash distributions to our limited
partners.
The real
estate market is affected, as set forth above, by many factors, such as general
economic conditions, availability of financing, interest rates and other
factors, including supply and demand, that are beyond our control. We
cannot predict whether we will be able to sell any property for the price or on
the terms set by us, or whether any price or other terms offered by a
prospective purchaser would be acceptable to us. We cannot predict
the length of time needed to find a willing purchaser and to close the sale of a
property. If we are unable to sell a property when we determine to do
so, it could have a significant adverse effect on our cash flow and results of
operations.
We
may suffer adverse consequences due to the financial difficulties, bankruptcy or
insolvency of our tenants.
The
current economic conditions have caused, and may continue to cause, our tenants
to experience financial difficulties, including bankruptcy, insolvency or a
general downturn in their business. We cannot assure you that any tenant that
files for bankruptcy protection will continue to pay us rent. A bankruptcy
filing by or relating to one of our tenants or a lease guarantor would bar
efforts by us to collect pre-bankruptcy debts from that tenant or lease
guarantor, or its property, unless we receive an order permitting us to do so
from the bankruptcy court. In addition, we cannot evict a tenant solely because
of bankruptcy. The bankruptcy of a tenant or lease guarantor could delay our
efforts to collect past due balances under the relevant leases, and could
ultimately preclude collection of these sums. If a lease is assumed by the
tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be
paid to us in full. If, however, a lease is rejected by a tenant in bankruptcy,
we would have only a general, unsecured claim for damages. An unsecured claim
would only be paid to the extent that funds are available and only in the same
percentage as is paid to all other holders of general, unsecured claims.
Restrictions under the bankruptcy laws further limit the amount of any other
claims that we can make if a lease is rejected. As a result, it is likely that
we would recover substantially less than the full value of the remaining rent
during the term.
Properties
that have significant vacancies could be difficult to sell, which could diminish
the return on an investment.
A
property may incur vacancies either by the continued default of tenants under
their leases or the expiration of tenant leases. If vacancies
continue for a long period of time, we may suffer reduced revenues resulting in
less cash to be distributed to limited partners. In addition, the
resale value of the property could be diminished because the market value of a
particular property will depend principally upon the value of the leases of such
property.
We
are dependent on tenants for our revenue, and lease terminations could reduce or
prevent distributions to our limited partners.
The
success of our real property investments, particularly properties occupied by a
single tenant, is materially dependent on the financial stability of our
tenants. A default by a significant tenant on its lease payments to
us would cause us to lose the revenue associated with such lease and cause us to
have to find an alternative source of revenue to meet mortgage payments and
prevent a foreclosure if the property is subject to a mortgage. In
the event of a tenant default, we may experience delays in enforcing our rights
as landlord and may incur substantial costs in protecting our investment and
re-letting our property. If significant leases are terminated, we
cannot assure investors that we will be able to lease the property for the rent
previously received or sell the property without incurring a loss.
If
we sell any of our properties in tenant-in-common transactions, those sales may
be viewed as sales of securities, and we would retain potential liability after
the sale under applicable securities laws.
We may
sell properties in tenant-in-common transactions. If we do make such
sales, they may be viewed as sales of securities, and as a result if the
purchasers in the tenant-in-common transaction had post-closing claims, they
could bring claims under applicable securities laws. Those claims
could have a material adverse effect upon our business and results of
operations.
16
If
we set aside insufficient working capital reserves, we may be required to defer
necessary property improvements.
If we do
not estimate enough reserves for working capital to supply needed funds for
capital improvements throughout the life of the investment in a property, we may
be required to defer necessary improvements to the property that may cause the
property to suffer from a greater risk of obsolescence or a decline in value, or
a greater risk of decreased cash flow as a result of fewer potential tenants
being attracted to the property. If this happens, we may not be able
to maintain projected rental rates for affected properties, and our results of
operations may be negatively impacted.
Uncertain
market conditions and the broad discretion of our General Partners relating to
the future disposition of properties could adversely affect the return on an
investment.
We intend
to hold the various real properties in which we invest until such time as our
General Partners determine that a sale or other disposition appears to be
advantageous to achieve our investment objectives or until it appears that such
objectives will not be met. Our General Partners may exercise their
discretion as to whether and when to sell a property, and we will have no
obligation to sell properties at any particular time, except upon our
termination on December 31, 2017, or earlier if our General Partners determine
to liquidate us, or, if investors holding a majority of the units vote to
liquidate us in response to a formal proxy to liquidate. We cannot
predict with any certainty the various market conditions affecting real estate
investments that will exist at any particular time in the future. Due
to the uncertainty of market conditions that may affect the future disposition
of our properties, we cannot assure limited partners that we will be able to
sell our properties at a profit in the future. Accordingly, the
extent to which investors will receive cash distributions and realize potential
appreciation on our real estate investments will be dependent upon fluctuating
market conditions.
Uninsured
losses relating to real property or excessively expensive premiums for insurance
coverage may adversely affect investors’ returns.
Our
General Partners will attempt to ensure that all of our properties are
adequately insured to cover casualty losses. However, there are types
of losses, generally catastrophic in nature, such as losses due to wars, acts of
terrorism, earthquakes, floods, hurricanes, pollution or environmental matters,
which are uninsurable or not economically insurable, or may be insured subject
to limitations, such as large deductibles or co-payments. Insurance
risks associated with potential terrorism acts could sharply increase the
premiums we pay for coverage against property and casualty
claims. Additionally, mortgage lenders in some cases have begun to
insist that specific coverage against terrorism be purchased by commercial
property owners as a condition for providing mortgage loans. It is
uncertain whether such insurance policies will be available, or available at
reasonable cost, which could inhibit our ability to finance or refinance our
properties. In such instances, we may be required to provide other
financial support, either through financial assurances or self-insurance, to
cover potential losses. We cannot assure investors that we will have
adequate coverage for such losses. In the event that any of our
properties incurs a casualty loss which is not fully covered by insurance, the
value of our assets will be reduced by any such uninsured loss. In
addition, other than the working capital reserve or other reserves we may
establish, we have no source of funding to repair or reconstruct any uninsured
damaged property, and we cannot assure limited partners that any such sources of
funding will be available to us for such purposes in the
future. Also, to the extent we must pay unexpectedly large amounts
for insurance, we could suffer reduced earnings that would result in less cash
available for distribution to limited partners.
Our
operating results may be negatively affected by potential development and
construction delays and resultant increased costs and risks.
We have
invested some of the proceeds available for investment in the acquisition and
development of properties upon which we will develop and construct improvements
at a fixed contract price. We are subject to risks relating to
uncertainties associated with re-zoning for development and environmental
concerns of governmental entities and/or community groups and our builder’s
ability to control construction costs or to build in conformity with plans,
specifications and timetables. The builder’s failure to perform may
necessitate legal action by us to rescind the purchase or the construction
contract or to compel performance. Performance may also be affected
or delayed by conditions beyond the builder’s control. Delays in
completion of construction could also give tenants the right to terminate
preconstruction leases for space at a newly developed project. We may
incur additional risks when we make periodic progress payments or other advances
to such builders prior to completion of construction. These and other
such factors can result in increased costs of a project or loss of our
investment. In addition, we will be subject to normal lease-up risks
relating to newly constructed projects. Furthermore, we must rely
upon projections of rental income and expenses and estimates of the fair market
value of property upon completion of construction when agreeing upon a price to
be paid for the property at the time of acquisition of the
property. If our projections are inaccurate, we may pay too much for
a property, and our return on our investment could suffer.
In
addition, we have invested in unimproved real property. Returns from
development of unimproved properties are also subject to risks and uncertainties
associated with re-zoning the land for development and environmental concerns of
governmental entities and/or community groups. Although our intention
is to limit any investment in unimproved property to property we intend to
develop, an investment nevertheless is subject to the risks associated with
investments in unimproved real property.
17
A
concentration of our investments in any one property class may leave our
profitability vulnerable to a downturn in such sector.
At any
one time, a significant portion of our investments could be in one property
class. As a result, we will be subject to risks inherent in
investments in a single type of property. If our investments are
substantially in one property class, then the potential effects on our revenues,
and as a result, on cash available for distribution to our unitholders,
resulting from a downturn in the businesses conducted in those types of
properties could be more pronounced than if we had more fully diversified our
investments.
The
costs of compliance with environmental laws and other governmental laws and
regulations may adversely affect our income and the cash available for any
distributions.
All real
property and the operations conducted on real property are subject to federal,
state and local laws and regulations relating to environmental protection and
human health and safety. These laws and regulations generally govern
wastewater discharges, air emissions, the operation and removal of underground
and above-ground storage tanks, the use, storage, treatment, transportation and
disposal of solid and hazardous materials, and the remediation of contamination
associated with disposals. Some of these laws and regulations may
impose joint and several liability on tenants, owners or operators for the costs
of investigation or remediation of contaminated properties, regardless of fault
or the legality of the original disposal. In addition, the presence
of these substances, or the failure to properly remediate these substances, may
adversely affect our ability to sell or rent such property or to use the
property as collateral for future borrowing.
Some of
these laws and regulations have been amended so as to require compliance with
new or more stringent standards as of future dates. Compliance with
new or more stringent laws or regulations or stricter interpretation of existing
laws may require material expenditures by us. We cannot assure
limited partners that future laws, ordinances or regulations will not impose any
material environmental liability, or that the current environmental condition of
our properties will not be affected by the operations of the tenants, by the
existing condition of the land, by operations in the vicinity of the properties,
such as the presence of underground storage tanks, or by the activities of
unrelated third parties. In addition, there are various local, state
and federal fire, health, life-safety and similar regulations with which we may
be required to comply, and which may subject us to liability in the form of
fines or damages for noncompliance.
Discovery
of previously undetected environmentally hazardous conditions may adversely
affect our operating results.
Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be liable for the
cost of removal or remediation of hazardous or toxic substances on, under or in
such property. The costs of removal or remediation could be
substantial. Such laws often impose liability whether or not the
owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. Environmental laws also may impose
restrictions on the manner in which property may be used or businesses may be
operated, and these restrictions may require substantial
expenditures. Environmental laws provide for sanctions in the event
of noncompliance and may be enforced by governmental agencies or, in certain
circumstances, by private parties. Certain environmental laws and
common law principles could be used to impose liability for release of and
exposure to hazardous substances, including asbestos-containing materials into
the air, and third parties may seek recovery from owners or operators of real
properties for personal injury or property damage associated with exposure to
released hazardous substances. The cost of defending against claims
of liability, of compliance with environmental regulatory requirements, of
remediating any contaminated property, or of paying personal injury claims could
materially adversely affect our business, assets or results of operations and,
consequently, amounts available for distribution to limited
partners.
Our
costs associated with complying with the Americans with Disabilities Act may
affect cash available for distributions.
Our
properties may be subject to the Americans with Disabilities Act of 1990, as
amended (the “Disabilities Act”). Under the Disabilities Act, all
places of public accommodation are required to comply with federal requirements
related to access and use by disabled persons. The Disabilities Act
has separate compliance requirements for “public accommodations” and “commercial
facilities” that generally require that buildings and services be made
accessible and available to people with disabilities. The
Disabilities Act’s requirements could require removal of access barriers and
could result in the imposition of injunctive relief, monetary penalties or, in
some cases, an award of damages. We will attempt to place the burden
on the seller or other third party, such as a tenant, to ensure compliance with
the Disabilities Act. However, we cannot assure investors that we
have acquired properties or will be able allocate responsibilities in this
manner. If we cannot, our funds used for Disabilities Act compliance
may affect cash available for distributions and the amount of distributions, if
any.
18
If
we sell properties by providing financing to purchasers, we will bear the risk
of default by the purchaser.
If we
decide to sell any of our properties, we intend to use our best efforts to sell
them for cash. However, in some instances we may sell our properties
by providing financing to purchasers. When we provide financing to
purchasers, we will bear the risk of default by the purchaser and will be
subject to remedies provided by law, which could negatively impact our cash
distributions to limited partners. There are no limitations or
restrictions on our ability to take purchase money obligations. We
may, therefore, take a purchase money obligation secured by a mortgage as part
payment for the purchase price. The terms of payment to us generally
will be affected by custom in the area where the property being sold is located
and the then-prevailing economic conditions. If we receive promissory
notes or other property in lieu of cash from property sales, the distribution of
the proceeds of sales to our limited partners, or their reinvestment in other
properties, will be delayed until the promissory notes or other property are
actually paid, sold, refinanced or otherwise disposed of. In some
cases, we may receive initial down payments in cash and other property in the
year of sale in an amount less than the selling price and subsequent payments
will be spread over a number of years. If any purchaser defaults
under a financing arrangement with us, it could negatively impact our ability to
pay cash distributions to limited partners.
We
may have to make significant capital expenditures to maintain lodging
facilities.
Hotels
have an ongoing need for renovations and other capital improvements, including
replacement of furniture, fixtures and equipment. Generally, we will
be responsible for the costs of these capital improvements, which gives rise to
the following risks:
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cost
overruns and delays;
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renovations
can be disruptive to operations and can displace revenue at the hotels,
including revenue lost while rooms under renovation are out of
service;
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the
cost of funding renovations and the possibility that financing for these
renovations may not be available on attractive terms;
and
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the
risk that the return on our investment in these capital improvements will
be less than expected.
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If we
have insufficient cash flow from operations to fund needed capital expenditures,
then we will need to borrow money to fund future capital
improvements.
We
are dependent on third-party managers of lodging facilities.
We depend
on independent management companies to adequately operate our
hotel. We may not have the authority to require any hotel to be
operated in a particular manner or to govern any particular aspect of the daily
operations of any hotel (for instance, setting room rates). Thus,
even if we believe our hotel is being operated inefficiently or in a manner that
does not result in satisfactory occupancy rates, revenue per available room and
average daily rates, we may not be able to force the management company to
change its method of operation of our hotel. We can only seek redress
if a management company violates the terms of the applicable management
agreement, and then only to the extent of the remedies provided for under the
terms of the management agreement. In the event that we need to
replace any of our management companies, we may be required by the terms of the
management agreement to pay substantial termination fees and may experience
significant disruptions at the affected hotels.
Risks
Related to Conflicts of Interest
We will
be subject to conflicts of interest arising out of our relationships with our
General Partners and their affiliates, including the material conflicts
discussed below.
Our
General Partners and certain of their key personnel will face competing demands
relating to their time, and this may cause our investment returns to
suffer.
Our
General Partners and certain of their key personnel and their respective
affiliates are general partners and sponsors of other real estate programs
having investment objectives and legal and financial obligations similar to ours
and may have other business interests as well. Because these persons
have competing interests on their time and resources, they may have conflicts of
interest in allocating their time between our business and these other
activities. During times of intense activity in other programs and
ventures, they may devote less time and resources to our business than is
necessary or appropriate. If this occurs, the returns on our
investments may suffer.
19
Our
General Partners will face conflicts of interest relating to joint ventures,
which could result in a disproportionate benefit to a Behringer Harvard program
or third party other than us.
We have
entered into joint ventures with other Behringer Harvard sponsored programs or
other third parties having investment objectives similar to ours for the
acquisition, development or improvement of properties. We have also
purchased and developed properties in joint ventures or in partnerships,
co-tenancies or other co-ownership arrangements with the sellers of the
properties, affiliates of the sellers, developers or other
persons. Such investments may involve risks not otherwise present
with other methods of investment in real estate, including, for
example:
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the
possibility that our co-venturer, co-tenant or partner in an investment
might become bankrupt;
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that
such co-venturer, co-tenant or partner may at any time have economic or
business interests or goals which are or which become inconsistent with
our business interests or goals;
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that
such co-venturer, co-tenant or partner may be in a position to take action
contrary to our instructions or requests or contrary to our policies or
objectives; or
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the
possibility that we may incur liabilities as the result of the action
taken by our co-venturer, co-tenant or
partner.
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Actions
by such a co-venturer, co-tenant or partner might have the result of subjecting
the property to liabilities in excess of those contemplated and may have the
effect of reducing limited partners returns.
Affiliates
of our General Partners have sponsored, or are currently sponsoring registered
public offerings on behalf of Behringer Harvard REIT I, Inc. (“Behringer
Harvard REIT I”), Behringer Harvard Opportunity REIT I, Inc. (“Behringer Harvard
Opportunity REIT I”), Behringer Harvard Opportunity REIT II, Inc. (“Behringer
Harvard Opportunity REIT II”), Behringer Harvard Multifamily REIT I, Inc.
(Behringer Harvard Multifamily REIT”) and Behringer Harvard Mid-Term Value
Enhancement Fund I LP (Behringer Harvard Mid-Term Value Enhancement
Fund”). Mr. Behringer and his affiliate, Behringer Harvard
Advisors I LP (an entity that is under common control with our general
partner, Behringer Advisors II), act as general partners of Behringer Harvard
Mid-Term Value Enhancement Fund, and Mr. Behringer serves as Chairman of
the Board of Behringer Harvard REIT I, Behringer Harvard Opportunity REIT
I, Behringer Harvard Opportunity REIT II, Behringer Harvard Multifamily REIT and
Behringer Harvard REIT II, Inc. Because our General Partners or their
affiliates have advisory and management arrangements with other Behringer
Harvard programs, it is likely that they will encounter opportunities to acquire
or sell properties to the benefit of one of the Behringer Harvard programs, but
not others. Our General Partners or their affiliates may make
decisions to buy or sell certain properties, which decisions might
disproportionately benefit a Behringer Harvard program other than
us.
If we
enter into a joint venture with another Behringer Harvard program or joint
venture, our General Partners may have a conflict of interest when determining
when and whether to sell a particular real estate property, and limited partners
may face certain additional risks. For example, if we joint venture
with a Behringer Harvard real estate investment trust (“REIT”) that subsequently
becomes listed on a national exchange, such REIT would automatically become a
perpetual life entity at the time of listing and might not continue to have
similar goals and objectives with respect to the resale of properties as it had
prior to being listed. In addition, if that Behringer Harvard REIT
was not listed on a securities exchange by the time set forth in its charter,
its organizational documents might provide for an immediate liquidation of its
assets. In the event of such liquidation, any joint venture between
us and that Behringer Harvard REIT might also be required to sell its properties
at such time even though we may not otherwise desire to do
so. Although the terms of any joint venture agreement between us and
another Behringer Harvard program would grant us a right of first refusal to buy
such properties, it is unlikely that we would have sufficient funds to exercise
our right of first refusal under these circumstances.
Since our
General Partners and their affiliates control us and either control or serve as
advisor to other Behringer Harvard programs, agreements and transactions between
the parties with respect to any joint venture between or among such parties will
not have the benefit of arm’s length negotiation of the type normally conducted
between unrelated co-venturers. Under these joint venture
arrangements, neither co-venturer may have the power to control the venture, and
under certain circumstances, an impasse could be reached regarding matters
pertaining to the joint venture, which might have a negative influence on the
joint venture and decrease potential returns to limited partners. In
the event that a co-venturer has a right of first refusal to buy out the other
co-venturer, it may be unable to finance such buy-out at that
time. It may also be difficult for us to sell our interest in any
such joint venture or partnership or as a co-tenant in property. In
addition, to the extent that our co-venturer, partner or co-tenant is an
affiliate of our General Partners, certain conflicts of interest will
exist.
The
General Partners and certain of their affiliates face conflicts of interest
caused by their compensation arrangements with us, which could result in actions
that are not in the long-term best interests of our unitholders.
Our
General Partners and certain of their affiliates, including our Property
Manager, are entitled to substantial fees from us under the terms of our
advisory management agreement and property management
agreement. These fees were not negotiated at arm’s length and reduce
the amount of cash available for distributions.
These
fees could influence our General Partner’s advice to us as well as the judgment
of their affiliates performing services for us. Among other matters, these
compensation arrangements could affect their judgment with respect
to:
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continuing,
renewing or enforcing our agreements with our General Partners and their
affiliates, including the advisory management agreement and the property
management agreement;
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property
sales, which reduce the asset management and property management fees
payable to our General Partners or their affiliates but also entitle them
to real estate commissions;
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|
·
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borrowings
to refinance properties, which increase the debt financing fees payable to
our General Partners;
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|
·
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determining
the compensation paid to employees for services provided to us, which
could be influenced in part by whether or not the General Partners is
reimbursed by us for the related salaries and
benefits;
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|
·
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whether
and when we seek to sell our assets, which sale could entitle our General
Partners to real estate
commissions.
|
The fees
our General Partners receive in connection with transactions involving the
management of an asset are based on the cost of the investment, including the
amount budgeted for the development, construction, and improvement of each
asset, and are not based on the quality of the investment or the quality of the
services rendered to us. This may influence our General Partners to recommend
riskier transactions to us.
We
may be restricted in our ability to replace our Property Manager under certain
circumstances.
Under the
terms of our property management agreement, we may terminate the agreement upon
30 days’ notice in the event of (and only in the event of) a showing of willful
misconduct, gross negligence, or deliberate malfeasance by our Property Manager
in the performance of their duties. Our General Partners may find the
performance of our Property Manager to be unsatisfactory. However,
such performance by the Property Manager may not reach the level of “willful
misconduct, gross negligence, or deliberate malfeasance.” As a
result, we may be unable to terminate the property management agreement at the
desired time, which may have an adverse effect on the management and
profitability of our properties.
Our
General Partners and certain of their key personnel face conflicts of interest
related to the positions they hold with affiliated entities, which could
diminish the value of the services they provide to us.
Mr.
Behringer and certain of the key personnel of Behringer Advisors II are also
officers of our property managers, our dealer manager and other affiliated
entities. As a result, these individuals owe fiduciary duties to
these other entities, which may conflict with the fiduciary duties that they owe
to us and our investors. Conflicts with our business and interests
are most likely to arise from involvement in activities related to (1)
allocation of management time and services between us and the other entities,
(2) the timing and terms of the sale of an asset, (3) development of our
properties by affiliates, (4) investments with affiliates of our General
Partners, (5) compensation to our General Partners, and (6) our
relationship with our dealer manager and property managers.
Because
we rely on affiliates of Behringer Holdings for the provision of property
management, if Behringer Holdings is unable to meet its obligations, we may be
required to find alternative providers of these services, which could result in
a significant and costly disruption of our business.
Behringer
Holdings, through one or more of its subsidiaries, owns and controls our
Property Manager. The operations of our Property Manager rely
substantially on Behringer Holdings. In light of the common ownership
of this entity and its reliance on Behringer Holdings, we consider the financial
condition of Behringer Holdings when assessing the financial condition of our
Property Manager. In the event that Behringer Holdings would be
unable to meet its obligations as they become due, we might be required to find
alternative service providers, which could result in a significant and costly
disruption of our business.
There
is no separate counsel for us and our affiliates, which could result in
conflicts of interest.
Morris,
Manning & Martin, LLP acts as legal counsel to us, and is also expected to
represent our General Partners and some of their affiliates from time to
time. There is a possibility in the future that the interests of the
various parties may become adverse and, under the Code of Professional
Responsibility of the legal profession, Morris, Manning & Martin, LLP may be
precluded from representing any one or all of such parties. If any
situation arises in which our interests appear to be in conflict with those of
our General Partners or their affiliates, additional counsel may be retained by
one or more of the parties to assure that their interests are adequately
protected. Moreover, should such a conflict not be readily apparent,
or otherwise not recognized, Morris, Manning & Martin, LLP may inadvertently
act in derogation of the interest of the parties which could affect us and,
therefore, our limited partners’ ability to meet our investment
objectives.
21
Federal
Income Tax Risks
The
Internal Revenue Service may challenge our characterization of material tax
aspects of an investment in our units of limited partnership
interest.
An
investment in units involves material income tax risks. Limited
partners are urged to consult with their own tax advisor with respect to the
federal, state and foreign tax considerations of an investment in our
units. We will not seek any rulings from the Internal Revenue Service
regarding any of the tax issues discussed herein. Further, although
we have obtained an opinion from our counsel, Morris, Manning & Martin, LLP,
regarding the material federal income tax issues relating to an investment in
our units, investors should be aware that the opinion represents only our
counsel’s best legal judgment, based upon representations and assumptions
referred to therein and conditioned upon the existence of certain
facts. Our counsel’s tax opinion has no binding effect on the
Internal Revenue Service or any court. Accordingly, we cannot assure
investors that the conclusions reached in the tax opinion, if contested, would
be sustained by any court. In addition, our counsel is unable to form
an opinion as to the probable outcome of the contest of certain material tax
aspects including whether we will be characterized as a “dealer” so that sales
of our assets would give rise to ordinary income rather than capital gain and
whether we are required to qualify as a tax shelter under the Internal Revenue
Code. Our counsel also gives no opinion as to the tax considerations
to investors of tax issues that have an impact at the individual or partner
level. Accordingly, investors are urged to consult with and rely upon
their own tax advisors with respect to tax issues that have an impact at the
partner or individual level.
Investors
may realize taxable income without cash distributions, and may have to use funds
from other sources to pay their tax liabilities.
As
limited partner, investors will be required to report their allocable share of
our taxable income on their personal income tax return regardless of whether
they have received any cash distributions from us. It is possible
that limited partnership units will be allocated taxable income in excess of
their cash distributions. We cannot assure investors that cash flow
will be available for distribution in any year. As a result,
investors may have to use funds from other sources to pay their tax
liability.
We
could be characterized as a publicly traded partnership, which would have an
adverse tax effect on investors.
If the
Internal Revenue Service were to classify us as a publicly traded partnership,
we could be taxable as a corporation, and distributions made to investors could
be treated as portfolio income rather than passive income. Our
counsel has given its opinion that we will not be classified as a publicly
traded partnership, which is defined generally as a partnership whose interests
are publicly traded or frequently transferred. However, this opinion
is based only upon certain representations of our General Partners and the
provisions in our Partnership Agreement that attempt to comply with certain safe
harbor standards adopted by the Internal Revenue Service. We cannot
assure investors that the Internal Revenue Service will not challenge this
conclusion or that we will not, at some time in the future, be treated as a
publicly traded partnership due to the following factors:
|
·
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the
complex nature of the Internal Revenue Service safe
harbors;
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·
|
the
lack of interpretive guidance with respect to such provisions;
and
|
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·
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the
fact that any determination in this regard will necessarily be based upon
facts that have not yet occurred.
|
The
deductibility of losses will be subject to passive loss limitations, and
therefore their deductibility will be limited.
Limited
partnership units will be allocated their pro rata share of our tax
losses. Section 469 of the Internal Revenue Code limits the allowance
of deductions for losses attributable to passive activities, which are defined
generally as activities in which the taxpayer does not materially
participate. Any tax losses allocated to investors will be
characterized as passive losses, and accordingly, the deductibility of such
losses will be subject to these limitations. Losses from passive
activities are generally deductible only to the extent of a taxpayer’s income or
gains from passive activities and will not be allowed as an offset against other
income, including salary or other compensation for personal services, active
business income or “portfolio income,” which includes non-business income
derived from dividends, interest, royalties, annuities and gains from the sale
of property held for investment. Accordingly, investors may receive
no current benefit from their share of tax losses unless they are currently
being allocated passive income from other sources.
The
Internal Revenue Service may challenge our allocations of profit and loss, and
any reallocation of items of income, gain, deduction and credit could reduce
anticipated tax benefits.
Counsel
has given its opinion that it is more likely than not that Partnership items of
income, gain, loss, deduction and credit will be allocated among our General
Partners and our limited partners substantially in accordance with the
allocation provisions of the Partnership Agreement. We cannot assure
investors, however, that the Internal Revenue Service will not successfully
challenge the allocations in the Partnership Agreement and reallocate items of
income, gain, loss, deduction and credit in a manner that reduces anticipated
tax benefits. The tax rules applicable to allocation of items of
taxable income and loss are complex. The ultimate determination of
whether allocations adopted by us will be respected by the Internal Revenue
Service will depend upon facts which will occur in the future and which cannot
be predicted with certainty or completely controlled by us. If the
allocations we use are not recognized, limited partners could be required to
report greater taxable income or less taxable loss with respect to an investment
in us and, as a result, pay more tax and associated interest and
penalties. Our limited partners might also be required to incur the
costs of amending their individual returns.
22
We
may be characterized as a dealer, and if so, any gain recognized upon a sale of
real property would be taxable to investors as ordinary income.
If we
were deemed for tax purposes to be a dealer, defined as one who holds property
primarily for sale to customers in the ordinary course of business, with respect
to one or more of our properties, any gain recognized upon a sale of such real
property would be taxable to investors as ordinary income and would also
constitute UBTI to investors who are tax-exempt entities. The
resolution of our status in this regard is dependent upon facts that will not be
known until the time a property is sold or held for sale. Under
existing law, whether property is held primarily for sale to customers in the
ordinary course of business must be determined from all the facts and
circumstances surrounding the particular property at the time of
disposition. These include the number, frequency, regularity and
nature of dispositions of real estate by the holder and activities of the holder
of the property in selling the property or preparing the property for
sale. Accordingly, our counsel is unable to render an opinion as to
whether we will be considered to hold any or all of our properties primarily for
sale to customers in the ordinary course of business.
We
may be audited by the Internal Revenue Service, which could result in the
imposition of additional tax, interest and penalties.
Our
federal income tax returns may be audited by the Internal Revenue
Service. Any audit of us could result in an audit of an investor’s
tax return that may require adjustments of items unrelated to an investment in
us, in addition to adjustments to various Partnership items. In the
event of any such adjustments, an investor might incur attorneys’ fees, court
costs and other expenses contesting deficiencies asserted by the Internal
Revenue Service. Investors may also be liable for interest on any
underpayment and penalties from the date their tax was originally
due. The tax treatment of all Partnership items will generally be
determined at the partnership level in a single proceeding rather than in
separate proceedings with each partner, and our General Partners are primarily
responsible for contesting federal income tax adjustments proposed by the
Internal Revenue Service. In this connection, our General Partners
may extend the statute of limitations as to all partners and, in certain
circumstances, may bind the partners to a settlement with the Internal Revenue
Service. Further, our General Partners may cause us to elect to be
treated as an electing large partnership. If they do, we could take
advantage of simplified flow-through reporting of Partnership
items. Adjustments to Partnership items would continue to be
determined at the partnership level, however, and any such adjustments would be
accounted for in the year they take effect, rather than in the year to which
such adjustments relate. Our General Partners will have the
discretion in such circumstances either to pass along any such adjustments to
the partners or to bear such adjustments at the partnership level.
State
and local taxes and a requirement to withhold state taxes may apply, and if so,
the amount of net cash from operations payable to investors would be
reduced.
The state
in which an investor resides may impose an income tax upon their share of our
taxable income. Further, states in which we will own our properties
may impose income taxes upon their share of our taxable income allocable to any
Partnership property located in that state. Many states have also
implemented or are implementing programs to require partnerships to withhold and
pay state income taxes owed by non-resident partners relating to
income-producing properties located in their states, and we may be required to
withhold state taxes from cash distributions otherwise
payable. Investors may also be required to file income tax returns in
some states and report their share of income attributable to ownership and
operation by the Partnership of properties in those states. Moreover,
despite our pass-through treatment for U.S. federal income tax purposes, certain
states may impose income or franchise taxes upon our income and not treat us as
a pass-through entity. The imposition of such taxes will reduce the
amounts distributable to our limited partners. In the event we are
required to withhold state taxes from cash distributions, the amount of the net
cash from operations otherwise payable would be reduced. In addition,
such collection and filing requirements at the state level may result in
increases in our administrative expenses that would have the effect of reducing
cash available for distribution. Investors are urged to consult with
their own tax advisors with respect to the impact of applicable state and local
taxes and state tax withholding requirements on an investment in our
units.
Legislative
or regulatory action could adversely affect investors.
In recent
years, numerous legislative, judicial and administrative changes have been made
in the provisions of the federal income tax laws applicable to investments
similar to an investment in our units. Additional changes to the tax
laws are likely to continue to occur, and we cannot assure investors that any
such changes will not adversely affect the taxation of a limited
partner. Any such changes could have an adverse effect on an
investment in our units or on the market value or the resale potential of our
properties. Investors are urged to consult with their own tax advisor
with respect to the impact of recent legislation on their investment in units
and the status of legislative, regulatory or administrative developments and
proposals and their potential effect on an investment in our
units. Investors should also note that our counsel’s tax opinion
assumes that no legislation that will be applicable to an investment in our
units will be enacted after the commencement of the Offering on February 19,
2003.
23
Congress
has passed major federal tax legislation regarding taxes applicable to
recipients of dividends. One of the changes reduced the tax rate to
recipients of dividends paid by corporations to individuals to a maximum of
15%. The tax changes did not, however, reduce the corporate tax
rates. Therefore, the maximum corporate tax rate of 35% has not been
affected. Even with the reduction of the rate on dividends received
by the individuals, the combined maximum corporate federal tax rate and
individual tax rate on qualified corporate dividends is 44.75% and, with the
effect of state income taxes, can exceed 50%.
Although
partnerships continue to receive substantially better tax treatment than
entities taxed as corporations, it is possible that future legislation would
make a limited partnership structure a less advantageous organizational form for
investment in real estate, or that it could become more advantageous for a
limited partnership to elect to be taxed for federal income tax purposes as a
corporation or a REIT. Pursuant to our Partnership Agreement, our
General Partners have the authority to make any tax elections on our behalf
that, in their sole judgment, are in our best interest. This
authority includes the ability to elect to cause us to be taxed as a corporation
or to qualify as a REIT for federal income tax purposes. Our General
Partners have the authority under our Partnership Agreement to make those
elections without the necessity of obtaining the approval of our limited
partners. In addition, our General Partners have the authority to
amend our Partnership Agreement without the consent of limited partners in order
to facilitate our operations so as to be able to qualify us as a REIT,
corporation or other tax status that they elect for us. Our General
Partners have fiduciary duties to us and to all investors and would only cause
such changes in our organizational structure or tax treatment if they determine
in good faith that such changes are in the best interest of our
investors.
There
are special considerations that apply to pension or profit sharing trusts or
IRAs investing in our units.
If
investors are investing the assets of a pension, profit sharing, 401(k), Keogh
or other qualified retirement plan or the assets of an IRA in our units of
limited partnership interest, they should be satisfied that, among other
things:
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·
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their
investment is consistent with their fiduciary obligations under ERISA and
the Internal Revenue Code;
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·
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their
investment is made in accordance with the documents and instruments
governing their plan or IRA, including their plan’s investment
policy;
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·
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their
investment satisfies the prudence and diversification requirements of
ERISA;
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·
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their
investment will not impair the liquidity of the plan or
IRA;
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·
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they
will be able to value the assets of the plan annually in accordance with
ERISA requirements;
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·
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their
investment will not constitute a prohibited transaction under Section 406
of ERISA or Section 4975 of the Internal Revenue
Code;
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·
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their
investment will likely produce UBTI for the plan or IRA and, therefore, is
not likely to be an appropriate investment for an IRA. (Due to
our intended method of operation, it is likely that we will generate
UBTI.)
|
We
may dissolve the Partnership if our assets are deemed to be “plan assets” or if
we engage in prohibited transactions.
If our
assets were deemed to be assets of qualified plans investing as limited
partners, known as “plan assets,” our General Partners would be considered to be
plan fiduciaries and certain contemplated transactions between our General
Partners or their affiliates and us may be deemed to be prohibited transactions
subject to excise taxation under Section 4975 of the Internal Revenue
Code. Additionally, if our assets were deemed to be plan assets,
ERISA’s fiduciary standards would extend to the General Partners as plan
fiduciaries with respect to our investments. We have not requested an
opinion of our counsel regarding whether or not our assets would constitute plan
assets under ERISA, nor have we sought any rulings from the U.S. Department of
Labor (“Department of Labor”) regarding classification of our
assets.
Department
of Labor regulations defining plan assets for purposes of ERISA contain
exemptions that, if satisfied, would preclude assets of a limited partnership
such as ours from being treated as plan assets. We cannot assure
investors that our Partnership Agreement and the Offering have been structured
so that the exemptions in such regulations would apply to us, and although our
General Partners intend that an investment by a qualified plan in units will not
be deemed an investment in our assets, we can make no representations or
warranties of any kind regarding the consequences of an investment in our units
by qualified plans in this regard. Plan fiduciaries are urged to
consult with and rely upon their own advisors with respect to this and other
ERISA issues which, if decided adversely to us, could result in prohibited
transactions, which would cause the imposition of excise taxation and the
imposition of co-fiduciary liability under Section 405 of ERISA in the event
actions undertaken by us are deemed to be non-prudent investments or prohibited
transactions.
In the
event our assets are deemed to constitute plan assets, or if certain
transactions undertaken by us are deemed to constitute prohibited transactions
under ERISA or the Internal Revenue Code and no exemption for such transactions
applies or is obtainable by us, our General Partners have the right, but not the
obligation, upon notice to all limited partners, but without the consent of any
limited partner to:
24
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·
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compel
a termination and dissolution of the Partnership;
or
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·
|
restructure
our activities to the extent necessary to comply with any exemption in the
Department of Labor regulations or any prohibited transaction exemption
granted by the Department of Labor or any condition that the Department of
Labor might impose as a condition to granting a prohibited transaction
exemption.
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Adverse
tax considerations may result because of minimum distribution
requirements.
If an
investor purchased units through an IRA, or if an investor is a trustee of an
IRA or other fiduciary of a retirement plan that invested in units, the investor
must consider the limited liquidity of an investment in our units as it relates
to applicable minimum distribution requirements under the Internal Revenue
Code. If units are held and our properties have not yet been sold at
such time as mandatory distributions are required to begin to an IRA beneficiary
or qualified plan participant, Sections 408(a)(6) and 401(a)(9) of the Internal
Revenue Code will likely require that a distribution-in-kind of the units be
made to the IRA beneficiary or qualified plan participant. Any such
distribution-in-kind of units must be included in the taxable income of the IRA
beneficiary or qualified plan participant for the year in which the units are
received at the fair market value of the units without any corresponding cash
distributions with which to pay the income tax liability attributable to any
such distribution. Also, fiduciaries of a retirement plan should
consider that, for distributions subject to mandatory income tax withholding
under Section 3405 of the Internal Revenue Code, the fiduciary may have an
obligation, even in situations involving in-kind distributions of units, to
liquidate a portion of the in-kind units distributed in order to satisfy such
withholding obligations. There may also be similar state and/or local
tax withholding or other obligations that should be considered.
UBTI
is likely to be generated with respect to tax-exempt investors.
We intend
to incur indebtedness. This will cause recharacterization of a
portion of our income allocable to tax-exempt investors as
UBTI. Further, in the event we are deemed to be a “dealer” in real
property, defined as one who holds real estate primarily for sale to customers
in the ordinary course of business, the gain realized on the sale of our
properties that is allocable to tax-exempt investors would be characterized as
UBTI. If we generate UBTI, a trustee of a charitable remainder trust
that has invested in us will lose its exemption from income taxation with
respect to all of its income for the tax year in question. A
tax-exempt limited partner other than a charitable remainder trust that has UBTI
in any tax year from all sources of more than $1,000 will be subject to taxation
on such income and be required to file tax returns reporting such
income.
Item
1B. Unresolved
Staff Comments.
None.
Item
2. Properties.
As of
December 31, 2009, we owned interests in five office building properties, one
shopping/service center, a hotel redevelopment with an adjoining condominium
development, two development properties and undeveloped land. In the
aggregate, the office and shopping/service center properties represent
approximately 1.15 million rentable square feet.
As of
December 31, 2009, we wholly-owned the following properties:
Approx.
Rentable
|
||||||
Property Name
|
Location
|
Square Footage
|
Description
|
|||
5050
Quorum
|
Dallas,
Texas
|
133,799
|
seven-story
office building
|
|||
Plaza
Skillman
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Dallas,
Texas
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98,764
|
shopping/service
center
|
|||
250/290
John Carpenter Freeway
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Irving,
Texas
|
539,000
|
three-building
office complex
|
|||
Landmark
I
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Dallas,
Texas
|
122,273
|
two-story
office building
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|||
Landmark
II
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Dallas,
Texas
|
135,154
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two-story
office building
|
|||
Cassidy
Ridge
|
Telluride, Colorado
|
land
|
development
property
|
|||
Melissa
Land
|
Melissa,
Texas
|
land
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land
|
|||
Bretton
Woods
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Dallas,
Texas
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land
|
developed
property
|
25
As of December 31, 2009, we owned
interests in the following properties through separate limited partnerships or
joint venture agreements:
Approx. Rentable
|
Ownership
|
||||||||||
Property Name
|
Location
|
Square Footage
|
Description
|
Interest
|
|||||||
1221
Coit Road
|
Dallas,
Texas
|
125,030 |
two-story
office building
|
90.00 | % | ||||||
Hotel
Palomar and Residences
|
Dallas,
Texas
|
475,000 |
redevelopment
property
|
70.00 | % |
The
following information generally applies to all of our properties:
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·
|
we
believe all of our properties are adequately covered by insurance and
suitable for their intended
purposes;
|
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·
|
we
have no plans for any material renovations, improvements or development of
our properties, except in accordance with planned
budgets;
|
|
·
|
our
properties are located in markets where we are subject to competition in
attracting new tenants and retaining current tenants;
and
|
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·
|
depreciation
is provided on a straight-line basis over the estimated useful lives of
the buildings.
|
Item
3. Legal
Proceedings.
We are
not party to, and none of our properties are subject to, any material pending
legal proceedings.
Item
4. (Removed
and Reserved).
26
PART
II
Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Market
Information
There is
no established trading market for our limited partnership units, and we do not
expect that one will develop. This illiquidity creates a risk that a
limited partner may not be able to sell their units at a time or price
acceptable to the limited partner. Our Partnership Agreement requires
that beginning with the fiscal year ended December 31, 2009, the General
Partners annually provide our limited partners with an estimate of the amount a
holder of limited partnership units would receive if our properties were sold at
their fair market values as of the close of the fiscal year, and the proceeds
from the sale of the properties (without reduction for selling expenses),
together with other funds of the Partnership, were distributed in a
liquidation. In 2005 and 2006, we sold two properties and distributed
$0.56 per unit with the result being that the estimated value per share
thereafter was adjusted from $10.00 to $9.44 to reflect the special distribution
of proceeds from those sales.
On
January 14, 2010 Behringer Advisors II, our co-general partner, adopted a new
estimated value per limited partnership unit as of December 31,
2009. As part of the valuation process, and as required by the
Partnership Agreement, the general partner has obtained the opinion of an
independent third party, Robert A. Stanger & Co., Inc., that the estimated
valuation is reasonable and was prepared in accordance with appropriate methods
for valuing real estate. Robert A. Stanger & Co., founded in
1978, is a nationally recognized investment banking firm specializing in real
estate, REIT’s and direct participation programs such as ours. The
new estimated valuation per limited partnership unit as of December 31, 2009 is
$6.45, adjusted from the previous estimated valuation of $9.44.
In
addition to meeting its obligation under the Partnership Agreement, the General
Partners understand that this estimated value per unit may be used by (i) broker
dealers who have customers who own our limited partnership units to assist in
meeting customer account statement reporting obligations under the National
Association of Securities Dealers (which is the former name of FINRA) Conduct
Rule 2340 as required by FINRA and (ii) fiduciaries of retirement
plans subject to the annual reporting requirements of ERISA to assist in the
preparation of their reports.
As with
any valuation methodology, the General Partner’s methodology is based upon a
number of estimates and assumptions that may not be accurate or
complete. Different parties with different assumptions and estimates
could derive a different estimated value per unit, and these differences could
be significant. The estimated value per unit does not represent the
fair value according to GAAP of our assets less liabilities, nor does it
represent the amount our units would trade at on a national securities
exchange.
Generally,
we do not anticipate selling our assets until we feel it is the right time to
dispose of an asset, or we feel that the economy has improved, and we have the
opportunity to realize additional value. Our general partners intend
to use all reasonable efforts to realize value for our limited partners when
commercial real estate prices have normalized. Therefore, as we have
previously disclosed, we will not be liquidated in our original estimated time
frame, but rather in a time frame that our general partners believe will provide
more value to limited partners.
Unit
Redemption Program
The
General Partners terminated our unit redemption program on December 31, 2006 and
currently have no intention of re-instituting the program.
Holders
As of
March 19, 2010, we had 10,803,839 limited partnership units outstanding that
were held by a total of approximately 4,200 limited partners.
Distributions
The
timing and amount of cash to be distributed to our limited partners is
determined by the General Partners and is dependent on a number of factors,
including funds available for payment of distributions, financial condition and
capital expenditures. However, if cash distributions are made, the
Partnership Agreement requires that such cash distributions be made at least
quarterly. We initiated the declaration of monthly distributions in
March 2004 in the amount of a 3% annualized rate of return, based on an
investment in our limited partnership units of $10.00 per unit. We
record all distributions when declared. We have paid special
distributions of a portion of the net proceeds from the sale of
properties. Beginning with the November 2006 monthly distribution,
distributions in the amount of a 3% annualized rate of return were based on an
investment in our limited partnership units of $9.44 per unit as a result of the
special distributions.
27
In light
of cash needs required to meet maturing debt obligations and our ongoing
operating capital needs, our General Partners determined it necessary to
discontinue payment of monthly distributions beginning with the 2009 third
quarter. We do not anticipate that payment of distributions will
resume in the near-term. Our General Partners, in their discretion,
may defer fees payable by us to them and make supplemental payments to us or to
our limited partners, or otherwise support our
operations. Accordingly, all or some of our distributions may
constitute a return of capital to our investors to the extent that distributions
exceed net cash from operations, or may be recognized as taxable income by our
investors.
The
following are the distributions declared during the years ended
December 31, 2009 and 2008 (in thousands):
2009
|
2008
|
|||||||
Fourth
Quarter
|
$ | - | $ | 771 | ||||
Third
Quarter
|
- | 771 | ||||||
Second
Quarter
|
762 | 763 | ||||||
First
Quarter
|
755 | 763 | ||||||
$ | 1,517 | $ | 3,068 |
Recent
Sales of Unregistered Securities
None.
Item
6. Selected
Financial Data.
We had
ownership interests in ten properties as of December 31, 2009 and
2008. As of December 31, 2007 and 2006 we had ownership interests in
eleven properties and ownership interests in twelve properties at December 31,
2005. Our most recent acquisitions were in July 2005. We
sold 4245 N. Central on September 30, 2008 and the Woodall Rodgers Property on
July 24, 2006. The following data should be read in conjunction with
our consolidated financial statements and the notes thereto and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
appearing elsewhere in this Annual Report on Form 10-K. The selected
data below as of and for each of the five years in the period ended December 31,
2009 has been derived from our financial statements (in thousands, except per
unit amounts).
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Total
assets
|
$ | 203,009 | $ | 199,918 | $ | 225,281 | $ | 233,364 | $ | 180,577 | ||||||||||
Notes
payable
|
$ | 156,024 | $ | 153,987 | $ | 145,637 | $ | 135,304 | $ | 78,307 | ||||||||||
Other
liabilities
|
12,589 | 10,740 | 10,264 | 15,143 | 6,416 | |||||||||||||||
Partners'
capital
|
36,513 | 34,874 | 66,971 | 76,533 | 88,727 | |||||||||||||||
Noncontrolling
interest
|
(2,117 | ) | 317 | 2,409 | 6,384 | 7,127 | ||||||||||||||
Total
liabilities and equity
|
$ | 203,009 | $ | 199,918 | $ | 225,281 | $ | 233,364 | $ | 180,577 |
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Total
revenues
|
$ | 21,682 | $ | 28,217 | $ | 37,048 | $ | 18,574 | $ | 11,409 | ||||||||||
Gain
(loss) on sale of assets
|
- | (2 | ) | - | - | 1,096 | ||||||||||||||
Loss
from continuing operations
|
(15,474 | ) | (32,887 | ) | (16,500 | ) | (5,721 | ) | (747 | ) | ||||||||||
Income
(loss) from discontinued operations
|
2 | 1,184 | (771 | ) | 1,483 | (475 | ) | |||||||||||||
Net
loss
|
(15,472 | ) | (31,703 | ) | (17,271 | ) | (4,238 | ) | (1,222 | ) | ||||||||||
Net
loss attributable to noncontrolling interest
|
2,434 | 1,159 | 3,811 | 1,150 | 100 | |||||||||||||||
Net
loss attributable to the Partnership
|
$ | (13,038 | ) | $ | (30,544 | ) | $ | (13,460 | ) | $ | (3,088 | ) | $ | (1,122 | ) | |||||
Basic
and diluted net loss per limited partnership unit
|
$ | (1.21 | ) | $ | (2.83 | ) | $ | (1.25 | ) | $ | (0.28 | ) | $ | (0.10 | ) | |||||
Distributions
declared per limited partnership unit
|
$ | 0.14 | $ | 0.28 | $ | 0.28 | $ | 0.76 | $ | 0.40 |
28
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion and analysis should be read in conjunction with our
accompanying consolidated financial statements and the notes
thereto:
Overview
During
2009 as in 2008, the U.S. and global economies experienced a significant
downturn, which included disruptions in the broader financial and credit
markets, declining consumer confidence and an increase in unemployment
rates. These conditions have contributed to weakened market
conditions. Consequently, we believe that overall demand across most
real estate sectors will continue to remain low and that rental rates will
remain weak through at least the first half of 2010. The national
vacancy percentage for office space continued to increase during
2009. In addition, the hospitality industry continues to be
negatively affected by the current economic recession. In addition to
reduced occupancy, the national Average Daily Rate (“ADR”) has declined as
compared to the prior year and we expect that Hotel Palomar will continue to
experience lower ADR in the near future.
Nine of
our real estate assets are located in Texas. These assets are located
in the Dallas-Fort Worth metropolitan area. This market and Texas in general
have historically been more resistant to recessionary trends than much of the
nation. Office vacancy rates in the Dallas-Fort Worth market
continued to rise through 2009. This was due in large part to office
employment declines in the financial activities, professional, and business
services industries. However, despite these declines, leasing
activity continues and supply is not as oversaturated in this market as in many
other markets. According to a recent study by the Brookings
Institute, a public policy think tank in Washington, D.C., the Dallas-Fort Worth
metropolitan area had one of the strongest economies in the nation during the
last quarter of 2009. The Dallas-Fort Worth area is expected to experience
modest leasing volume in 2010.
While it
is unclear when the overall economy will recover, we do not expect conditions to
improve significantly in the near future. As a result of the current
economy, our primary objectives will be to continue to preserve capital, as well
as sustain and enhance property values, while continuing to focus on the
disposition of our properties. Our ability to dispose of our
properties will be subject to various factors, including the ability of
potential purchasers to access capital debt financing. Given the
disruptions in the capital markets and the current lack of available credit, our
ability to dispose of our properties may be delayed, or we may receive lower
than anticipated returns. In addition, a more prolonged economic
downturn could negatively affect our ability to attract and retain
tenants. Given current market conditions, we anticipate that this
investment program’s life will extend beyond its original anticipated
liquidation date.
Current economic conditions discussed
above make it difficult to predict future operating results. There
can be no assurance that we will not experience further declines in revenues or
earnings for a number of reasons, including, but not limited to the possibility
of greater than anticipated weakness in the economy and the continued impact of
the trends mentioned above.
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with GAAP. The preparation of these financial statements
requires our management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On a regular basis,
we evaluate these estimates, including investment impairment. These
estimates are based on management’s historical industry experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these
estimates.
Principles
of Consolidation and Basis of Presentation
The
consolidated financial statements include our accounts and the accounts of our
subsidiaries. All inter-company transactions, balances
and profits have been eliminated in consolidation. Interests in
entities acquired are evaluated based on applicable GAAP, which includes the
consolidation of variable interest entities (“VIE’s’) in which we are deemed to
be the primary beneficiary. If the interest in the entity is
determined not to be a VIE, then the entities are evaluated for consolidation
based on legal form, economic substance, and the extent to which we have control
and/or substantive participating rights under the respective ownership
agreement.
There are
judgments and estimates involved in determining if an entity in which we have
made an investment is a VIE and if so, if we are the primary
beneficiary. The entity is evaluated to determine if it is a VIE by,
among other things, calculating the percentage of equity being risked compared
to the total equity of the entity. Determining expected future losses
involves assumptions of various possibilities of the results of future
operations of the entity, assigning a probability to each possibility and using
a discount rate to determine the net present value of those future
losses. A change in the judgments, assumptions and estimates outlined
above could result in consolidating an entity that should not be consolidated or
accounting for an investment on the equity method that should in fact be
consolidated, the effects of which could be material to our financial
statements.
29
Impairment
of Long-Lived Assets
Management
monitors events and changes in circumstances indicating that the carrying
amounts our real estate assets may not be recoverable. When such
events or changes in circumstances occur, we assess potential impairment by
comparing estimated future undiscounted operating cash flows expected to be
generated over the estimated period we expect to hold the asset, including its
eventual disposition, to the carrying amount of the asset. In the
event that the carrying amount exceeds the estimated future undiscounted
operating cash flows, we recognize an impairment loss to adjust the carrying
value of the asset to estimated fair value. We determine the
estimated fair value based on discounted cash flow streams using various factors
including estimated future selling prices, costs spent to date, remaining
budgeted costs and selling costs.
In
evaluating our real estate for impairment, management uses appraisals and makes
several estimates and assumptions, including, but not limited to, the projected
date of disposition of the properties, the estimated future cash flows of the
properties during our ownership and the projected sales price of each of the
properties. A change in these estimates and assumptions could result
in understating or overstating the book value of our investments, which could be
material to our financial statements.
Inventory
Valuation Adjustment
For real
estate inventory, at each reporting date, management compares the estimated fair
value less costs to sell to the carrying value. An adjustment is
recorded to the extent that the fair value less costs to sell is less than the
carrying value. We determine the estimated fair value based on
comparable sales in the normal course of business under existing and anticipated
market conditions. This evaluation takes into consideration estimated
future selling prices, costs spent to date, estimated additional future costs
and management’s plans for the property.
Results
of Operations
Fiscal
year ended December 31, 2009 as compared to the fiscal year ended December 31,
2008
We had
ownership interests in ten properties as of December 31, 2009 and
2008. All investments in partnerships and joint ventures were
consolidated with and into our accounts as of December 31, 2009 and
2008. The operations of 4245 N. Central, which was sold on September
30, 2008, are classified as discontinued operations in each of the periods
presented in the accompanying consolidated statements of
operations. The single tenant at 1221 Coit Road terminated its lease,
which was set to expire on March 31, 2013, effective March 31,
2008. The lease at Landmark I expired March 31, 2008 and the lease at
Landmark II expired in May 2008. We executed a long-term direct lease
for approximately 90,000 rentable square feet of Landmark I to a tenant who had
previously subleased the space. Both 1221 Coit Road and Landmark II
remained vacant during the twelve months ended December 31,
2009. During 2009 and 2008, the U.S. housing market and related
condominium sector continued to decline. As a result, we implemented
a leasing program beginning in the second quarter of 2009 for the unsold
condominium units at Hotel Palomar and Residences. As of December 31,
2009, we had leased approximately 81% of the units available for
leasing. Although our strategy for the project continues to be to
sell the units, we will be generating rental income by leasing the units until
the condominium market improves.
Continuing
Operations
Rental Revenue. Rental
revenue for the years ended December 31, 2009 and 2008 totaled $9.0 million and
$12.3 million, respectively, and was comprised of revenue, including adjustments
for straight-line rent and amortization of above- and below-market
leases. The decrease in revenue for the year ended December 31,
2009 is primarily the result of the loss of the single tenant leases at 1221
Coit Road and Landmark II. Rental revenue for the year ended December
31, 2008 includes an early termination fee of approximately $1.0 million from
the single tenant’s lease at 1221 Coit Road. Management expects
rental revenue to remain relatively flat unless we are able to quickly lease-up
space that is currently unoccupied. We currently have approximately
13,000 leased rentable square feet set to expire during the year ended December
31, 2010.
Hotel Revenue. Hotel revenue
for the years ended December 31, 2009 and 2008 was $12.4 million and $15.1
million, respectively, and was comprised of revenue generated by the hotel
operations of Hotel Palomar and Residences. The continuing economic
recession, global credit crisis, and eroding consumer confidence all contributed
to soft lodging demand and lower daily room rates. We do not
anticipate hotel revenue to improve until the overall U.S. economy experiences
sustained growth and lodging demand increases.
Real Estate Inventory Sales Revenue.
Real estate inventory sales revenue of $0.3 million for the year ended
December 31, 2009 was comprised of the sale of a developed land lot at Bretton
Woods. Real estate inventory sales revenue of $0.8 million for
the year ended December 31, 2008 was comprised of the sale of condominiums
located at Hotel Palomar and Residences.
During
2009, the U.S. housing market continued its nationwide downturn that began in
2006 as a result of high inventory levels, weak consumer confidence and lower
levels of mortgage financing available to consumers. These factors
contributed to weakened demand for new homes and slower than expected
sales. If these conditions continue to exist, we will continue to
experience slow sales of our real estate inventory in the
future.
30
Property Operating Expenses.
Property operating expenses for the years ended December 31, 2009 and
2008 were $16.3 million and $18.7 million, respectively, and were comprised of
expenses related to the daily operations of our properties. The
decreased property operating expenses for year ended December 31, 2009 was
primarily due to decreased occupancy at Hotel Palomar and the write-off of
accounts receivable in 2008 associated with the single-tenant lease termination
at 1221 Coit Road and receivables from CompUSA on its leases at Landmark I and
II. Additionally, we were able to reduce property expenses by
consolidating certain services across our portfolio. Without
leasing-up available space, we expect property operating expenses to remain
relatively constant.
Inventory Valuation Adjustment.
The inventory valuation adjustment for the years ended December 31, 2009
and 2008 were $0.5 million and $16.8 million, respectively. The
inventory valuation adjustment for the year ended December 31, 2009 was composed
of non-cash adjustments related to the luxury homes constructed at Bretton
Woods. During the year ended December 31, 2008, we recognized
non-cash adjustments of $14.9 million to reduce the carrying value of
condominiums at Hotel Palomar and Residences and $1.9 million to reduce the
carrying value of developed land lots at Bretton Woods to their estimated fair
value. During 2009 as in 2008, the housing market and related
condominium sales have experienced difficult conditions including high inventory
levels, tightening of the credit market, rising foreclosures and weak consumer
confidence. In the event that market conditions continue to decline
in the future or the current difficult market conditions extend beyond our
expectations, additional adjustments may be necessary in the
future.
Interest Expense. Interest
expense for the years ended December 31, 2009 and 2008 was $6.8 million and $8.0
million, respectively, and was comprised of interest expense and amortization of
deferred financing fees related to the notes associated with the acquisition and
development of our consolidated properties. The decrease in interest
expense for the year ended December 31, 2009 is primarily the result of the
decrease in variable interest rates associated with our
loans. Interest costs for the development of Cassidy Ridge will
continue to be capitalized until this project is complete. Interest
costs for construction of the speculative homes at Bretton Woods were
capitalized until construction was completed during the quarter ended June 30,
2009. For the year ended December 31, 2009, we capitalized interest
costs of $1.3 million for Cassidy Ridge and $54,000 for Bretton
Woods. For the year ended December 31, 2008, we capitalized interest
costs of $1.0 million for Cassidy Ridge and $0.2 million for Bretton
Woods. Interest expense for the years ended December 31, 2009 and
2008 includes the reclassification of approximately $0.7 million and $0.2
million, respectively, of realized losses on interest rate derivatives from
other comprehensive loss.
The U.S.
credit markets have experienced volatility and as a result, there is greater
uncertainty regarding our ability to access the credit markets in order to
attract financing on reasonable terms. Our ability to borrow funds to
refinance current debt could be adversely affected by our inability to secure
financing on favorable terms.
Real Estate Taxes. Real
estate taxes for the years ended December 31, 2009 and 2008 were $2.6 million
and $3.8 million, respectively, and were comprised of real estate taxes from
each of our properties. The decrease for the year ended December 31,
2009 is primarily due to a refund of 2008 property taxes and a reduction of 2009
assessed tax valuations. Without successful appeals of future
property tax valuations, we expect real estate taxes to remain flat in the near
future.
Property and Asset Management Fees.
Property and asset management fees for the years ended December 31,
2009 and 2008 were $1.8 million and $1.9 million, respectively. We
expect property and asset management fees to remain relatively constant in the
near future.
General and Administrative Expenses.
General and administrative expenses for the years ended December 31,
2009 and 2008 were $1.6 million and $1.4 million,
respectively. General and administrative expenses were comprised of
auditing fees, advisor administrative services, transfer agent fees, tax
preparation fees, directors’ and officers’ insurance premiums, legal fees,
printing costs and other administrative expenses. Our advisor waived
reimbursement of general and administrative expense of $0.3 million for the year
ended December 31, 2009. The increase for the year ended December 31,
2009 is primarily the result of additional auditing costs and an increase in tax
preparation fees. We expect general and administrative expenses to
remain relatively constant in the near future.
Advertising Costs.
Advertising costs for the years ended December 31, 2009 and 2008 were
$0.3 million and $0.5 million, respectively. Management expects
future advertising costs to remain relatively unchanged until we begin a
marketing campaign for the condominiums at Cassidy Ridge.
Depreciation and Amortization
Expense. Depreciation and amortization expense for the years ended
December 31, 2009 and 2008 was $6.4 million and $8.3 million, respectively, and
includes depreciation and amortization of buildings, furniture and equipment,
and real estate intangibles associated with our wholly-owned properties and our
investments in partnerships. The decrease in depreciation and
amortization expense during the year ended December 31, 2009 is primarily due to
accelerated amortization of lease intangibles associated with the termination
and expiration of leases during the year ended December 31, 2008.
Cost of Real Estate Inventory Sales.
Cost of real estate inventory sales for the year ended December 31, 2009
was $0.3 million and was comprised of the costs associated with the sale of
developed land, including selling costs, at Bretton Woods. Cost of
real estate inventory sales for the year ended December 31, 2008 was $0.7
million and was comprised of the costs associated with the sale of condominiums,
including selling costs, located at Hotel Palomar and
Residences.
31
Loss on Derivative
Instruments. Loss on derivative instruments for the years
ended December 31, 2009 and 2008 was $0.5 million and $0.9 million,
respectively. In September 2007, we entered into an interest rate
swap agreement associated with the Hotel Palomar and Residences, which was
designated as a cash flow hedge. Accordingly, changes in the fair
value of the swap were recorded in accumulated other comprehensive loss at each
measurement date. We entered into an amendment to the swap agreement
in October 2008, thus terminating the original interest rate
swap. The amended interest rate swap was entered into as an economic
hedge against the variability of future interest rates on the variable interest
rate borrowings. The amended swap agreement has not been designated
as a cash flow hedge for accounting purposes. Thus, changes in the
fair value of the amended interest rate swap are recognized in current
earnings. We mark the interest rate swap to its estimated fair value
as of each balance sheet date.
Net Loss Attributable to
Noncontrolling Interest. Net loss attributable to noncontrolling interest
for the years ended December 31, 2009 and 2008 was $2.4 million and $1.2
million, respectively, and represents the other partners’ proportionate share of
losses from investments in the partnerships that we consolidate.
Discontinued
Operations
Income (loss) from Discontinued
Operations. Income from discontinued operations for the years ended
December 31, 2009 and 2008 represent activity for 4245 N. Central which was
sold on September 30, 2008. Amounts for the year ended December 31,
2009 represent final settlements related to operations of the
property.
Fiscal
year ended December 31, 2008 as compared to the fiscal year ended December 31,
2007
We had
ownership interests in ten properties as of December 31, 2008 and eleven
properties as of December 31, 2007. All investments in partnerships
and joint ventures were consolidated with and into our accounts as of December
31, 2008 and 2007. The operations of 4245 N. Central, which was sold
on September 30, 2008, are classified as discontinued operations in each of the
periods presented in the accompanying consolidated statements of
operations. Additionally, the single tenant at 1221 Coit Road
terminated its lease, which was set to expire on March 31, 2013, effective March
31, 2008. CompUSA, Inc., a retailer of consumer electronics, leased
100% of Landmark I and Landmark II. The lease at Landmark II expired
March 31, 2008 and the lease at Landmark I expired in May 2008. We
executed a long-term direct lease for approximately 90,000 rentable square feet
or approximately 74% of Landmark I to a tenant who had previously subleased the
space.
Continuing
Operations
Rental Revenue. Rental
revenue for the years ended December 31, 2008 and 2007 totaled $12.3 million and
$12.9 million, respectively, and was comprised of revenue, including adjustments
for straight-line rent and amortization of above- and below-market
leases. The decrease in revenue for the year ended December 31,
2008 was primarily the result of the loss of the single tenant leases at
Landmark I and Landmark II, partially offset by the new lease at one of those
properties. Rental revenue for the year ended December 31, 2008 also
included an early termination fee of approximately $1.0 million from the single
tenant’s lease at 1221 Coit Road.
Hotel Revenue. Hotel revenue
for the years ended December 31, 2008 and 2007 was $15.1 million and $15.9
million, respectively, and was comprised of revenue generated by the hotel
operations of Hotel Palomar and Residences.
Real Estate Inventory Sales Revenue.
Real estate inventory sales revenue for the years ended December 31, 2008
and 2007 was $0.8 million and $8.2 million, respectively, and was comprised of
the sales of condominiums located at Hotel Palomar and Residences. We
completed construction of seventy-one units during the first quarter of 2007 and
recognized revenue from the sale of a number of them during the years ended
December 31, 2008 and 2007. During 2008 and 2007, the U.S. housing
market continued its nationwide downturn that began in 2006. The
housing market experienced an oversupply of new and existing homes available for
sale, reduced availability and stricter terms of mortgage financing,
deteriorating conditions in the overall economy and rising
unemployment. These factors contributed to weakened demand for new
homes and slower than expected sales.
Property Operating Expenses.
Property operating expenses for the years ended December 31, 2008 and
2007 were $18.7 million and $17.3 million, respectively. Property
operating expenses for the years ended December 31, 2008 and 2007 were comprised
of expenses related to our daily operation. The increase in property
operating expenses for the year ended December 31, 2008 was primarily due to the
write-off of accounts receivable associated with the early termination of the
single tenant lease at 1221 Coit Road and receivables from CompUSA on its leases
at Landmark I and Landmark II. We also incurred utility costs
which were previously paid directly by the tenants who vacated these
properties.
32
Inventory Valuation Adjustment.
The inventory valuation adjustment for the years ended December 31, 2008
and 2007 was $16.8 and $2.4 million, respectively, and was comprised of non-cash
adjustments related to our condominium inventory at Hotel Palomar and Residences
and developed land lots at Bretton Woods. During 2008 and 2007, the
housing market and related condominium sales experienced difficult conditions
including high inventory levels, tightening of the credit market and
deteriorating conditions in the overall economy. As a result of our
evaluations and the economic conditions, we recognized adjustments of $14.9
million and $2.1 million for the years ended December 31, 2008 and 2007,
respectively, to reduce the carrying value of condominiums at Hotel Palomar and
Residences. We also recognized adjustments of $1.9 million and $0.3
million for the years ended December 31, 2008 and 2007, respectively, to reduce
the carrying value of developed land lots at Bretton Woods to their estimated
fair value.
Interest Expense. Interest
expense for the years ended December 31, 2008 and 2007 was $8.0 million and $9.7
million, respectively, and was comprised of interest expense and amortization of
deferred financing fees related to the notes associated with the acquisition and
development of our consolidated properties. The decrease in interest
expense for the year ended December 31, 2008 is primarily the result of the
decrease in variable interest rates associated with our notes
payable. As of December 31, 2008, approximately $103.7 million of the
outstanding balance of our notes payable of $154.0 million had variable interest
rates. Interest costs for the development of Cassidy Ridge and the
construction of homes at Bretton Woods continued to be capitalized until
completion of these projects. For the year ended December 31, 2008,
we capitalized interest costs of approximately $1.2 million associated with the
development of Cassidy Ridge and Bretton Woods to real estate
inventory. For the year ended December 31, 2007, we capitalized
interest costs of approximately $1.8 million associated with the development of
Hotel Palomar and Residences, Cassidy Ridge and Bretton Woods to real estate
inventory.
Real Estate Taxes. Real
estate taxes for the years ended December 31, 2008 and 2007 were $3.8 million
and $3.6 million, respectively, and were comprised of real estate taxes from
each of our properties.
Property and Asset Management Fees.
Property and asset management fees for the years ended December 31,
2008 and 2007 were $1.9 million and $1.0 million, respectively. Asset
management fees of approximately $0.9 million were waived by Behringer Advisors
II for the year ended December 31, 2007. No asset management fees
were waived for the year ended December 31, 2008.
General and Administrative Expenses.
General and administrative expenses for the years ended December 31,
2008 and 2007 were $1.4 million and $0.9 million,
respectively. General and administrative expenses were comprised of
auditing fees, advisor administrative services, transfer agent fees, tax
preparation fees, directors’ and officers’ insurance premiums, legal fees,
printing costs and other administrative expenses. The increase for
the year ended December 31, 2008 was primarily the result of reimbursement to
our advisor for administrative services of $0.3 million as well as legal and
printing costs incurred for our special meeting of unitholders.
Advertising Costs.
Advertising costs for the year ended December 31, 2008 was $0.5
million. Advertising costs for the year ended December 31, 2007 were
$2.4 million and included higher advertising costs for Hotel Palomar and
Residences.
Depreciation and Amortization
Expense. Depreciation and amortization expense for the years ended
December 31, 2008 and 2007 was $8.3 million and $8.4 million, respectively, and
includes depreciation and amortization of buildings, furniture and equipment,
and real estate intangibles associated with our wholly-owned properties and our
investments in partnerships.
Cost of Real Estate Inventory Sales.
Cost of real estate inventory sales for the years ended December 31, 2008
and 2007 were $0.7 million and $7.9 million, respectively, and was comprised of
the costs associated with the sale of condominiums, including selling costs,
located at Hotel Palomar and Residences.
Loss on Derivative
Instruments. Loss on derivative instruments for the year ended
December 31, 2008 was $0.9 million. We entered into an amended
interest rate swap in October 2008 that was an economic hedge against the
variability of future interest rates on variable interest rate
borrowings. The amended swap agreement was not designated as a cash
flow hedge for accounting purposes. Thus, changes in the fair value
of the amended interest rate swap were recognized in current
earnings. We marked the interest rate swap to its estimated fair
value as of each balance sheet date. However, the original swap
entered into in September 2007 was designated as a cash flow hedge, with all
changes recorded in accumulated comprehensive loss.
Net Loss Attributable to
Noncontrolling Interest. Net loss attributable to noncontrolling interest
for the years ended December 31, 2008 and 2007 was $1.2 million and $3.8
million, respectively, and represents the other partners’ proportionate share of
losses from investments in the partnerships that we consolidate.
Discontinued
Operations
Income (loss) from Discontinued
Operations. Income (loss) from discontinued operations for the years
ended December 31, 2008 and 2007 represent activity for 4245 N. Central
which was sold on September 30, 2008.
33
Cash
Flow Analysis
Fiscal
year ended December 31, 2009 as compared to the fiscal year ended December 31,
2008
Cash used
in operating activities for the year ended December 31, 2009 was $17.2 million
and was comprised primarily of the net loss of $15.5 million, adjusted for
depreciation and amortization of $7.6 million and inventory valuation
adjustments of $0.5 million and the increase in real estate inventory of $9.9
million, which was primarily composed of development of the condominiums at
Cassidy Ridge. Cash used in operating activities for the year ended
December 31, 2008 was $15.1 million and was comprised primarily of the net loss
of $31.7 million, adjusted for depreciation and amortization of $9.5 million and
inventory valuation adjustments of $16.8 million, the change in real estate
inventory of $6.3 million, changes in working capital accounts of $1.9 million
and the gain on sale of discontinued operations of $1.6 million.
Cash used
in investing activities for the year ended December 31, 2009 was $0.4 million
and was primarily comprised of capital expenditures for real estate of $0.5
million. Cash provided by investing activities for the year ended
December 31, 2008 was $9.4 million and was primarily comprised of proceeds from
the sale of 4245 N. Central of $10.1 million.
Cash
provided by financing activities was $14.9 million in 2009 versus $5.3 million
in 2008. For the year ended December 31, 2009, cash flows from
financing activities consisted primarily of proceeds from notes payable, net of
payments, of $17.1 million, partially offset by $1.8 million of distributions to
our limited partners. For the year ended December 31, 2008, cash
flows from financing activities consisted primarily of proceeds from notes
payable, net of payments, of $8.4 million, partially offset by $3.1 million of
distributions to our limited partners.
Fiscal
year ended December 31, 2008 as compared to the fiscal year ended December 31,
2007
Cash used
in operating activities for the year ended December 31, 2008 was $15.1 million
and was comprised primarily of the net loss of $31.7 million, adjusted for
depreciation and amortization of $9.5 million and inventory valuation
adjustments of $16.8 million, the change in real estate inventory of $6.3
million, changes in working capital accounts of $1.9 million and the gain on
sale of discontinued operations of $1.6 million. Cash used in
operating activities for the year ended December 31, 2007 was $16.0 million and
was comprised primarily of the net loss of $17.3 million, adjusted for
depreciation and amortization of $10.8 million and changes in working capital
accounts of $8.8 million.
Cash
provided by investing activities for the year ended December 31, 2008 was $9.4
million and was primarily comprised of proceeds from the sale of 4245 N. Central
of $10.1 million. Cash used in investing activities for the year
ended December 31, 2007 was $14.2 million and was primarily comprised of capital
expenditures for real estate of $13.4 million.
Cash
provided by financing activities was $5.3 million in 2008 versus $14.2 million
in 2007. For the year ended December 31, 2008, cash flows from
financing activities consisted primarily of proceeds from notes payable, net of
payments, of $8.4 million, partially offset by $3.1 million of distributions to
our limited partners. For the year ended December 31, 2007, cash
flows from financing activities consisted primarily of proceeds from notes
payable, net of payments, of $17.9 million, partially offset by $3.1 million of
distributions to our limited partners.
Liquidity
and Capital Resources
Our cash
and cash equivalents were $2.0 million at December 31, 2009. Our
principal demands for funds will be for the payment of capital improvements,
operating expenses and for the payment of our outstanding
indebtedness. Generally, these cash needs are currently expected to
be met from borrowings and proceeds from the disposition of properties, as set
forth in more detail below.
The
timing and amount of cash to be distributed to our limited partners is
determined by our General Partners and is dependent on a number of factors,
including funds available for payment of distributions, financial condition and
capital expenditures. In light of cash needs required to meet
maturing debt obligations and our ongoing operating capital needs, our General
Partners determined it necessary to discontinue payment of monthly distributions
beginning with the 2009 third quarter. We do not anticipate that
payment of distributions will resume in the near-term. Our General
Partners, in their discretion, may defer fees payable by us to them and make
supplemental payments to us or to our limited partners, or otherwise support our
operations. Accordingly, all or some of such distributions may
constitute a return of capital to our limited partners to the extent that
distributions exceed net cash from operations, or may be recognized as taxable
income to our limited partners or us.
Distributions
paid in the years ended December 31, 2009 and 2008 were approximately $1.8
million and $3.1 million, respectively. The decrease in distributions
paid for year ended December 31, 2009 is due to the discontinuance of monthly
distributions beginning with the 2009 third quarter. For the years
ended December 31, 2009 and 2008, we had negative cash flow from operating
activities of approximately $17.2 million and $15.1 million,
respectively. Accordingly, cash amounts distributed to our limited
partners for each of the years ended December 31, 2009 and 2008 exceeded cash
flow from operating activities, which differences were funded from our
borrowings.
34
The
recent turbulent financial markets and disruption in the banking system, as well
as the nationwide economic downturn, has created a severe lack of credit and
rising costs of any debt that is available. A continuing market
downturn could reduce cash flow, cause us to incur additional losses, and cause
us not to be in compliance with lender covenants. As of December 31,
2009, of our $156.0 million in debt, $97.8 million is subject to variable
interest rates, excluding those notes subject to minimum interest rates, $38.0
million of which is effectively fixed by an interest rate swap agreement. As of
December 31, 2009, $32.1 million of principal payments and notes payable matures
within the next twelve months. We are working with lenders to
either extend the maturity dates of the loans or refinance the loans under
different terms. Of that amount, only $5.5 million of the notes
payable agreements contain a provision to extend the maturity date for at least
one additional year if certain conditions are met. We were able to
restructure or extend approximately $108.0 million of our loan agreements during
the year ended December 31, 2009. We currently expect to use
additional borrowings and proceeds from the disposition of properties to
continue making our scheduled debt service payments until the maturity dates of
the loans are extended, the loans are refinanced, or the outstanding balance of
the loans are completely paid off. There is no guaranty that we will
be able to refinance our borrowings with more or less favorable terms or extend
the maturity dates of such loans. In addition, the continued economic
downturn and lack of available credit could delay or inhibit our ability to
dispose of our properties, or cause us to have to dispose of our properties for
a lower than anticipated return. As a result, our primary objectives
will be to continue to preserve capital, as well as sustain and enhance property
values, while continuing to focus on the disposition of our
properties. Given current market conditions, however, we anticipate
that the life of this investment program will extend beyond its original
anticipated liquidation date.
Our 30%
noncontrolling partner previously entered into multiple loan agreements with
Behringer Harvard Mockingbird Commons LLC (“Mockingbird Commons Partnership”),
an entity in which we have a 70% direct and indirect ownership interest,
totaling $1.3 million. All of these loans are unsecured, subordinate
to payment of any mortgage debt and matured prior to December 31,
2009. Interest rates under the loan agreements ranged from 6% to
12%. Nonpayment of the outstanding balances due and payable on the
maturity dates of the loan agreements constitute an event of
default. As a result, past due amounts under the loan agreements bear
interest up to 18% per annum during the default period. We believe
that we are in compliance with all other covenants under these loan
agreements.
On July
16, 2007, we entered into a loan agreement with Citibank, N.A. to borrow up to
$4.5 million for development of the land at Bretton Woods. Proceeds
from the loan were used to completely pay down an existing loan with the Frost
National Bank. The loan matured on July 15, 2009. On
October 9, 2009, we entered into a modification agreement with Citibank, N.A.,
effective July 15, 2009, whereby the maturity date was extended to July 15,
2011. The interest rate under the modification agreement is the Prime
rate plus two percent (2.0%) per annum, subject to a minimum interest rate of
six percent (6.0%). A principal payment of $0.7 million was made upon
closing of the loan modification agreement. Payments of interest only
are due monthly with principal payments due upon sales of the residential lots,
with the remaining balance due and payable on the maturity date. The
outstanding principal balance of the loan was $1.3 million at December 31,
2009.
On July
29, 2009, we entered into an agreement with Dallas City Bank to extend the
maturity date of the Melissa Land Loan to July 29, 2012. The interest
rate under the amended loan agreement is the Prime rate plus one-half percent
(0.5%) per annum, but subject to a floor of 5.5% per annum. The
amended agreement requires monthly payments of principal in the amount of
$10,000, together with all accrued but unpaid interest, with the remaining
balance due and payable on the maturity date. The outstanding
principal balance of the loan was $1.7 million at December 31,
2009.
On
October 28, 2009, the Mockingbird Commons Partnership entered into the Third
Amendment to Note and Construction Agreement (“Mockingbird CULS Loan Agreement”)
with Credit Union Liquidity Services, LLC f/k/a Texans Commercial Capital, LLC
(“CULS”), effective October 1, 2009. The Mockingbird Commons
Partnership entered into a promissory note to CULS on October 4, 2005, whereby
it was permitted to borrow up to $34 million to construct luxury high-rise
condominiums. The Mockingbird CULS Loan Agreement, among other
things, extended the maturity date of the loan from October 1, 2009 to October
1, 2011 and permits leasing of the residential condominium units pending their
ultimate sale. In addition, the loan agreement required a principal
payment of $0.2 million, which was paid at closing from proceeds provided by
borrowings from the Fourth Amended BHH Loan, and an additional principal payment
of at least $3.0 million on or before September 30,
2010. Payments of interest only are due monthly with the unpaid
principal balance and all accrued but unpaid interest due on October 1,
2011. The Mockingbird CULS Loan Agreement bears interest at the Prime
rate plus one percent (1.0%). In addition, the borrower was also
required to deposit $0.3 million quarterly into a deposit account for the
benefit of CULS, up to a total of $1.2 million. We have deposited
$0.6 million of the $1.2 million as of March 19, 2009. These amounts
are pledged as additional collateral for the loan. The outstanding
balance of the Mockingbird CULS Loan Agreement was $25.0 million at
December 31, 2009.
We have
guaranteed payment of the obligation under the Mockingbird CULS Loan Agreement
in the event that, among other things, the Mockingbird Commons Partnership
becomes insolvent or enters into bankruptcy proceedings. In addition, the
guaranty agreement assigns a second lien position on the Cassidy Ridge Property
to CULS in the amount of $12.6 million as additional security to the Mockingbird
CULS Loan Agreement and requires we maintain a minimum net
worth.
35
Additionally,
on October 28, 2009, Behringer Harvard Mountain Village, LLC (“Cassidy Ridge
Borrower”), our wholly-owned subsidiary, entered into the Second Modification
Agreement (“Cassidy Ridge Loan Agreement”) with CULS, an unaffiliated third
party, effective October 1, 2009. The modification was entered into
to permit the second lien position as additional security for the Mockingbird
CULS Loan Agreement. On September 25, 2008, the Cassidy Ridge
Borrower entered into a promissory note payable to CULS, pursuant to which they
were permitted to borrow a total principal amount of $27.7
million. As of December 31, 2009, total borrowings under the loan
agreement were approximately $10.8 million. The maturity date of the
Cassidy Ridge Loan Agreement remains October 1, 2011 and the interest rate
continues to be equal to the greater of the Prime Rate plus one and one-half
percent (1.50%) or a fixed rate of 6.5%, with interest being calculated on the
unpaid principal. Monthly payments of unpaid accrued interest are
required through September 1, 2011, with a final payment of the outstanding
principal and unpaid accrued interest due on the maturity date.
We have
guaranteed payment of the obligation under the Cassidy Ridge Loan Agreement in
the event that, among other things, the Cassidy Ridge Borrower becomes insolvent
or enters into bankruptcy proceedings. In addition, the guaranty
agreement waives all prior failure to comply with certain covenants and
establishes new covenants on our part. Specifically, the guaranty
agreement removes a liquidity covenant and adds a net worth
covenant.
On
November 13, 2009, we entered into the Fourth Amended and Restated Unsecured
Promissory Note payable to Behringer Holdings (“Amended BHH Loan”), pursuant to
which we may borrow a maximum of $40.0 million. The outstanding principal
balance under the Amended BHH Loan as of December 30, 2009 was $28.9
million. On December 31, 2009, Behringer Holdings forgave $15.0
million of principal borrowings and all accrued interest thereon which has been
accounted for as a capital contribution by our General
Partners. After forgiveness of the $15.0 million in borrowings, the
outstanding balance of the loan was $13.9 million at December 31,
2009. Borrowings under the Amended BHH Loan are being used
principally to finance general working capital and capital
expenditures. While we would normally explore obtaining additional
liquidity of this sort in the debt market, the debt market has tightened and we
accessed support from our sponsor instead. The Amended BHH Loan is unsecured and
bears interest at a rate of 5.0% per annum, with the accrued and unpaid amount
of interest payable until the principal amount of each advance under the note is
paid in full. The maturity date of all borrowings under the Amended BHH
Loan is November 13, 2012.
While it
is unclear when the overall economy will recover, we do not expect conditions to
improve in the near future. Management expects that the current
volatility in the capital markets will continue, at least in the
short-term. As a result, we expect that we will continue to require
this liquidity support from our sponsor during 2010. Our sponsor,
subject to their approval, may make available to us additional funds under the
Fourth Amended BHH Loan through 2010, potentially up to the borrowing limits
thereunder. There is no guarantee that our sponsor will provide
additional liquidity to us and if so, in what amounts.
On
December 22, 2009, the Mockingbird Commons Partnership entered into the Second
Amendment Agreement (the “Loan Agreement”) with Bank of America, N.A. (“Bank of
America”), effective December 21, 2009. The Loan Agreement, among
other things, extends the maturity date of the loan from September 6, 2010 to
December 21, 2012 with options to extend the maturity date for two periods
of twelve months each if certain conditions are met and removes certain
financial covenants. Payments of interest only are due monthly with
the unpaid principal balance and all accrued but unpaid interest due on December
21, 2012. Amounts outstanding under the Loan Agreement will continue
to bear interest at the 30-day London Interbank Offer Rate (“LIBOR”) plus one
and three-fourths percent (1.75%) until September 1, 2010, at which time the
interest rate will increase to LIBOR plus three and one-half percent
(3.5%). The outstanding principal balance of the Loan Agreement was
approximately $41.2 million at December 31, 2009.
We have
guaranteed payment of the obligation under the Loan Agreement in the event that,
among other things, the borrower becomes insolvent or enters into bankruptcy
proceedings. Borrowings under the Loan Agreement are secured by Hotel
Palomar. We are also guarantor of the Revolver Agreement (as
referenced below) and have assigned a second lien position in the 250/290
Carpenter Property (as referenced below) to the Lender as additional security to
the Loan Agreement.
In
addition, on December 22, 2009, we entered into the Fifth Amendment to the
Credit Agreement (the “Revolver Agreement”) with Bank of America, effective
October 30, 2009. The Revolver Agreement, among other things, extends
the maturity date of borrowings under the loan agreement from October 30, 2009
to December 21, 2012 with options to extend the maturity date for two
periods of twelve months each if certain conditions are met and removes certain
financial covenants. Payments of interest only are due monthly with
the unpaid principal balance and all accrued but unpaid interest due on
December 21, 2012. Amounts outstanding under the Revolver
Agreement will continue to bear interest at LIBOR plus three and one-half
percent (3.5%). The outstanding principal balance under the Revolver
Agreement was $9.7 million at December 31, 2009.
36
In April
2005, we acquired a three-building office complex containing approximately
539,000 rentable square feet located on approximately 15.3 acres of land in
Irving, Texas, a suburb of Dallas, Texas (the “250/290 Carpenter Property”)
through our direct and indirect partnership interests in Behringer Harvard
250/290 Carpenter LP (the “Carpenter Partnership”). We have
guaranteed payment of the obligation under the Revolver
Agreement. The 250/290 Carpenter Property is subject to a deed of
trust to secure payment under the Revolver Agreement. In addition, as
noted above, we have assigned Bank of America a second lien position in the
250/290 Carpenter Property as additional security for the Loan
Agreement.
Generally,
our notes payable mature approximately three to five years from
origination. Most of our borrowings are on a recourse basis to us,
meaning that the liability for repayment is not limited to any particular
asset. The majority of our notes payable require payments of interest
only, with all unpaid principal and interest due at maturity. Our
loan agreements stipulate that we comply with certain reporting and financial
covenants. These covenants include, among other things, notifying the
lender of any change in management and maintaining minimum debt service
coverage.
We were
not in compliance with a liquidity covenant under the 1221 Coit Road Loan
Agreement at December 31, 2009. We have received a waiver from the
lender waiving any failure to comply with the liquidity covenant at December 31,
2009. Additionally, we did not make the full required mortgage
payments on the Plaza Skillman Loan due for the months of December 2009 and
January 2010. We expect to continue making partial mortgage payments
until the loan is restructured or modified. The loan matures on April
11, 2011 and the outstanding principal balance was approximately $9.4 million at
December 31, 2009. Failure to make the full mortgage payment
constitutes a default under the debt agreement and, absent a waiver or
modification of the debt agreement, the lender may accelerate maturity with all
unpaid interest and principal immediately due and payable. We are
currently in negotiations with the lender to waive the event of noncompliance or
modify the loan agreement. However, there are no assurances that we
will be successful in our negotiations with the lender.
We
believe that we were in compliance with all other debt covenants under our loan
agreements at December 31, 2009. Each loan is secured by the
associated real property and all loans, with the exception of the Plaza Skillman
Loan, are unconditionally guaranteed by us.
Net
Operating Income
Net
operating income (“NOI”) is a non-GAAP financial measure that is defined as
total revenue less property operating expenses, real estate taxes, property
management fees, advertising costs and the cost of real estate inventory
sales. We believe that NOI provides an accurate measure of the
operating performance of our operating assets because NOI excludes certain items
that are not associated with management of our properties. NOI should
not be considered as an alternative to net income (loss), or an indication of
our liquidity. NOI is not indicative of funds available to meet our
cash needs or our ability to make distributions and should be reviewed in
connection with other GAAP measurements. To facilitate understanding
of this financial measure, a reconciliation of NOI to net loss attributable to
the Partnership in accordance with GAAP has been provided. Our
calculations of NOI for the years ended December 31, 2009, 2008 and 2007 are
presented below (in thousands).
37
2009
|
2008
|
2007
|
||||||||||
Total
revenues
|
$ | 21,682 | $ | 28,217 | $ | 37,048 | ||||||
Operating
expenses
|
||||||||||||
Property operating expenses
|
16,284 | 18,744 | 17,340 | |||||||||
Real estate taxes, net
|
2,592 | 3,808 | 3,590 | |||||||||
Property and asset management fees
|
1,789 | 1,853 | 988 | |||||||||
Advertising costs
|
255 | 502 | 2,382 | |||||||||
Cost of real estate inventory sales
|
263 | 661 | 7,910 | |||||||||
Less: Asset management fees
|
(910 | ) | (933 | ) | - | |||||||
Total
operating expenses
|
20,273 | 24,635 | 32,210 | |||||||||
Net
operating income
|
$ | 1,409 | $ | 3,582 | $ | 4,838 | ||||||
Reconciliation to Net loss
|
||||||||||||
Net
operating income
|
$ | 1,409 | $ | 3,582 | $ | 4,838 | ||||||
Less:
Depreciation and amortization
|
(6,447 | ) | (8,272 | ) | (8,417 | ) | ||||||
General and administrative expenses
|
(1,550 | ) | (1,442 | ) | (925 | ) | ||||||
Interest expense, net
|
(6,770 | ) | (8,025 | ) | (9,745 | ) | ||||||
Asset management fees
|
(910 | ) | (933 | ) | - | |||||||
Inventory valuation adjustment
|
(541 | ) | (16,790 | ) | (2,444 | ) | ||||||
Provision for income taxes
|
(199 | ) | (200 | ) | (175 | ) | ||||||
Add:
Interest income
|
26 | 78 | 368 | |||||||||
Loss on sale of assets
|
- | (2 | ) | - | ||||||||
Loss on derivative instruments, net
|
(492 | ) | (883 | ) | - | |||||||
Income (loss) from discontinued operations
|
2 | 1,184 | (771 | ) | ||||||||
Net
loss
|
$ | (15,472 | ) | $ | (31,703 | ) | $ | (17,271 | ) |
Performance
Reporting Required by the Partnership Agreement
Section
15.2 in our Partnership Agreement requires us to provide our limited partners
with our net cash from operations, a non-GAAP financial measure, which is
defined as net income, computed in accordance with GAAP, plus depreciation and
amortization on real estate assets, adjustments for gains from the sale of
assets and gains on the sale of discontinued operations, debt service and
capital improvements (“Net Cash From Operations”). Our calculations
of Net Cash From Operations for the years ended December 31, 2009, 2008 and
2007 are presented below (in thousands):
2009
|
2008
|
2007
|
||||||||||
Net
loss
|
$ | (15,472 | ) | $ | (31,703 | ) | $ | (17,271 | ) | |||
Net
loss attributable to noncontrolling interest
|
2,434 | 1,159 | 3,811 | |||||||||
Adjustments
|
||||||||||||
Real
estate depreciation (1)
|
5,799 | 5,119 | 4,565 | |||||||||
Real
estate amortization (1)
|
619 | 2,745 | 3,355 | |||||||||
Inventory
valuation adjustment (1)
|
541 | 12,321 | 1,740 | |||||||||
Gain
on sale of discontinued operations (1)
|
- | (1,008 | ) | - | ||||||||
Debt
service, net of amounts capitalized (1)
|
(5,068 | ) | (6,406 | ) | (7,258 | ) | ||||||
Capital
improvements (1)(2)
|
(558 | ) | (1,542 | ) | (12,553 | ) | ||||||
Net
cash from operations
|
$ | (11,705 | ) | $ | (19,315 | ) | $ | (23,611 | ) |
(1)
|
This
represents our ownership portion of the properties that we
consolidate.
|
(2)
|
Amounts
include building improvements, tenant improvements and furniture and
fixtures.
|
38
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements that are reasonably likely to have a current
or future material effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Contractual
Obligations
The following table sets forth certain
information concerning our contractual obligations and commercial commitments as
of December 31, 2009, and outlines expected future payments to be made under
such obligations and commitments (in thousands):
Payments due by period
|
||||||||||||||||||||||||
Totals
|
2010
|
2011
|
2012
|
2013
|
2014
|
|||||||||||||||||||
Notes
payable (1)
|
$ | 155,774 | $ | 32,122 | $ | 57,397 | $ | 66,255 | $ | - | $ | - | ||||||||||||
Capital
lease
|
119 | 66 | 53 | - | - | - | ||||||||||||||||||
Interest
|
14,280 | 7,160 | 4,568 | 2,552 | - | - | ||||||||||||||||||
Total
|
$ | 170,173 | $ | 39,348 | $ | 62,018 | $ | 68,807 | $ | - | $ | - |
(1) Excludes
unamortized premium of $0.3 million.
Other
Behringer Harvard Programs
As
discussed elsewhere herein, the current economic crisis which began with the
collapse of residential subprime credit markets and continued through an overall
crisis in, and freeze of, the credit markets toward the end of 2008, followed by
unemployment and economic declines unprecedented in the last 70 years, has had
severely negative effects across substantially all commercial real estate. As
the industry has been affected, just as we have been adversely affected, other
Behringer Harvard-sponsored investment programs that substantially completed
their primary equity offerings at or prior to the end of 2008 have been
adversely affected by the disruptions to the economy generally and the real
estate market. These economic conditions have adversely affected the
financial condition of many of these programs’ tenants and lease guarantors,
resulting in tenant defaults or bankruptcies. Further, lowered asset
values, as a result of declining occupancies, reduced rental rates, and greater
tenant concessions and leasing costs, have reduced investor returns in these
investment programs because these factors not only reduce current return to
investors but also negatively impact the ability of these investment programs to
refinance or sell their assets and to realize gains thereon. In
response to these economic stresses, these investment programs have altered
their overall strategies from acquisition and growth to focusing on capital
conservation, debt extensions and restructurings, reduction of operating
expenses, and management of lease renewals, re-tenanting, declining occupancies
and rental rates and increases in tenant concessions and leasing
costs. Identified and described in detail below are certain
consequences of the current economic environment affecting certain
characteristics of these other investment programs.
In
response to these economic stresses, like us, these Behringer Harvard-sponsored
investment programs have altered their overall strategies from acquisition and
growth to focusing on capital conservation, debt extensions and restructurings,
reduction of operating expenses, and management of lease renewals and
retenanting, declining occupancies and rental rates, and increases in tenant
concessions and leasing costs. Identified and described below are
trends regarding the consequences of the current economic environment affecting
certain characteristics of these other investment programs. These
trends provide additional information as to the consequences of the current
economic conditions on real estate investment programs of the type sponsored by
Behringer Harvard, many of which consequences currently or in the future may
affect us.
Distributions and
Redemptions. Behringer Harvard Mid-Term Value Enhancement Fund
I has paid, and continues to pay, monthly distributions at a 6% annualized rate
(all distribution rate calculations herein assume a per unit or share purchase
price of $10.00 reduced for capital distributions arising from sales of
assets). While portfolio liquidation has been delayed because of
current economic challenges, Behringer Harvard Mid-Term Value Enhancement Fund
is at the stage where it is operating with a view to provide capital returns to
its investors through the sale of its assets, and it has entered into a contract
to sell one of the five buildings currently included in its
portfolio. If that sale is consummated, the general partners
currently anticipate distributing the net proceeds of the sale to the limited
partners and would also consider reducing the normal distribution to reflect the
reduction of income resulting from the disposition of this asset and resulting
higher operating costs relative to revenues.
Behringer
Harvard Opportunity REIT I has maintained its 3% annualized rate, but moved from
monthly to quarterly distributions. Behringer Harvard REIT I lowered
its annualized distribution rate from 6.5% to 3.25% in connection with its
monthly distributions beginning in April 2009. Behringer Harvard
Opportunity REIT I, Behringer Harvard REIT I, and Behringer Harvard Mid-Term
Value Enhancement Fund I have each indicated that their focus in the current
environment is on capital preservation and that they may reduce their
distribution rates or cease paying distributions.
39
In March
2009, to conserve capital, Behringer Harvard Opportunity REIT I and Behringer
Harvard REIT I suspended their share redemption programs except for redemptions
requested by shareholders by reason of death, disability, or confinement to
long-term care. Behringer Harvard REIT I further limited such
redemptions to no more than $10 million for the 2010 fiscal
year. Behringer Harvard Opportunity REIT I and Behringer Harvard REIT
I may further limit or suspend redemptions. In connection with the
announcement of its intention to enter its portfolio liquidation phase in
December 2006, Behringer Harvard Mid-Term Value Enhancement Fund I terminated
its redemption plans (as well as its distribution reinvestment
plan).
The
recession has also negatively impacted the operating performance of Behringer
Harvard Opportunity REIT I and Behringer Harvard REIT I. Cash flow
from operating activities has been insufficient to fund both the net cash
required to fund distributions and the capital requirements of their
properties. As a result, a portion of the net cash required for
distributions and capital expenditures of these REITs was funded from their cash
on hand, including proceeds from their offerings and/or borrowings.
Estimated
Valuations. Behringer Harvard Mid-Term Value Enhancement Fund
announced its estimated valuation as of December 31, 2009 of $7.09 per limited
partner unit. Behringer Harvard Opportunity REIT I announced
estimated valuations of its common stock of $8.17 per share as of June 30, 2009
and $8.03 as of December 31, 2009. Each of these units and shares
were originally sold in their best efforts public offerings for a gross offering
price of $10.00. Behringer Harvard REIT I intends to announce an
estimated valuation of its common stock as of June 30, 2010 that it expects to
be less than the gross offering price of $10.00 per share at which shares were
originally offered on a primary basis in its public offerings.
As with
any valuation methodology, the methodologies used by the Behringer Harvard
sponsored investment programs utilize a number of estimates and
assumptions. Parties using different assumptions and estimates could
derive a different estimated value and these differences could be
significant. The estimated values per share or unit were adopted
pursuant to the specific valuation policies of these investment programs and do
not represent the fair value of the shares or units calculated in accordance
with GAAP or the price at which such shares or units would trade on a national
securities exchange. The valuation policies and the announcements of
estimated values for these programs should be reviewed for additional
information and limitations.
Waiver of Fees and
Expenses. Behringer Holdings and its affiliates have from time
to time, voluntarily when it has perceived circumstances to warrant it, waived
fees and expenses due from their sponsored investment programs. In
2009, Behringer Harvard Holdings entities waived asset management fees of
approximately $7.5 million owed by Behringer Harvard REIT I, asset management
fees and reimbursement of operating expenses of $70,000 and $187,000,
respectively, owed by Behringer Harvard Strategic Opportunity Fund I LP (a
privately offered program), and asset management fees and reimbursement of
operating expenses of $172,000 and $161,000, respectively, owed by Behringer
Harvard Strategic Opportunity Fund II LP (also a privately offered
program). In addition, Behringer Holdings entities waived property
management oversight fees of approximately $161,000 owed by Behringer Harvard
Strategic Opportunity Fund II LP. There is no assurance that
Behringer Holdings or its affiliated entities will waive or defer fees or
expenses due from its sponsored investment programs in the future.
Impairments. Under
GAAP, Behringer Harvard sponsored investment programs consider the applicability
of any financial statement impairments of the assets that they
own. As a result of adverse economic conditions beginning in 2008 and
continuing through 2009, Behringer Harvard Opportunity REIT I and Behringer
Harvard REIT I have taken impairments of approximately $19.4 million and
approximately $21.1 million, respectively, during the fiscal year ended December
31, 2008 and approximately $15.5 million and approximately $259.1 million,
respectively, during the fiscal year ended December 31, 2009. In
addition, Behringer Harvard Opportunity REIT I has made mezzanine loans to
develop two multifamily communities, which Behringer Harvard Opportunity REIT I
has determined meet the criteria of “variable interest entities” under
GAAP. Therefore, Behringer Harvard Opportunity REIT I consolidates
these entities, including the related real estate assets and third party
construction financing, on its financial statements. As of December
31, 2009, the outstanding principal balance of these mezzanine loans was
approximately $22.7 million plus accrued interest, which was eliminated upon
consolidation. As of December 31, 2009, Behringer Harvard Opportunity
REIT I believes that all of the amounts due under the mezzanine loans may not be
collectible and, to the extent that it would in the future deconsolidate the
investments, it would recognize an impairment of the mezzanine
loans.
Financings. The
recent turbulent financial markets and disruption in the banking system, as well
as the nationwide economic downturn, have created a severe lack of credit,
rising costs of any debt that is available and reluctance by lenders to lend as
large a percentage of debt to equity than in prior periods. These
market disruptions have adversely affected all of the Behringer Harvard
investment programs that substantially completed their equity offerings at or
prior to the end of 2008 (except Behringer Harvard Mid-Term Value Enhancement
Fund I which incurred no debt). These investment programs have
experienced property loan maturities that have not been refinanced or that have
been refinanced at reduced values requiring additional collateral or equity
and/or at higher interest rates or loan defaults related to certain of their
assets. These programs are working with their lenders to replace,
extend, or restructure debt arrangements as they mature or to purchase or payoff
the debt at discounted amounts. To date, these investment programs
have had success in these activities, though in respect of two assets where it
was unable to negotiate a satisfactory restructuring or debt purchase, Behringer
Harvard REIT I has allowed the mortgage lenders to foreclose or take the
related property in lieu of foreclosure. These investment programs
each intend to continue with their efforts to manage their debt arrangements to
preserve value for their investors but there is no assurances that they will be
able retain all of their assets as mortgage loans mature.
40
Sponsor
Activities. Behringer Holdings entities have also, voluntarily
and in circumstances where a short term need for liquidity has been deemed by
them to be advisable, provided loans to certain Behringer Harvard-sponsored
investment programs, including Behringer Harvard Strategic Opportunity Fund I LP
and Behringer Harvard Strategic Opportunity Fund II LP. The
outstanding principal balance of these loans as of December 31, 2009 was
approximately $10.8 million and $13.2 million,
respectively. Behringer Harvard Holdings has also leased vacant space
at certain of its TIC Programs discussed below. There is no assurance
that Behringer Harvard Holdings or its affiliated entities will engage in such
activities with respect to its sponsored investment programs in the
future.
Co-Investor
Arrangements. Behringer Holdings sponsored private offerings
from 2003 through 2005 for eight single asset co-investment arrangements
structured as tenant-in-common programs (“TIC Programs”). Behringer
Harvard Strategic Opportunity Fund I LP sponsored one TIC Program. As
of December 31, 2009, Behringer Harvard REIT I had acquired all TIC interests
where it had been the largest TIC owner in four TIC Programs and remained the
largest tenant-in-common investor in two TIC Programs. Behringer
Harvard Strategic Opportunity Fund I LP owns a tenant-in-common interest in the
one TIC Program it sponsored, and the remaining TIC Program is owned by
tenant-in-common investors with a small interest owned by Behringer
Holdings. The remaining TIC Program sold its property in
2008.
Investors
in five of the TIC Programs received a positive total return on their investment
including investors in one TIC Program who received a total return above what
was projected in its private placement offering memorandum. In
general, the recession has adversely affected the operating performance of the
remaining four TIC Programs. One of the TIC Programs is
underperforming relative to projections substantially due to representations
made by the seller and its agents related to its operating expenses and revenues
that Behringer Holdings believes to be false. Behringer Holdings is
currently engaged in a lawsuit where it has received settlements for the TIC
investors while it remains in dispute with the former on-site property
manager. The tenant-in-common investors have received substantial
settlement consideration and are no longer party to this suit.
Several
Behringer Harvard sponsored investment programs have made portfolio investments
under co-investment arrangements, generally as partnerships. Certain
of these co-investors have threatened claims against these investment programs
and their sponsor where current economic conditions have resulted in these
investments underperforming expectations. Other than as to Behringer
Harvard Opportunity REIT I which has been sued by a co-investor in one such
circumstance, none of these threats have resulted in lawsuits. While
there is not believed to be any merit in this lawsuit or any of the threats, the
defense and any settlement of these claims may negatively impact returns to the
investors in these investment programs.
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued new
accounting guidance on fair value measurements. This guidance
establishes a single authoritative definition of fair value, sets out a
framework for measuring fair value, and requires additional disclosures about
fair value measurements. It applies only to fair value measurements
that are already required or permitted by other accounting
standards. In February 2008, the FASB staff issued authoritative
guidance deferring the effective date of the fair value guidance for all
non-financial assets and liabilities to fiscal years beginning after November
15, 2008, except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The
implementation of this standard on January 1, 2009 did not have a material
impact on our consolidated financial position or results of
operations.
In
December 2007, the FASB issued new guidance on noncontrolling
interests. The new guidance establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a
subsidiary, which is sometimes referred to as minority interest, is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. Among other requirements, this guidance
requires consolidated net income to be reported, on the face of the consolidated
income statement at amounts that include the amounts attributable to both the
parent and the noncontrolling interest. This standard is effective for
fiscal years and interim periods within those fiscal years, beginning on or
after December 15, 2008 and is applied prospectively as of the beginning of
the fiscal year in which it is initially adopted, except for the presentation
and disclosure requirements. Prior year amounts relating to
noncontrolling interests have been reclassified to conform to the current year
presentation as required by the new standard. Adoption of this
standard on January 1, 2009 increased our total equity by approximately $0.3
million for the year ended December 31, 2008. Net income (loss) no
longer includes an allocation of income or losses to noncontrolling
interests. Income (loss) attributable to the Partnership was not
affected.
41
In March
2008, the FASB issued new guidance requiring entities to provide greater
transparency about how and why they use derivative instruments, how the
instruments and related hedged items are accounted for, and how the instruments
and related hedged items affect the financial position, results of operations,
and cash flows of the entity. We implemented this standard
January 1, 2009 and have included the additional disclosure information
required for our derivative instruments.
In April
2009, the FASB issued additional guidance for estimating fair value when there
has been a significant decrease in market activity for a financial
asset. This guidance re-emphasizes that regardless of market
conditions, the fair value measurement is an exit price concept. It
clarifies and includes additional factors to consider in determining whether
there has been a significant decrease in market activity for an asset or
liability and provides additional clarification on estimating fair value when
the market activity for an asset or liability has declined
significantly. This guidance is applied prospectively to all fair
value measurements where appropriate and is effective for interim and annual
periods ending after June 15, 2009. The implementation of this
guidance did not have a material impact on our consolidated financial
statements.
In May
2009, the FASB issued new guidance on subsequent events. The new
guidance establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. The implementation of
this standard had no material impact on our consolidated financial
statements.
In June
2009, the FASB issued the Accounting Standards Codification (the
“Codification”). The Codification is the source and organization of
GAAP recognized by the FASB to be applied by nongovernmental
entities. The Codification is effective for financial statements
issued for interim and annual periods ending after September 15,
2009. The implementation of this standard did not have a material
impact on our consolidated financial position or results of
operations.
Inflation
The real
estate market has not been affected significantly by inflation in the past
several years due to the relatively low inflation rate. The majority
of our leases contain inflation protection provisions applicable to
reimbursement billings for common area maintenance charges, real estate tax and
insurance reimbursements on a per square foot basis, or in some cases, annual
reimbursement of operating expenses above a certain per square foot
allowance.
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
We may be
exposed to interest rate changes primarily from variable interest rate debt
incurred to acquire and develop properties, issue loans and make other permitted
investments. Our management’s objectives, with regard to interest
rate risks, are to limit the impact of interest rate changes on earnings and
cash flows and to lower overall borrowing costs. To achieve these
objectives, we borrow primarily at fixed rates or variable rates with the lowest
margins available and in some cases, with the ability to convert variable rates
to fixed rates. With regard to variable rate financing, we will
assess interest rate cash flow risk by continually identifying and monitoring
changes in interest rate exposures that may adversely impact expected future
cash flows and by evaluating hedging opportunities. We may enter into
derivative financial instruments such as options, forwards, interest rate swaps,
caps or floors to mitigate our interest rate risk on a related financial
instrument or to effectively lock the interest rate portion of our variable rate
debt. Of our approximately $156.0 million in notes payable at
December 31, 2009, approximately $97.8 million represented debt subject to
variable interest rates, excluding those notes subject to minimum interest
rates. If our variable interest rates increased 100 basis points,
excluding the $38.0 million of debt effectively fixed by an interest rate swap
agreement, we estimate that total annual interest expense would increase by
approximately $0.6 million.
A 100
basis point decrease in interest rates would result in a $0.1 million net
decrease in the fair value of our interest rate swap. A 100 basis
point increase in interest rates would result in a $0.3 million net increase in
the fair value of our interest rate swap.
At
December 31, 2009, we did not have any foreign operations and thus were not
exposed to foreign currency fluctuations.
Item
8.
|
Financial
Statements and Supplementary Data.
|
The
information required by this Item 8 is hereby incorporated by reference to our
Financial Statements beginning on page F-1 of this Annual Report on Form
10-K.
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
|
None.
42
Item
9A(T).
|
Controls
and Procedures.
|
Evaluation
of Disclosure Controls and Procedures
As
required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act,
the management of Behringer Advisors II, our general partner, including the
Chief Executive Officer and Chief Financial Officer of our general partner,
evaluated as of December 31, 2009 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, the Chief Executive Officer and
Chief Financial Officer of Behringer Advisors II concluded that our disclosure
controls and procedures, as of December 31, 2009, were effective for the purpose
of ensuring that information required to be disclosed by us in this report is
recorded, processed, summarized and reported within the time periods specified
by the rules and forms of the Exchange Act and is accumulated and communicated
to management, including the Chief Executive Officer and Chief Financial Officer
of Behringer Advisors II, as appropriate to allow timely decisions regarding
required disclosures.
We
believe, however, that a controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
systems are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud or error, if any, within a
partnership have been detected.
Management’s
Annual Report on Internal Control over Financial Reporting
Management is responsible for
establishing and maintaining adequate internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our
management, including the Chief Executive Officer and Chief Financial Officer of
Behringer Advisors II, evaluated as of December 31, 2009 the effectiveness of
our internal control over financial reporting using the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer of Behringer Advisors II concluded that our
internal controls, as of December 31, 2009, were effective in providing
reasonable assurance regarding reliability of financial reporting.
This annual report does not include an
attestation report of our registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject
to attestation by the Partnership’s registered public accounting firm pursuant
to temporary rules of the Securities and Exchange Commission that permit the
Partnership to provide only management’s report in this annual
report.
Changes
in Internal Control over Financial Reporting
There has
been no change in internal control over financial reporting that occurred during
the quarter ended December 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Item
9B.
|
Other
Information.
|
None.
43
PART
III
Item
10.
|
Directors,
Executive Officers and Corporate
Governance.
|
The
General Partners
We
operate under the direction of our General Partners, which are responsible for
the management and control of our affairs. The General Partners are
assisted by the employees of HPT, the general partner of Behringer Advisors
II. We do not employ our own management personnel; but instead we pay
fees and expense allocations to our General Partners for their
services.
The
General Partners are responsible for our direction and management, including
previous acquisitions, construction and property management. Any
action required to be taken by the General Partners will be taken only if it is
approved, in writing or otherwise, by both General Partners, unless the General
Partners agree between themselves to a different arrangement for the approval of
actions by the General Partners.
The
General Partners are Behringer Advisors II and Mr. Behringer,
individually. Behringer Advisors II is a Texas limited
partnership formed in July 2002. The executive office of both General
Partners is located at 15601 Dallas Parkway, Suite 600, Addison, Texas
75001. Behringer Advisors II is owned by HPT, its sole general
partner, and Behringer Harvard Partners, LLC (“Behringer Partners”), its sole
limited partner. Behringer Holdings is the sole owner of HPT and
Behringer Partners. Mr. Behringer is the Chief Executive Officer of
each of these companies. Mr. Behringer is the founder, Chief
Executive Officer and sole manager of Behringer Holdings. Behringer
Holdings also is the indirect owner of our Property Manager, Behringer
Development, a real estate development company, and Behringer Securities, our
dealer manager.
Behringer
Advisors II was created in 2002 for the sole purpose of acting as one of our
General Partners. It is managed by its executive officers, namely:
Name
|
Age
|
Position(s)
|
||
Robert
M. Behringer
|
61
|
Chairman
|
||
Robert
S. Aisner
|
63
|
Chief
Executive Officer and President
|
||
Samuel
A. Gillespie
|
51
|
Chief
Operating Officer
|
||
Gerald
J. Reihsen, III
|
51
|
Executive
Vice President – Corporate Development and Legal and Secretary
|
||
Gary
S. Bresky
|
43
|
Chief
Financial Officer
|
||
M.
Jason Mattox
|
34
|
Executive
Vice
President
|
Robert M. Behringer is the
Chairman of Behringer Advisors II. He has also served as the Chairman
of the Board of Behringer Harvard REIT I since June 2002, Behringer Harvard
Multifamily REIT I since December 2007, Behringer Harvard Opportunity REIT I
since June 2006, and Behringer Harvard Opportunity REIT II since January 2007,
each a publicly registered real estate investment trust, and Behringer Harvard
REIT II, Inc., a newly formed real estate investment trust since April
2007. He is also the founder, sole manager and Chief Executive
Officer of Behringer Holdings, the indirect parent company of Behringer Advisors
II. Since 2002, Mr. Behringer has been a general partner of ours and
Behringer Harvard Mid-Term Value Enhancement Fund I, each a publicly registered
real estate limited partnership. Mr. Behringer also controls the
general partners of Behringer Harvard Strategic Opportunity Fund I LP and
Behringer Harvard Strategic Opportunity Fund II LP, both private real estate
limited partnerships.
From 1995
until 2001, Mr. Behringer was Chief Executive Officer of Harvard Property Trust,
Inc., a privately held REIT formed by Mr. Behringer that was liquidated with a
net asset value of approximately $200 million before
liquidation. Before forming Harvard Property Trust, Inc., Mr.
Behringer invested in commercial real estate as Behringer Partners, a sole
proprietorship formed in 1989 that invested in single asset limited
partnerships. From 1985 until 1993, Mr. Behringer was Vice
President and Investment Officer of Equitable Real Estate Investment Management,
Inc. (since acquired by, and now known as Lend Lease Real Estate Investments,
Inc.), one of the largest real estate pension managers and advisors in the
United States. While at Equitable, Mr. Behringer was responsible for
its General Account Real Estate Assets located in the south central United
States. The portfolio included institutional quality office,
industrial, retail, apartment and hotel properties exceeding 17 million square
feet with a value of approximately $2.8 billion. Although Mr.
Behringer was a significant participant in acquisitions, management, leasing,
redevelopment and dispositions, his primary responsibility was to increase net
operating income and the overall value of the portfolio.
44
Mr.
Behringer has over 25 years of experience in real estate investment, management
and finance activities, including experience with approximately 140 different
properties with over 24 million square feet of office, retail, industrial,
apartment, hotel and recreational properties. In addition to being
the Chief Investment Officer of Behringer Advisors II, he is currently the
general partner or a co-general partner in several real estate limited
partnerships formed for the purpose of acquiring, developing and operating
office buildings and other commercial properties located in the United States
and other countries, including Germany, the Netherlands, England, the Bahamas
and Australia. Mr. Behringer is a Certified Property Manager, Real
Property Administrator and Certified Hotel Administrator, holds FINRA Series 7, 24 and 63
registrations and is a member of the Institute of Real Estate Management, the
Building Owners and Managers Association, the Urban Land Institute and the Real
Estate Council. Mr. Behringer also was a licensed certified public
accountant for over 20 years. Mr. Behringer received a Bachelor of
Science degree from the University of Minnesota.
Robert S. Aisner is the Chief
Executive Officer and President of Behringer Advisors II. Mr. Aisner
also serves as President (since May 2005), Chief Executive Officer (since June
2008) and a director of Behringer Harvard REIT I. In addition, Mr.
Aisner serves as President (since November 2004), Chief Executive Officer (since
June 2008) and a director (since June 2006) of Behringer Harvard Opportunity
REIT I. Mr. Aisner also has served as President, Chief Executive
Officer and a director of Behringer Harvard Opportunity REIT II since January
2007, as Chief Executive Officer and a director of Behringer Harvard Multifamily
REIT I since August 2006 and as President (since April 2007) and Chief
Executive Officer (since September 2008) of Behringer Harvard REIT II, Inc.
Mr. Aisner is also President of the other Behringer Harvard
companies.
Mr.
Aisner has over 30 years of commercial real estate experience with acquiring,
managing and disposing of properties located in the United States and other
countries, including Germany, the Netherlands, England, the Bahamas and
Australia. From 1996 until joining Behringer Harvard REIT I in 2003,
Mr. Aisner served as (1) Executive Vice President of AMLI Residential Properties
Trust, formerly a New York Stock Exchange listed REIT focused on the
development, acquisition and management of upscale apartment communities, which
serves as advisor and asset manager for institutional investors with respect to
their multifamily real estate investment activities, (2) President of AMLI
Management Company, that oversees all of AMLI’s apartment operations in 80
communities, (3) President of the AMLI Corporate Homes division that manages
AMLI’s corporate housing properties, (4) Vice President of AMLI Residential
Construction, a division of AMLI that performs real estate construction
services, and (5) Vice President of AMLI Institutional Advisors, the AMLI
division that serves as institutional advisor and asset manager for
institutional investors with respect to their multifamily real estate
activities. Mr. Aisner also served on AMLI’s Executive Committee and
Investment Committee from 1999 until 2003. From 1994 until 1996, Mr.
Aisner owned and operated Regents Management, Inc., which had both a multifamily
development and construction group, and a general commercial property management
group. From 1984 to 1994, he was employed by HRW Resources, Inc., a
real estate development and management company, where he served as Vice
President.
Mr.
Aisner served as an independent director of Behringer Harvard REIT I from June
2002 until February 2003 and as a management director from June 2003 until the
present. Mr. Aisner received a Bachelor of Arts degree from Colby
College and a Masters of Business Administration degree from the University of
New Hampshire.
Samuel A. Gillespie has served
as Chief Operating Officer of Behringer Advisors II since June 2008. In
addition, Mr. Gillespie has served as Senior Vice President of Harvard Property
Trust, the managing member of Behringer Advisors II since March 2006. Mr.
Gillespie also serves as Chief Operating Officer for Behringer Harvard
Opportunity REIT I, Behringer Harvard Opportunity REIT II, and for the general
partner of Behringer Harvard Mid-Term Value Enhancement Fund (since July
2008).
Mr.
Gillespie has over 25 years of experience in the commercial real estate industry
guiding diverse and sophisticated portfolios. Prior to joining Behringer
Harvard in November 2004, Mr. Gillespie was with the Trammell Crow Company for
21 years. At Trammell Crow, he held the position of Managing Director of
National Accounts and was responsible for Trammell Crow Company’s largest
institutional customers. Prior to that, Mr. Gillespie was partner in
charge of Trammell Crow’s Indianapolis office from 1986 to 1997. He began
his career with Trammell Crow as a leasing agent in Oklahoma City in 1983.
Mr. Gillespie holds a Bachelor of Science degree, summa cum laude, in accounting
from Texas A&M University, and holds the CCIM designation.
Gerald J. Reihsen, III serves
as the Executive Vice President – Corporate Development & Legal and
Secretary of Behringer Advisors II. Since 2001, Mr. Reihsen has
served in this and similar executive capacities with the other Behringer Harvard
companies, including serving as President of Behringer Securities.
For over
20 years, Mr. Reihsen’s business and legal background has centered on
sophisticated financial and transactional matters, including commercial real
estate transactions, real estate partnerships, and public and private securities
offerings. For the period from 1985 to 2000, Mr. Reihsen practiced as
an outside corporate securities attorney. After serving from 1986 to
1995 in the corporate department of Gibson, Dunn & Crutcher, LLP, a leading
international commercial law firm, Mr. Reihsen established his own firm, Travis
& Reihsen, where he served as a corporate/securities partner until
1998. In 1998, Mr. Reihsen became the lead partner in the
corporate/securities section of the law firm Novakov Davis, where he served
until 2000. In 2000, he practiced law as a principal of Block &
Balestri, a corporate and securities law firm. In 2000 and 2001, Mr.
Reihsen was employed as the Vice President – Corporate Development and Legal of
Xybridge Technologies, Inc., a telecommunications software company that Mr.
Reihsen helped guide through venture funding, strategic alliances with
international telecommunications leaders and its ultimate sale to Zhone
Technologies, Inc. Mr. Reihsen holds FINRA Series 7, 24, 27 and 63
registrations. Mr. Reihsen received a Bachelor of Arts degree, magna
cum laude, from the University of Mississippi and a Juris Doctorate degree, cum
laude, from the University of Wisconsin.
45
Gary S. Bresky is the Chief
Financial Officer of Behringer Advisors II. Mr. Bresky also serves as
Executive Vice President and Chief Financial Officer or in similar executive
capacities with other entities sponsored by Behringer Holdings, including
Behringer Harvard Advisors I LP who is co-general partner of Behringer Harvard
Mid-Term Value Enhancement Fund, Behringer Harvard Opportunity REIT I (since
January 2004) and Behringer Harvard Opportunity REIT II (since January
2007). Mr. Bresky also serves as Executive Vice President of
Behringer Harvard REIT I (since June 2002) and Behringer Harvard Multifamily
REIT I (since August 2006) and previously served as Chief Financial Officer of
Behringer Harvard REIT I (from June 2002 to May 2009) and Behringer Harvard
Multifamily REIT I (from August 2006 to September 2009).
Mr. Bresky
has been active in commercial real estate and related financial activities for
over 15 years. Prior to his employment with Behringer Advisors II,
Mr. Bresky served as Senior Vice President of Finance with Harvard Property
Trust, Inc. from 1997 to 2001. In this capacity, Mr. Bresky was
responsible for directing all accounting and financial reporting functions and
overseeing all treasury management and banking functions for the
company. Mr. Bresky also was integral in analyzing deal and capital
structures as well as participating in all major decisions related to any
acquisition or sale of assets.
From 1995
until 1996, Mr. Bresky worked in the Real Estate Group at Coopers & Lybrand
LLP in Dallas, Texas, where he focused on finance and accounting for both public
and private real estate investment trusts. His experience included
conducting annual audits, preparing public securities reporting compliance
filings and real estate securities registration statements for his
clients. From 1989 to 1994, Mr. Bresky worked with Ten West
Associates, LTD and Westwood Financial Corporation in Los Angeles, California as
a real estate analyst and asset manager for two commercial real estate
portfolios totaling in excess of $185 million. From 1988 until 1989,
Mr. Bresky worked as an analysts’ assistant for both Shearson-Lehman Bros., Inc.
and Hambrecht and Quist Inc. assisting brokers in portfolio
management. Mr. Bresky holds FINRA Series 7, 24, 27 and 63
registrations. Mr. Bresky received a Bachelor of Arts degree from the
University of California – Berkeley and a Masters of Business Administration
degree from the University of Texas at Austin.
M. Jason Mattox is the
Executive Vice President of Behringer Advisors II and serves in a similar
capacity with other Behringer Harvard companies. From 2002 until
March 2006, Mr. Mattox served as the Senior Vice President of Behringer Advisors
II.
From 1997
until joining Behringer Advisors II in 2002, Mr. Mattox served as a Vice
President of Harvard Property Trust, Inc. and became a member of its Investment
Committee in 1998. From 1999 until 2001, Mr. Mattox served as Vice
President of Sun Resorts International, Inc., a recreational property investment
company, coordinating marina acquisitions throughout the southern United States
and the U.S. Virgin Islands. From 1999 until 2001, in addition to
providing services related to investing, acquisition, disposition and
operational activities, Mr. Mattox served as an asset manager with
responsibility for over one million square feet of Harvard Property Trust,
Inc.’s commercial office assets in Texas and Minnesota, overseeing property
performance, management offices, personnel and outsourcing
relationships.
Mr.
Mattox is a continuing member of the Building Owners and Managers Association
and the National Association of Industrial and Office Properties. Mr.
Mattox holds FINRA Series 7, 24 and 63 registrations. Mr. Mattox
received both a Bachelor of Business Administration degree, with honors, and a
Bachelor of Science degree, cum laude, from Southern Methodist
University.
Jon L.
Dooley resigned his position as our Executive Vice President – Real Estate
effective December 31, 2009, in order to accept a similar position with a joint
venture of which Behringer Harvard owns 50%.
Other
Personnel
The
General Partners are assisted by the officers and employees of HPT, which is the
general partner of Behringer Advisors II. HPT and its affiliates
employed approximately 430 full-time persons at December 31, 2009, including the
executive officers listed above. HPT and its affiliates will continue
to hire employees as needed. HPT and its affiliates also will engage
the services of non-affiliated third parties to assist with the identification
of properties for possible acquisition and management of our
operations.
Advisory
Board
We do not
have a board of directors. The General Partners were initially
assisted by an advisory board, which was dissolved on March 31,
2008.
46
No
Audit Committee; No “Audit Committee Financial Expert”
We do not
have a board of directors and, as such, have no board committees such as an
audit committee. Because we do not have an audit committee, we do not have
an “audit committee financial expert.” The General Partners are
responsible for managing the relationship with our Independent Registered Public
Accounting Firm.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires each
director, officer, and individual beneficially owning more than 10% of a
registered security of the Partnership to file with the SEC reports of security
ownership and reports on subsequent changes in ownership of our securities
within specified time frames. These specified time frames require the
reporting of changes in ownership within two business days of the transaction
giving rise to the reporting obligation. Reporting persons are required to
furnish us with copies of all Section 16(a) forms filed with the SEC.
Based upon our review of the reports furnished to us pursuant to Section 16(a)
of the Exchange Act, to the best of our knowledge, all required Section 16(a)
filings were timely and correctly made by reporting persons during
2009.
Code
of Ethics
Behringer
Advisors II has adopted a code of ethics applicable to its principal executive
officer, principal financial officer, principal accounting officer, controller
and other employees. A copy of the code of ethics of Behringer Advisors II
may be obtained from our web site at http://www.behringerharvard.com. The
web site will be updated to include any material waivers or modifications to the
code of ethics.
Item
11.
|
Executive
Compensation.
|
We
operate under the direction of our General Partners, which are responsible for
the management and control of our affairs. As of December 31, 2009, we
have not made any payments to Mr. Behringer as compensation for serving as
general partner. The officers and employees of HPT assist the General
Partners. The officers and employees of HPT do not devote all of their
time to managing us, and they do not receive any compensation from us for their
services. We pay fees and expense allocations to Behringer Advisors II and
its other affiliates as provided for in our Partnership Agreement.
Accordingly, we do not have, and our General Partners have not considered, a
compensation policy or program for themselves, their affiliates, any employees
of Behringer Advisors II or any employees of affiliates of our General Partners
and have not included a Compensation Discussion and Analysis in this Annual
Report on Form 10-K. See “Item 13. Certain Relationships and Related
Transactions, and Director Independence” for a description of the fees payable
and expenses reimbursed to our affiliates.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
We do not
have any officers or directors. Our two General Partners, Mr. Behringer
and Behringer Advisors II, each own 50% of the general partnership
interests. We do not maintain any equity compensation plans, and no
arrangements exist that would, upon operation, result in a change in
control.
The
following table sets forth information as of March 19, 2010 regarding the
beneficial ownership of our limited partnership and general partnership
interests by each of our General Partners, each director or executive officer of
our General Partner, Behringer Advisors II, and all directors and officers of
Behringer Advisors II as a group. There were no limited partners known by
us who beneficially owned more than 5% of our limited partnership units as of
March 19, 2010. The percentage of beneficial ownership is calculated based
on 10,803,839 limited partnership units and contributions from our General
Partners.
Limited Partnership
|
Percent
|
|||||||||
Units Beneficially
|
of
|
|||||||||
Title of class
|
Beneficial owner
|
Owned
|
Class
|
|||||||
General
partner interest
|
Robert
M. Behringer (1)(2)(3)(4)
|
0 | 50 | % | ||||||
General
partner interest
|
Behringer
Harvard Advisors II LP (1)(3)(4)
|
0 | 50 | % | ||||||
Limited
partner interest
|
Robert
M. Behringer (1)(2)
|
386.74 | * | |||||||
Limited
partner interest
|
Robert
S. Aisner (1)(2)
|
386.74 | * | |||||||
Limited
partner interest
|
Samuel
A. Gillespie (1)(2)
|
0 | * | |||||||
Limited
partner interest
|
Gerald
J. Reihsen, III (1)(2)
|
0 | * | |||||||
Limited
partner interest
|
Gary
S. Bresky (1)(2)
|
0 | * | |||||||
Limited
partner interest
|
M.
Jason Mattox (1)(2)
|
0 | * | |||||||
Limited
partner interest
|
All
current executive officers as a group (6 persons)
|
773.48 | * |
*Denotes less than 1%
47
(1)
|
The
address of Messrs. Behringer, Aisner, Reihsen, Gillespie, Bresky, Mattox
and Behringer Advisors II is 15601 Dallas Parkway, Suite 600, Addison,
Texas 75001.
|
(2)
|
Executive
Officers of Behringer Advisors II.
|
(3)
|
General
Partners.
|
(4)
|
Consists
of $500 of combined general partnership interests held directly by Mr.
Behringer and Behringer Advisors
II.
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
Transactions
with Related Persons
The
General Partners and certain of their affiliates are entitled to receive fees
and compensation in connection with the management and sale of our assets, and
have received fees in the past in connection with the Offering and
acquisitions. Our General Partners have agreed that all of these fees and
compensation will be allocated to Behringer Advisors II since the day-to-day
responsibilities of serving as our general partner are performed by Behringer
Advisors II through the executive officers of its general partner.
Behringer
Advisors II or its affiliates receive acquisition and advisory fees of up to 3%
of the contract purchase price of each asset for the acquisition, development or
construction of real property. Behringer Advisors II or its affiliates
also receive up to 0.5% of the contract purchase price of the assets acquired by
us for reimbursement of expenses related to making investments. During the
years ended December 31, 2009 and 2008, Behringer Advisors II earned no
acquisition and advisory fees nor were they reimbursed for acquisition related
expenses. During the year ended December 31, 2007, Behringer Advisors II
earned $1.0 million of acquisition and advisory fees and was reimbursed $0.2
million for acquisition-related expenses primarily related to the development of
Cassidy Ridge.
For the
management and leasing of our properties, we pay our Property Manager property
management and leasing fees equal to the lesser of: (a) the amounts
charged by unaffiliated persons rendering comparable services in the same
geographic area or (b)(1) for commercial properties that are not leased on a
long-term net lease basis, 4.5% of gross revenues, plus separate leasing fees of
up to 1.5% of gross revenues based upon the customary leasing fees applicable to
the geographic location of the properties, and (2) in the case of
commercial properties that are leased on a long-term net lease basis (ten or
more years), 1% of gross revenues plus a one-time initial leasing fee of 3% of
gross revenues payable over the first five years of the lease term. We
reimburse the costs and expenses incurred by our Property Manager on our behalf,
including the wages and salaries and other employee-related expenses of all
on-site employees who are engaged in the operation, management, maintenance and
leasing or access control of our properties, including taxes, insurance and
benefits relating to such employees, and legal, travel and other out-of-pocket
expenses that are directly related to the management of specific
properties. During the year ended December 31, 2009 and 2008, we incurred
property management fees payable to our Property Manager of $0.4 million and
$0.5 million, respectively, of which approximately $2,000 and $40,000 is
included in loss from discontinued operations, respectively. During the
year ended December 31, 2007, we incurred property management fees payable to
our Property Manager of $0.6 million of which approximately $55,000 is included
in loss from discontinued operations.
We pay
Behringer Advisors II or its affiliates an annual asset management fee of 0.5%
of the contract purchase price of our assets. Any portion of the asset
management fee may be deferred and paid in a subsequent year. During the
year ended December 31, 2009, we incurred asset management fees of $1.1 million,
of which $0.1 million was capitalized to real estate and $31,000 was
waived. For the year ended December 31, 2008, we incurred asset management
fees of $1.1 million of which approximately $30,000 was included in loss from
discontinued operations and $0.1 million was capitalized to real estate
inventory. During the year ended December 31, 2007, asset management fees
of $1.0 million were waived, of which approximately $40,000 was included in loss
from discontinued operations and $0.1 million was previously capitalized to real
estate inventory.
We will
pay Behringer Advisors II or its affiliates a debt financing fee for certain
debt made available to us. We incurred $0.1 million of such debt financing
fees for the year ended December 31, 2008. We incurred no such debt
financing fees for the years ended December 31, 2009 and 2007.
In
connection with the sale of our properties, we will pay to the General Partners
or their affiliates a real estate commission in an amount not exceeding the
lesser of: (a) 50% of the reasonable, customary and competitive real
estate brokerage commissions customarily paid for the sale of a comparable
property in light of the size, type and location of the property, or (b) 3% of
the gross sales price of each property, subordinated to distributions to limited
partners from the sale proceeds of an amount which, together with prior
distributions to the limited partners, will equal (1) 100% of their capital
contributions plus (2) a 10% annual cumulative (noncompounded) return of their
net capital contributions. Subordinated real estate commissions that are
not payable at the date of sale, because limited partners have not yet received
their required minimum distributions, will be deferred and paid at such time as
these subordination conditions have been satisfied. In addition, after the
limited partners have received a return of their net capital contributions and a
10% annual cumulative (noncompounded) return on their net capital contributions,
then the General Partners are entitled to receive 15% of the remaining residual
proceeds available for distribution (a subordinated participation in net sale
proceeds and distributions); provided, however, that in no event will the
General Partners receive in the aggregate more than 15% of sale proceeds
remaining after the limited partners have received a return of their net capital
contributions. Since the conditions above have not been met at this time,
we incurred no such real estate commissions for the years ended December 31,
2009, 2008 or 2007.
48
We may
reimburse Behringer Advisors II for costs and expenses paid or incurred to
provide services to us including direct expenses and the costs of salaries and
benefits of certain persons employed by those entities and performing services
for us, as permitted by our Partnership Agreement. For the year ended
December 31, 2009 and 2008, we incurred such costs for administrative services
totaling $0.5 million and $0.3 million, respectively, of which approximately
$0.2 million was waived for the year ended December 31, 2009. In addition,
Behringer Advisors II waived $0.1 million for reimbursement of expenses for the
year ended December 31, 2009. We incurred and expensed no such costs for
the year ended December 31, 2007.
On
November 13, 2009, we entered into the Fourth Amended BHH Loan, pursuant to
which we may borrow a maximum of $40.0 million. The outstanding principal
balance under the Fourth Amended BHH Loan as of December 30, 2009 was $28.9
million. On December 31, 2009, Behringer Holdings forgave $15.0 million of
principal borrowings and all accrued interest thereon which has been accounted
for as a capital contribution by our General Partners. After forgiveness
of the $15.0 million in borrowings, the outstanding balance of the loan was
$13.9 million at December 31, 2009. The Fourth Amended BHH Loan is
unsecured and bears interest at a rate of 5% per annum, with the accrued and
unpaid amount of interest payable until the principal amount of each advance
under the note is paid in full. The maturity date of all borrowings under
the Fourth Amended BHH Loan is November 13, 2012. All proceeds from such
borrowings are being used for cash flow needs related principally to working
capital purposes and capital expenditures.
At
December 31, 2009, we had payables to related parties of approximately $1.2
million. This balance consists primarily of interest accrued on the Fourth
Amended BHH Loan and management fees payable to our property
managers.
We are
dependent on Behringer Advisors II, our Property Manager, or their affiliates,
for certain services that are essential to us, including disposition decisions,
property management and leasing services and other general and administrative
responsibilities. In the event that these companies were unable to provide
the respective services to us, we would be required to obtain such services from
other sources.
Policies
and Procedures for Transactions with Related Persons
The
agreements and arrangements among us, our General Partners and their affiliates
have been established by our General Partners, who believe the amounts to be
paid thereunder are reasonable and customary under the circumstances. In
an effort to establish standards for minimizing and resolving their potential
conflicts of interest, our General Partners have agreed to the guidelines and
limitations set forth in our Partnership Agreement. Among other things,
these provisions:
|
·
|
set
forth the specific conditions under which we may own or lease property
jointly or in a partnership with an affiliate of the General
Partners;
|
|
·
|
prohibit
loans by us to our General Partners or their
affiliates;
|
|
·
|
prohibit
the commingling of partnership funds (except in the case of making capital
contributions to joint ventures and to the limited extent permissible
under the NASAA Guidelines); and
|
|
·
|
with
certain exceptions, prohibit our General Partners from merging or
consolidating us with another partnership or a corporation or converting
us to a corporation unless the transaction complies with certain terms and
conditions including first obtaining a majority vote of our limited
partners.
|
In
addition, our General Partners have a fiduciary obligation to act in the best
interests of both our limited partners and the investors in other affiliated
programs and will use their best efforts to assure that we will be treated at
least as favorably as any other affiliated program.
Item
14.
|
Principal
Accounting Fees and Services.
|
Because we
do not have a board of directors or any board committees, including an audit
committee, the General Partners pre-approve all auditing and permissible
non-auditing services provided by our independent registered public
accounting firm. The independent public accountants may not be retained to
perform the non-auditing services specified in Section 10A(g) of the Securities
Exchange Act of 1934.
Fees
Paid to Principal Independent Public Registered Accounting Firm
The
following table presents (in thousands) aggregate fees for professional audit
services billed to us for the fiscal years ended December 31, 2009 and 2008 by
our independent registered public accounting firm, Deloitte & Touche LLP,
the member firm of Deloitte Touche Tohmatsu, and their respective affiliates
(collectively, “Deloitte Entities”):
49
2009
|
2008
|
|||||||
Audit
Fees (1)
|
$ | 442 | $ | 480 | ||||
Audit-Related
Fees (2)
|
- | 2 | ||||||
Tax
Fees (3)
|
74 | 40 | ||||||
Total
Fees
|
$ | 516 | $ | 522 |
(1)
|
Audit
fees consisted of fees for professional services performed in connection
with the audit of our annual consolidated financial statements and review
of consolidated financial statements included in our Forms
10-Q.
|
(2)
|
Audit-related
fees consisted of fees for Sarbanes-Oxley Act, Section 404 advisory
services.
|
(3)
|
Tax fees
consist principally of fees for assistance with matters related to
tax compliance, tax planning and tax
advice.
|
50
PART
IV
Item
15.
|
Exhibits,
Financial Statement Schedules.
|
(a)
|
List of Documents
Filed.
|
|
1.
|
Financial
Statements
|
|
The
list of the financial statements filed as part of this Annual Report on
Form 10-K is set forth on page F-1
herein.
|
|
2.
|
Financial Statement
Schedules
|
Report of Independent Registered Public
Accounting Firm on Financial Statement Schedules
Schedule II – Valuation and Qualifying
Accounts
Schedule III - Real Estate and
Accumulated Depreciation
|
3.
|
Exhibits
|
|
The
list of exhibits filed as part of this Annual Report on Form 10-K is
submitted in the Exhibit Index following the financial statements in
response to Item 601 of Regulation
S-K.
|
(b)
|
Exhibits.
|
The
exhibits filed in response to Item 601 of Regulation S-K are listed on the
Exhibit Index attached hereto.
(c)
|
Financial Statement
Schedules.
|
All
financial statement schedules, except for Schedule II and III (see (a) 2.
above), have been omitted because the required information of such schedules is
not present, is not present in amounts sufficient to require a schedule or is
included in the financial statements.
51
SIGNATURES
Pursuant
to the requirements of the Section 13 or 15(d) 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 Short-Term Opportunity Fund I LP
|
||
March 31, 2010
|
By:
|
/s/ Robert S. Aisner
|
Robert S. Aisner
|
||
Chief Executive Officer and President of Behringer Harvard Advisors
II LP
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
March 31, 2010
|
/s/ Robert S. Aisner
|
Robert S. Aisner
|
|
Chief Executive Officer and President of Behringer Harvard Advisors
II LP (Principal Executive Officer)
|
March 31, 2010
|
/s/ Gary S. Bresky
|
Gary S. Bresky
|
|
Chief Financial Officer of Behringer Harvard Advisors II LP
(Principal Financial Officer)
|
March 31, 2010
|
/s/ Kimberly Arianpour
|
Kimberly Arianpour
|
|
Chief Accounting Officer of Behringer Harvard Advisors II LP
(Principal Accounting Officer)
|
52
INDEX
TO FINANCIAL STATEMENTS
Page
|
|
Financial Statements
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-3
|
Consolidated
Statements of Operations for the Years Ended December 31, 2009, 2008 and
2007
|
F-4
|
Consolidated
Statements of Equity and Comprehensive Loss for the Years Ended December
31, 2009, 2008 and 2007
|
F-5
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
2007
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
Financial Statement
Schedules
|
|
Report
of Independent Registered Public Accounting Firm
|
F-25
|
Schedule
II – Valuation and Qualifying Accounts
|
F-26
|
Schedule
III – Real Estate and Accumulated Depreciation
|
F-27
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Partners of
Behringer
Harvard Short-Term Opportunity Fund I LP
Addison,
Texas
We have
audited the accompanying consolidated balance sheets of the Behringer Harvard
Short-Term Opportunity Fund I LP and subsidiaries (the “Partnership”) as of
December 31, 2009 and 2008 and the related consolidated statements of
operations, equity and comprehensive loss and cash flows for each of the three
years in the period ended December 31, 2009. These financial
statements are the responsibility of the Partnership’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Partnership is
not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Partnership’s internal control
over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Partnership at December 31, 2009
and 2008, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.
As
discussed in Note 3 to the consolidated financial statements, on January 1,
2009, the Partnership changed its method of accounting for noncontrolling
interests and retrospectively adjusted all periods presented in the consolidated
financial statements.
/s/
Deloitte & Touche LLP
|
Dallas,
Texas
|
March
31, 2010
|
F-2
Behringer
Harvard Short-Term Opportunity Fund I LP
Consolidated
Balance Sheets
As
of December 31, 2009 and 2008
(in
thousands, except unit amounts)
2009
|
2008
|
|||||||
Assets
|
||||||||
Real
estate
|
||||||||
Land
|
$ | 31,000 | $ | 31,000 | ||||
Buildings
and improvements, net
|
101,960 | 91,543 | ||||||
Total
real estate
|
132,960 | 122,543 | ||||||
Real
estate inventory, net
|
53,770 | 56,033 | ||||||
Cash
and cash equivalents
|
1,964 | 4,584 | ||||||
Restricted
cash
|
2,520 | 2,631 | ||||||
Accounts
receivable, net
|
3,905 | 4,267 | ||||||
Prepaid
expenses and other assets
|
1,085 | 1,279 | ||||||
Furniture,
fixtures, and equipment, net
|
2,424 | 3,580 | ||||||
Deferred
financing fees, net
|
1,084 | 1,055 | ||||||
Lease
intangibles, net
|
3,297 | 3,946 | ||||||
Total
assets
|
$ | 203,009 | $ | 199,918 | ||||
Liabilities
and Equity
|
||||||||
Liabilities
|
||||||||
Notes
payable
|
$ | 142,106 | $ | 140,717 | ||||
Note
payable to related party
|
13,918 | 13,270 | ||||||
Accounts
payable
|
4,697 | 1,320 | ||||||
Payables
to related parties
|
1,165 | 562 | ||||||
Acquired
below-market leases, net
|
53 | 68 | ||||||
Distributions
payable
|
- | 260 | ||||||
Accrued
liabilities
|
6,555 | 8,351 | ||||||
Capital
lease obligations
|
119 | 179 | ||||||
Total
liabilities
|
168,613 | 164,727 | ||||||
Commitments
and contingencies
|
||||||||
Equity
|
||||||||
Partners'
capital
|
||||||||
Limited
partners - 11,000,000 units authorized, 10,803,839 units issued and
outstanding at December 31, 2009 and 2008
|
11,846 | 26,401 | ||||||
General
partners
|
24,667 | 9,208 | ||||||
Accumulated
other comprehensive loss
|
- | (735 | ) | |||||
Partners'
capital
|
36,513 | 34,874 | ||||||
Noncontrolling
interest
|
(2,117 | ) | 317 | |||||
Total
equity
|
34,396 | 35,191 | ||||||
Total
liabilities and equity
|
$ | 203,009 | $ | 199,918 |
See
Notes to Consolidated Financial Statements.
F-3
Behringer
Harvard Short-Term Opportunity Fund I LP
Consolidated
Statements of Operations
For
the years ended December 31, 2009, 2008 and 2007
(in
thousands, except per unit amounts)
2009
|
2008
|
2007
|
||||||||||
Revenues
|
||||||||||||
Rental
revenue
|
$ | 8,990 | $ | 12,309 | $ | 12,934 | ||||||
Hotel
revenue
|
12,382 | 15,133 | 15,882 | |||||||||
Real
estate inventory sales
|
310 | 775 | 8,232 | |||||||||
Total
revenues
|
21,682 | 28,217 | 37,048 | |||||||||
Expenses
|
||||||||||||
Property
operating expenses
|
16,284 | 18,744 | 17,340 | |||||||||
Inventory
valuation adjustment
|
541 | 16,790 | 2,444 | |||||||||
Interest
expense, net
|
6,770 | 8,025 | 9,745 | |||||||||
Real
estate taxes, net
|
2,592 | 3,808 | 3,590 | |||||||||
Property
and asset management fees
|
1,789 | 1,853 | 988 | |||||||||
General
and administrative
|
1,550 | 1,442 | 925 | |||||||||
Advertising
costs
|
255 | 502 | 2,382 | |||||||||
Depreciation
and amortization
|
6,447 | 8,272 | 8,417 | |||||||||
Cost
of real estate inventory sales
|
263 | 661 | 7,910 | |||||||||
Total
expenses
|
36,491 | 60,097 | 53,741 | |||||||||
Interest
income
|
26 | 78 | 368 | |||||||||
Loss
on sale of assets
|
- | (2 | ) | - | ||||||||
Loss
on derivative instrument, net
|
(492 | ) | (883 | ) | - | |||||||
Loss
from continuing operations before income taxes and noncontrolling
interest
|
(15,275 | ) | (32,687 | ) | (16,325 | ) | ||||||
Provision
for income taxes
|
(199 | ) | (200 | ) | (175 | ) | ||||||
Loss
from continuing operations before noncontrolling interest
|
(15,474 | ) | (32,887 | ) | (16,500 | ) | ||||||
Discontinued
operations
|
||||||||||||
Income
(loss) from discontinued operations
|
2 | (428 | ) | (771 | ) | |||||||
Gain
on sale of discontinued operations
|
- | 1,612 | - | |||||||||
Income
(loss) from discontinued operations
|
2 | 1,184 | (771 | ) | ||||||||
Net
loss
|
(15,472 | ) | (31,703 | ) | (17,271 | ) | ||||||
Noncontrolling
interest in continuing operations
|
2,443 | 1,727 | 3,524 | |||||||||
Noncontrolling
interest in discontinued operations
|
(9 | ) | (568 | ) | 287 | |||||||
Net
loss attributable to noncontrolling interest
|
2,434 | 1,159 | 3,811 | |||||||||
Net
loss attributable to the Partnership
|
$ | (13,038 | ) | $ | (30,544 | ) | $ | (13,460 | ) | |||
Amounts
attributable to the Partnership
|
||||||||||||
Continuing
operations
|
$ | (13,031 | ) | $ | (31,160 | ) | $ | (12,976 | ) | |||
Discontinued
operations
|
(7 | ) | 616 | (484 | ) | |||||||
Net
loss attributable to the Partnership
|
$ | (13,038 | ) | $ | (30,544 | ) | $ | (13,460 | ) | |||
Basic
and diluted weighted average limited partnership units
outstanding
|
10,804 | 10,804 | 10,804 | |||||||||
Net
loss per limited partnership unit - basic and diluted
|
||||||||||||
Loss
from continuing operations attributable to the Partnership
|
$ | (1.21 | ) | $ | (2.88 | ) | $ | (1.20 | ) | |||
Income
(loss) from discontinued operations attributable to the
Partnership
|
- | 0.05 | (0.05 | ) | ||||||||
Basic
and diluted net loss per limited partnership unit
|
$ | (1.21 | ) | $ | (2.83 | ) | $ | (1.25 | ) |
See
Notes to Consolidated Financial Statements.
F-4
Behringer
Harvard Short-Term Opportunity Fund I LP
Consolidated
Statements of Equity and Comprehensive Loss
For
the years ended December 31, 2009, 2008 and 2007
(in
thousands)
Accumulated
|
||||||||||||||||||||||||||||||||||||
General
Partners
|
Limited
Partners
|
Comprehensive
|
||||||||||||||||||||||||||||||||||
Accumulated
Other
|
Income
(Loss)
|
|||||||||||||||||||||||||||||||||||
Accumulated
|
Number
of
|
Contributions/
|
Accumulated
|
Comprehensive
|
Attributable
to
|
Noncontrolling
|
||||||||||||||||||||||||||||||
Contributions
|
Losses
|
Units
|
(Distributions)
|
Losses
|
Income
(Loss)
|
the
Partnership
|
Interest
|
Total
|
||||||||||||||||||||||||||||
Balance
as of January 1, 2007
|
$ | - | $ | - | 10,804 | $ | 82,167 | $ | (5,634 | ) | $ | - | $ | (5,634 | ) | $ | 6,384 | $ | 82,917 | |||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||||||
Net
loss
|
(13,460 | ) | (13,460 | ) | (3,811 | ) | (17,271 | ) | ||||||||||||||||||||||||||||
Unrealized
loss on interest rate swap
|
(579 | ) | (579 | ) | - | (579 | ) | |||||||||||||||||||||||||||||
Total
comprehensive loss
|
(14,039 | ) | (3,811 | ) | (17,850 | ) | ||||||||||||||||||||||||||||||
Contributions
|
7,537 | 83 | 7,620 | |||||||||||||||||||||||||||||||||
Distributions
|
(3,060 | ) | (247 | ) | (3,307 | ) | ||||||||||||||||||||||||||||||
Balance
as of December 31, 2007
|
7,537 | - | 10,804 | 79,107 | (19,094 | ) | (579 | ) | (19,673 | ) | 2,409 | 69,380 | ||||||||||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||||||
Net
loss
|
(30,544 | ) | (30,544 | ) | (1,159 | ) | (31,703 | ) | ||||||||||||||||||||||||||||
Reclassifications
due to hedging activities
|
162 | 162 | 162 | |||||||||||||||||||||||||||||||||
Unrealized
loss on interest rate swap
|
(318 | ) | (318 | ) | - | (318 | ) | |||||||||||||||||||||||||||||
Total
comprehensive loss
|
(30,700 | ) | (1,159 | ) | (31,859 | ) | ||||||||||||||||||||||||||||||
Contributions
|
1,671 | 66 | 1,737 | |||||||||||||||||||||||||||||||||
Distributions
|
(3,068 | ) | (999 | ) | (4,067 | ) | ||||||||||||||||||||||||||||||
Balance
as of December 31, 2008
|
9,208 | - | 10,804 | 76,039 | (49,638 | ) | (735 | ) | (50,373 | ) | 317 | 35,191 | ||||||||||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||||||
Net
loss
|
(13,038 | ) | (13,038 | ) | (2,434 | ) | (15,472 | ) | ||||||||||||||||||||||||||||
Reclassifications
due to hedging activities
|
735 | 735 | - | 735 | ||||||||||||||||||||||||||||||||
Total
comprehensive income (loss)
|
(12,303 | ) | (2,434 | ) | (14,737 | ) | ||||||||||||||||||||||||||||||
Note
receivable
|
(334 | ) | (334 | ) | ||||||||||||||||||||||||||||||||
Contributions
|
15,459 | 334 | 15,793 | |||||||||||||||||||||||||||||||||
Distributions
|
(1,517 | ) | - | (1,517 | ) | |||||||||||||||||||||||||||||||
Balance
as of December 31, 2009
|
$ | 24,667 | $ | - | 10,804 | $ | 74,522 | $ | (62,676 | ) | $ | - | $ | (62,676 | ) | $ | (2,117 | ) | $ | 34,396 |
See
Notes to Consolidated Financial Statements.
F-5
Behringer
Harvard Short-Term Opportunity Fund I LP
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2009, 2008 and 2007
(in
thousands)
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities
|
||||||||||||
Net
loss
|
$ | (15,472 | ) | $ | (31,703 | ) | $ | (17,271 | ) | |||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Loss
on sale of assets
|
- | 2 | - | |||||||||
Gain
on sale of discontinued operations
|
- | (1,612 | ) | - | ||||||||
Depreciation
and amortization
|
7,630 | 9,538 | 10,786 | |||||||||
Inventory
valuation adjustment
|
541 | 16,790 | 2,444 | |||||||||
Loss
on derivative instrument, net
|
492 | 883 | - | |||||||||
Change
in real estate inventory
|
(9,931 | ) | (6,301 | ) | (438 | ) | ||||||
Change
in accounts receivable
|
362 | (1,544 | ) | (1,501 | ) | |||||||
Change
in prepaid expenses and other assets
|
194 | (214 | ) | (400 | ) | |||||||
Change
in lease intangibles
|
(94 | ) | (779 | ) | (2,740 | ) | ||||||
Change
in accounts payable
|
48 | (828 | ) | (8,064 | ) | |||||||
Change
in accrued liabilities
|
(1,987 | ) | (749 | ) | 2,180 | |||||||
Change
in payables or receivables with related parties
|
1,062 | 1,424 | (1,008 | ) | ||||||||
Cash
used in operating activities
|
(17,155 | ) | (15,093 | ) | (16,012 | ) | ||||||
Cash
flows from investing activities
|
||||||||||||
Capital
expenditures for real estate
|
(519 | ) | (1,701 | ) | (13,433 | ) | ||||||
Proceeds
from sale of assets
|
- | 236 | - | |||||||||
Proceeds
from sale of discontinued operations
|
- | 10,056 | - | |||||||||
Change
in restricted cash
|
111 | 844 | (729 | ) | ||||||||
Cash
(used in) provided by investing activities
|
(408 | ) | 9,435 | (14,162 | ) | |||||||
Cash
flows from financing activities
|
||||||||||||
Proceeds
from notes payable
|
4,607 | 19,723 | 57,647 | |||||||||
Proceeds
from note payable to related party
|
15,648 | 13,270 | 7,500 | |||||||||
Payments
on notes payable
|
(3,131 | ) | (24,560 | ) | (47,235 | ) | ||||||
Payments
on capital lease obligations
|
(60 | ) | (55 | ) | (50 | ) | ||||||
Financing
costs
|
(344 | ) | (714 | ) | (599 | ) | ||||||
Distributions
|
(1,777 | ) | (3,068 | ) | (3,060 | ) | ||||||
Distributions
to noncontrolling interest holders
|
- | (998 | ) | (42 | ) | |||||||
Contributions
from noncontrolling interest holders
|
- | 66 | 83 | |||||||||
Contributions
from general partners
|
- | 1,671 | - | |||||||||
Cash
flows provided by financing activities
|
14,943 | 5,335 | 14,244 | |||||||||
Net
change in cash and cash equivalents
|
(2,620 | ) | (323 | ) | (15,930 | ) | ||||||
Cash
and cash equivalents at beginning of year
|
4,584 | 4,907 | 20,837 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 1,964 | $ | 4,584 | $ | 4,907 | ||||||
Supplemental
disclosure:
|
||||||||||||
Interest
paid, net of amounts capitalized
|
$ | 4,973 | $ | 7,869 | $ | 9,012 | ||||||
Income
tax paid
|
$ | 203 | $ | 201 | $ | - | ||||||
Non-cash
investing activities:
|
||||||||||||
Note
receivable from noncontrolling interest holder
|
$ | 334 | $ | - | $ | - | ||||||
Capital
expenditures for real estate in accrued liabilities
|
$ | 56 | $ | - | $ | 732 | ||||||
Reclassification
of real estate inventory to buildings
|
$ | 14,485 | $ | - | $ | - | ||||||
Non-cash
financing activities:
|
||||||||||||
Distributions
to noncontrolling interest holder
|
$ | - | $ | - | $ | 205 | ||||||
Contributions
from noncontrolling interest holder
|
$ | 334 | $ | - | $ | - | ||||||
Financing
costs in accrued liabilities
|
$ | 412 | $ | - | $ | - | ||||||
Contribution
from general partner
|
$ | 15,459 | $ | - | $ | 7,537 |
See
Notes to Consolidated Financial Statements.
F-6
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
1.
|
Business
and Organization
|
Business
Behringer
Harvard Short-Term Opportunity Fund I LP (which may be referred to as the
“Partnership,” “we,” “us,” or “our”) is a limited partnership formed in Texas on
July 30, 2002. Our general partners are Behringer Harvard Advisors II LP
(“Behringer Advisors II”) and Robert M. Behringer (collectively, the “General
Partners”). We were funded through capital contributions from our General
Partners and initial limited partner on September 20, 2002 (date of inception)
and offered our limited partnership units pursuant to the public offering which commenced on
February 19, 2003 and was terminated on February 19, 2005 (the
“Offering”). The Offering was a best efforts continuous offering, and we
admitted new investors until the termination of the Offering in February
2005. Our limited partnership units are not currently listed on a national
exchange, and we do not expect any public market for the units to develop.
We have used the proceeds from the Offering, after deducting offering expenses,
to acquire interests in twelve properties, including seven office building
properties, one shopping/service center, a hotel redevelopment with an adjoining
condominium development, two development properties and undeveloped land.
We do not actively engage in the business of operating the hotel. As of
December 31, 2009, ten of the twelve properties we acquired remain in our
portfolio. Our Agreement of Limited Partnership, as amended (the
“Partnership Agreement”), provides that we will continue in existence until the
earlier of December 31, 2017 or termination of the Partnership pursuant to the
dissolution and termination provisions of the Partnership
Agreement.
During
2009 and 2008, the U.S. economy experienced a significant downturn, which
included disruptions in the broader financial and credit markets, declining
consumer confidence and an increase in unemployment rates. These
conditions have contributed to weakened market conditions. While it is
unclear when the overall economy will recover, we do not expect conditions to
improve in the near future. As a result of the current economy, our
primary objectives will be to continue to preserve capital, as well as sustain
property values, while continuing to focus on the disposition of our
properties. Our ability to dispose of our properties will be subject to
various factors, including the ability of potential purchasers to access capital
debt financing. Given the disruptions in the capital markets and the
current lack of available credit, our ability to dispose of our properties may
be delayed, or we may receive lower than anticipated returns. Given
current market conditions, we anticipate that this investment program’s life
will extend beyond its original anticipated liquidation date. As of
December 31, 2009, $32.1 million of principal payments and notes payable matures
in the next twelve months. In light of cash needs required to meet
maturing debt obligations and our ongoing operating capital needs, our General
Partners determined it necessary to discontinue payment of monthly distributions
beginning with the 2009 third quarter. Of the $32.1 million of principal
payments and notes payable maturing in the next twelve months, only $5.5 million
of the notes payable agreements contain a provision to extend the maturity date
for at least one additional year if certain conditions are met. We were
able to restructure or extend approximately $108.0 million of our loan
agreements during the year ended December 31, 2009. We currently expect to
use additional borrowings and proceeds from the disposition of properties to
continue making our scheduled debt service payments until the maturity dates of
the loans are extended, the loans are refinanced, or the outstanding balance of
the loans are completely paid off. However, there is no guaranty that we
will be able to refinance our borrowings with more or less favorable terms or
extend the maturity dates of such loans.
2.
|
Summary
of Significant Accounting Policies
|
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates include such items as
purchase price allocation for real estate acquisitions, impairment of long-lived
assets, inventory valuations adjustments, depreciation and amortization and
allowance for doubtful accounts. Actual results could differ from those
estimates.
Principles
of Consolidation and Basis of Presentation
The
consolidated financial statements include our accounts and the accounts of our
subsidiaries. All inter-company transactions, balances and profits
have been eliminated in consolidation. Interests in entities acquired are
evaluated based on applicable GAAP, which includes the consolidation of variable
interest entities (“VIE”) in which we are deemed to be the primary
beneficiary. If the interest in the entity is determined not to be a VIE,
then the entities are evaluated for consolidation based on legal form, economic
substance, and the extent to which we have control and/or substantive
participating rights under the respective ownership agreement. We have evaluated
subsequent events for recognition or disclosure in our consolidated financial
statements.
F-7
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
Real
Estate
Upon the
acquisition of real estate properties, we allocate the purchase price of those
properties to the assets acquired, consisting of land, inclusive of associated
rights, and buildings, any assumed liabilities, identified intangible assets,
asset retirement obligations and any noncontrolling interest based on their
relative fair values. Identified intangible assets consist of the fair
value of above-market and below-market leases, in-place leases, in-place tenant
improvements, in-place leasing commissions and tenant relationships.
Acquisition-related costs are expensed as incurred. Initial valuations are
subject to change until our information is finalized, which is no later than 12
months from the acquisition date.
The fair
value of the tangible assets acquired, consisting 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 and buildings. Land values are derived
from appraisals, and building values are calculated as replacement cost less
depreciation or management’s estimates of the relative fair value of these
assets using discounted cash flow analyses or similar methods. The value
of commercial office buildings is depreciated over the estimated useful life of
25 years using the straight-line method and hotels/mixed-use properties are
depreciated over the estimated useful life of 39 years using the straight-line
method.
We
determine the value of above-market and below-market in-place leases for
acquired properties based on the present value (using an interest rate that
reflects the risks associated with the leases acquired) of the difference
between (1) the contractual amounts to be paid pursuant to the in-place leases
and (2) management’s estimate of current market lease rates for the
corresponding in-place leases, measured over a period equal to (a) the remaining
non-cancelable lease term for above-market leases, or (b) the remaining
non-cancelable lease term plus any fixed rate renewal option 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.
The total
value of identified real estate intangible assets acquired is further allocated
to in-place lease values, in-place tenant improvements, in-place leasing
commissions and tenant relationships based on our evaluation of the specific
characteristics of each tenant’s lease and our overall relationship with that
respective tenant. The aggregate value for tenant improvements and leasing
commissions is based on estimates of these costs incurred at inception of the
acquired leases, amortized through the date of acquisition. The aggregate
value of in-place leases acquired and tenant relationships is determined by
applying a fair value model. The estimates of fair value of in-place
leases include an estimate of carrying costs during the expected lease-up
periods for the respective spaces considering current market conditions.
In estimating the carrying costs that would have otherwise been incurred had the
leases not been in place, we include such items as real estate taxes, insurance
and other operating expenses as well as lost rental revenue during the expected
lease-up period based on current market conditions. The estimates of the
fair value of tenant relationships also include costs to execute similar leases
including leasing commissions, legal fees and tenant improvements as well as an
estimate of the likelihood of renewal as determined by management on a
tenant-by-tenant basis.
We
determine the fair value of assumed debt by calculating the net present value of
the scheduled note payments using interest rates for debt with similar terms and
remaining maturities that we believe 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.
We
amortize the value of in-place leases, in-place tenant improvements and in-place
leasing commissions to expense over the term of the respective leases. The
value of tenant relationship intangibles is amortized to expense over the
initial term and any anticipated renewal periods, but in no event does the
amortization period for intangible assets exceed the remaining depreciable life
of the building. Should a tenant terminate its lease, the unamortized
portion of the in-place lease value and tenant relationship intangibles would be
charged to expense.
Anticipated
amortization associated with acquired lease intangibles for each of the
following five years ended December 31 is as follows (in
thousands):
2010
|
$ | 167 | ||
2011
|
133 | |||
2012
|
90 | |||
2013
|
28 | |||
2014
|
22 |
Accumulated
depreciation and amortization related to direct investments in real estate
assets and related lease intangibles as of December 31, 2009 and 2008 were as
follows (in thousands):
F-8
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
Buildings and
|
Lease
|
Acquired Below-
|
||||||||||
As of December 31, 2009
|
Improvements
|
Intangibles
|
Market Leases
|
|||||||||
Cost
|
$ | 118,743 | $ | 5,339 | $ | (131 | ) | |||||
Less:
depreciation and amortization
|
(16,783 | ) | (2,042 | ) | 78 | |||||||
Net
|
$ | 101,960 | $ | 3,297 | $ | (53 | ) |
Buildings and
|
Lease
|
Acquired Below-
|
||||||||||
As of December 31, 2008
|
Improvements
|
Intangibles
|
Market Leases
|
|||||||||
Cost
|
$ | 104,009 | $ | 5,552 | $ | (132 | ) | |||||
Less:
depreciation and amortization
|
(12,466 | ) | (1,606 | ) | 64 | |||||||
Net
|
$ | 91,543 | $ | 3,946 | $ | (68 | ) |
Impairment
of Long-Lived Assets
Management
monitors events and changes in circumstances indicating that the carrying
amounts of our real estate assets may not be recoverable. When such events
or changes in circumstances occur, we assess potential impairment by comparing
estimated future undiscounted operating cash flows expected to be generated over
the estimated period we expect to hold the asset, including its eventual
disposition, to the carrying amount of the asset. In the event that the
carrying amount exceeds the estimated future undiscounted operating cash flows,
we recognize an impairment loss to adjust the carrying value of the asset to
estimated fair value. We determine the estimated fair value based on
discounted cash flow streams using various factors including estimated future
selling prices, costs spent to date, remaining budgeted costs and selling
costs. During 2009 as in 2008, the U.S. and global economies experienced a
significant downturn, which included disruptions in the broader financial and
credit markets, declining consumer confidence and an increase in unemployment
rates. There were no impairment charges for the years ended December 31,
2009 and 2008. However, real estate values may continue to have
fluctuations due to, among other things, the current economic environment and,
as a result, there can be no assurance we will not have impairments in the
future. Any such non-cash charges would have an adverse effect on our
consolidated financial position.
Real
Estate Inventory
Real
estate inventory is stated at the lower of cost or fair market value and
consists of developed land, condominiums and constructed homes. In
addition to land acquisition costs, land development costs and construction
costs, costs include interest and real estate taxes, which are capitalized
during the period beginning with the commencement of development and ending with
the completion of construction.
Inventory
Valuation Adjustment
For real
estate inventory, at each reporting date, management compares the estimated fair
value less costs to sell to the carrying value. An adjustment is recorded
to the extent that the fair value less costs to sell is less than the carrying
value. We determine the estimated fair value based on comparable sales in
the normal course of business under existing and anticipated market
conditions. This evaluation takes into consideration estimated future
selling prices, costs spent to date, estimated additional future costs and
management’s plans for the property.
During
2009 the U.S. housing market and related condominium sector continued its
nationwide downturn that began in 2006. The housing market has experienced
an oversupply of new and existing homes available for sale, reduced
availability, stricter terms of mortgage financing, rising foreclosure activity
and unemployment and deteriorating conditions in the overall economy.
These factors contributed to weakened demand for new homes and slower than
expected sales. As a result of our evaluations, we recognized inventory
valuation adjustments of $0.5 million related to the luxury homes constructed at
Bretton Woods for the year ended December 31, 2009. For the years ended
December 31, 2008 and 2007, we recognized inventory valuation adjustments of
$14.9 million and $2.1 million, respectively, to reduce the carrying value of
condominiums at Hotel Palomar and Residences. We also recognized
adjustments of $1.9 million and $0.3 million for the years ended
December 31, 2008 and 2007, respectively, to reduce the carrying value of
developed land lots at Bretton Woods to their estimated fair value. In the
event that market conditions continue to decline in the future or the current
difficult market conditions extend beyond our expectations, additional
adjustments may be necessary in the future. Any such non-cash charges
would have an adverse effect on our consolidated financial
position.
Cash
and Cash Equivalents
We
consider investments with original maturities of three months or less to be cash
equivalents.
F-9
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
Restricted
Cash
Restricted
cash includes monies to be held in escrow for insurance, taxes and other
reserves for our consolidated properties as required by our
lenders.
Accounts
Receivable
Accounts receivable primarily consists
of receivables from hotel guests and tenants related to our properties.
Our allowance for doubtful accounts associated with accounts receivable was $0.1
million and $0.3 million at December 31, 2009 and 2008,
respectively.
Prepaid
Expenses and Other Assets
Prepaid expenses and other assets
include hotel inventory, prepaid directors’ and officers’ insurance, prepaid
advertising, as well as prepaid insurance. Hotel inventory consists of
food, beverages, linens, glassware, china and silverware and is carried at the
lower of cost or market value.
Furniture,
Fixtures and Equipment
Furniture,
fixtures and equipment are recorded at cost and depreciation is calculated using
the straight-line method over the estimated useful lives of the assets.
Equipment, furniture and fixtures, and computer software are depreciated over 3
to 5 year lives. Maintenance and repairs are charged to operations as incurred
while renewals or improvements to such assets are capitalized. Accumulated
depreciation associated with our furniture, fixtures and equipment totaled $4.3
million and $3.0 million at December 31, 2009 and 2008,
respectively.
Deferred
Financing Fees
Deferred financing fees 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. Accumulated
amortization associated with deferred financing fees was $0.8 million and $1.0
million at December 31, 2009 and 2008, respectively.
Derivative
Financial Instruments
Our
objective in using derivatives is to add stability to interest expense and to
manage our exposure to interest rate movements or other identified risks.
To accomplish this objective, we use interest rate swaps as part of our cash
flow hedging strategy. Interest rate swaps designated as cash flow hedges
are entered into to limit our exposure to increases in the London Interbank
Offer Rate (“LIBOR”) above a “strike rate” on certain of our floating-rate
debt.
We
measure our derivative instruments and hedging activities at fair value and
record them as an asset or liability, depending on our rights or obligations
under the applicable derivative contract. For derivatives designated as
fair value hedges, the changes in the fair value of both the derivative
instrument and the hedged items are recorded in earnings. Derivatives used to
hedge the exposure to variability in expected future cash flows, or other types
of forecasted transactions, are considered cash flow hedges. For
derivatives designated as cash flow hedges, the effective portions of changes in
the fair value of the derivative are reported in accumulated other comprehensive
income (loss) (“OCI”) and are subsequently reclassified into earnings when the
hedged item affects earnings. Changes in the fair value of derivative
instruments not designated as hedges and ineffective portions of hedges are
recognized in earnings in the affected period. We assess the effectiveness
of each hedging relationship by comparing the changes in the fair value or cash
flows of the derivative hedging instrument with the changes in the fair value or
cash flows of the designated hedged item or transaction.
Revenue
Recognition
We
recognize rental income generated from leases on real estate assets on the
straight-line basis over the terms of the respective leases, including the
effect of rent holidays, if any. The total net decrease to rental revenues
due to straight-line rent adjustments for the year ended December 31, 2009 was
$0.1 million. The total net increase due to straight-line rent adjustments
for the years ended December 31, 2008 and 2007 was $1.7 million and $1.5
million, respectively. As discussed above, our rental revenue also
includes amortization of above and below market leases. Any payments made
to tenants that are considered lease incentives or inducements are being
amortized to revenue over the life of the respective leases. Revenues
relating to lease termination fees are recognized at the time that a tenant’s
right to occupy the space is terminated and when we have satisfied all
obligations under the agreement.
We also
recognize revenue from the operations of a hotel. Hotel revenues
consisting of guest room, food and beverage, and other revenue are derived from
the operations of the boutique hotel portion of Hotel Palomar and Residences and
are recognized as the services are rendered.
F-10
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
Revenues
from the sales of condominiums are recognized when sales are closed and title
passes to the new owner, the new owner’s initial and continuing investment is
adequate to demonstrate a commitment to pay for the condominium, the new owner’s
receivable is not subject to future subordination and we do not have a
substantial continuing involvement with the new condominium. Amounts
received prior to closing on sales of condominiums are recorded as deposits in
our financial statements.
Advertising
Costs
Advertising
costs are expensed as they are incurred. We expensed advertising costs of
$0.3 million, $0.5 million and $2.4 million for the years ended December 31,
2009, 2008 and 2007, respectively.
Cash
Flow Distributions
Net cash
distributions, as defined in the Partnership Agreement, are to be distributed to
the partners as follows:
|
a)
|
To
the limited partners, on a per unit basis, until each of such limited
partners has received distributions of net cash from operations with
respect to such fiscal year, or applicable portion thereof, equal to ten
percent (10%) per annum of their net capital
contribution;
|
|
b)
|
Then
to the limited partners, on a per unit basis, until each limited partner
has received or has been deemed to have received one hundred percent
(100%) of their net capital contribution;
and
|
|
c)
|
Thereafter,
eighty-five percent (85%) to the limited partners, on a per unit basis,
and fifteen percent (15%) to the General
Partners.
|
Other
limitations of allocated or received distributions are defined within the
Partnership Agreement.
Income
(Loss) Allocations
Net
income for each applicable accounting period is allocated to the partners as
follows:
|
a)
|
To
the partners to the extent of and in proportion to allocations of net loss
as noted below; and
|
|
b)
|
Then,
so as to cause the capital accounts of all partners to permit liquidating
distributions to be made in the same manner and priority as set forth in
the Partnership Agreement with respect to net cash
distributions.
|
Net loss
for each applicable accounting period is allocated to the partners as
follows:
|
a)
|
To
the partners having positive balances in their capital accounts (in
proportion to the aggregate positive balances in all capital accounts) in
an amount not to exceed such positive balance as of the last day of the
fiscal year; and
|
|
b)
|
Then,
eighty-five percent (85%) to the limited partners and fifteen percent
(15%) to the General Partners.
|
Concentration
of Credit Risk
We have
cash and cash equivalents in excess of federally insured levels on deposit in
financial institutions. 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. We have diversified
our cash and cash equivalents between several banking institutions in an attempt
to minimize exposure to any one of these entities.
Reportable
Segments
We have
determined that we have one reportable segment, with activities related to the
ownership, development and management of real estate assets. Our income
producing properties generated 100% of our consolidated revenues for the years
ending December 31, 2009, 2008 and 2007. Our chief operating decision
maker evaluates operating performance on an individual property level.
Therefore, our properties are aggregated into one reportable
segment.
Noncontrolling
Interest
We hold a
direct or indirect majority controlling interest in certain real estate
partnerships and thus, consolidate the accounts with and into our
accounts. Noncontrolling interests in partnerships represents the
third-party partners’ proportionate share of the equity in consolidated real
estate partnerships. Income and losses are allocated to noncontrolling
interest holders based on their weighted average percentage ownership during the
year.
Income Taxes
As a
limited partnership, we are generally not subject to income tax. However,
legal entities that conduct business in Texas are generally subject to the Texas
margin tax, including previously non-taxable entities such as limited
partnerships and limited liability partnerships. The tax is assessed on
Texas sourced taxable margin, which is defined as the lesser of (1) 70% of
total revenue or (2) total revenue less (a) the cost of goods sold or
(b) compensation and benefits. Although the law states that the
margin tax is not an income tax, it has the characteristics of an income tax
since it is determined by applying a tax rate to a base that considers both
revenues and expenses. For the year ended December 31, 2009, we recognized
a provision for current tax expense of approximately $199,000 related to the
Texas margin tax. For the year ended December 31, 2008, we recognized a
provision for current tax expense of approximately $175,000 and a provision for
deferred tax expense of approximately $25,000 related to the Texas margin
tax. For the year ended December 31, 2007, we recognized a provision for
current tax expense of approximately $181,000 and a provision for a deferred tax
benefit of approximately $6,000 related to the Texas margin tax. The
Partnership does not have any entity level uncertain tax
positions.
F-11
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
Certain
of our transactions may be subject to accounting methods for income tax purposes
that differ from the accounting methods used in preparing these financial
statements in accordance with GAAP. Accordingly, our net income or loss
and the resulting balances in the partners’ capital accounts reported for income
tax purposes may differ from the balances reported for those same items in the
accompanying financial statements.
Net
Income (Loss) Per Limited Partnership Unit
Net
income (loss) per limited partnership unit is calculated by dividing the net
income (loss) allocated to limited partners for each period by the weighted
average number of limited partnership units outstanding during such
period. Net income (loss) per limited partnership unit on a basic and
diluted basis is the same because the Partnership has no potential dilutive
limited partnership units outstanding.
3.
|
New
Accounting Pronouncements
|
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued new
accounting guidance on fair value measurements. This guidance establishes
a single authoritative definition of fair value, sets out a framework for
measuring fair value, and requires additional disclosures about fair value
measurements. It applies only to fair value measurements that are already
required or permitted by other accounting standards. In February 2008, the
FASB staff issued authoritative guidance deferring the effective date of the
fair value guidance for all non-financial assets and liabilities to fiscal years
beginning after November 15, 2008, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). The implementation of this standard on January 1, 2009
did not have a material impact on our consolidated financial position or results
of operations.
In
December 2007, the FASB issued new guidance on noncontrolling
interests. The new guidance establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary,
which is sometimes referred to as minority interest, is an ownership interest in
the consolidated entity that should be reported as equity in the consolidated
financial statements. Among other requirements, this guidance requires
consolidated net income to be reported, on the face of the consolidated income
statement at amounts that include the amounts attributable to both the parent
and the noncontrolling interest. This standard is effective for fiscal
years and interim periods within those fiscal years, beginning on or after
December 15, 2008 and is applied prospectively as of the beginning of the
fiscal year in which it is initially adopted, except for the presentation and
disclosure requirements. Prior year amounts relating to noncontrolling
interests have been reclassified to conform to the current year presentation as
required by the new standard. Adoption of this standard on January 1, 2009
increased our total equity by approximately $0.3 million for the year ended
December 31, 2008. Net income (loss) no longer includes an allocation of
income or losses to noncontrolling interests. Income (loss) attributable
to the Partnership was not affected.
In March
2008, the FASB issued new guidance requiring entities to provide greater
transparency about how and why they use derivative instruments, how the
instruments and related hedged items are accounted for, and how the instruments
and related hedged items affect the financial position, results of operations,
and cash flows of the entity. We implemented this standard January 1,
2009 and have included the additional disclosure information required within
Note 8, “Derivative Instruments and Hedging Activities.”
In April
2009, the FASB issued additional guidance for estimating fair value when there
has been a significant decrease in market activity for a financial asset.
This guidance re-emphasizes that regardless of market conditions, the fair value
measurement is an exit price concept. It clarifies and includes additional
factors to consider in determining whether there has been a significant decrease
in market activity for an asset or liability and provides additional
clarification on estimating fair value when the market activity for an asset or
liability has declined significantly. This guidance is applied
prospectively to all fair value measurements where appropriate and is effective
for interim and annual periods ending after June 15, 2009. The
implementation of this guidance did not have a material impact on our
consolidated financial statements.
In May
2009, the FASB issued new guidance on subsequent events. The new guidance
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. The implementation of this standard had
no material impact on our consolidated financial statements. See Note
2. “Summary of Significant Accounting Policies.”
F-12
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
In June
2009, the FASB issued the Accounting Standards Codification (the
“Codification”). The Codification is the source and organization of GAAP
recognized by the FASB to be applied by nongovernmental entities. The
Codification is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The implementation of this
standard did not have a material impact on our consolidated financial position
or results of operations.
4.
|
Fair
Value Measurements
|
Fair
value is a market-based measurement, not an entity-specific measurement.
Therefore, a fair value measurement should be determined based on the
assumptions that market participants would use in pricing the asset or
liability. As a basis for considering market participant assumptions in
fair value measurements, a fair value hierarchy was established by the FASB that
distinguishes between market participant assumptions based on market data
obtained from sources independent of the reporting entity (observable inputs
that are classified within Levels 1 and 2 of the hierarchy) and the reporting
entity’s own assumptions about market participant assumptions (unobservable
inputs classified within Level 3 of the hierarchy).
Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that we have the ability to access. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs may
include quoted prices for similar assets and liabilities in active markets, as
well as inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates, and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are
unobservable inputs for the asset or liability, which 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 entire fair
value measurement falls is based on the lowest level input that is significant
to the fair value measurement in its entirety. Our assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or
liability.
Recurring
Fair Value Measurements
Derivative
financial instruments
Currently,
we use interest rate swaps to manage our interest rate risk. The fair
values of interest rate swaps are determined using the market standard
methodology of netting the discounted future fixed cash receipts (or payments)
and the discounted expected variable cash payments (or receipts). The
variable cash payments (or receipts) are based on an expectation of future
interest rates (forward curves) derived from observable market interest rate
curves.
We
incorporate credit valuation adjustments to appropriately reflect both our own
nonperformance risk and the respective counterparty’s nonperformance risk in the
fair value measurements. In adjusting the fair value of our derivative
contracts for the effect of nonperformance risk, we have considered the impact
of netting and any applicable credit enhancements, such as collateral postings,
thresholds, mutual puts, and guarantees.
Although
we have determined that the majority of the inputs used to value our derivatives
fall within Level 2 of the fair value hierarchy, the credit valuation
adjustments associated with our derivatives utilize Level 3 inputs, such as
estimates of current credit spreads, to evaluate the likelihood of default by
itself and its counterparties. However, as of December 31, 2009, we have
assessed the significance of the impact of the credit valuation adjustments on
the overall valuation of our derivative positions and have determined that the
credit valuation adjustments are not significant to the overall valuation of our
derivatives. As a result, we have determined that our derivative
valuations in their entirety are classified in Level 2 of the fair value
hierarchy.
The
following table sets forth our financial assets and (liabilities) measured at
fair value on a recurring basis, which equals book value, by level within the
fair value hierarchy as of December 31, 2009 and 2008 (in thousands). Our
derivative financial instruments are classified in “Accrued liabilities” on our
consolidated balance sheet at December 31, 2009 and 2008. See Note 8,
“Derivative Instruments and Hedging Activities” for additional information
regarding our hedging activity.
2009
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
Derivative
financial instruments
|
$ | - | $ | (879 | ) | $ | - | $ | (879 | ) |
2008
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
Derivative
financial instruments
|
$ | - | $ | (1,697 | ) | $ | - | $ | (1,697 | ) |
F-13
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
Nonrecurring
Fair Value Measurements
Inventory Valuation
Adjustment
During
2009 the housing market and related condominium sales continued to experience
difficult conditions and as a result we evaluated our real estate inventory for
potential impairment. As a result of our evaluations, we recognized
inventory valuation adjustments of $0.5 million related to the luxury homes
constructed at Bretton Woods for the year ended December 31, 2009. The
inputs used to calculate the fair value of these assets included projected
future operating cash flows and estimated future selling prices that would be
used by a market participant in valuing these assets.
The
following fair value hierarchy table presents information about our assets
measured at fair value on a nonrecurring basis during December 31, 2009 (in
thousands):
Total
|
Gain
|
|||||||||||||||||||
2009
|
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
(Loss)
|
|||||||||||||||
Real
estate inventory, net
|
$ | - | $ | - | $ | 53,770 | $ | 53,770 | $ | (541 | ) |
Other
Items
Fair value of financial
instruments
As of
December 31, 2009 and December 31, 2008, management estimated the carrying
value of cash and cash equivalents, restricted cash, accounts receivable,
accounts payable, accrued expenses and distributions payable were at amounts
that reasonably approximated their fair value based on their short-term
maturities.
The notes
payable and capital lease obligations totaling approximately $156.1 million and
$154.2 million as of December 31, 2009 and 2008, respectively, have a fair
value of approximately $155.0 million and $153.5 million, respectively, based
upon interest rates for mortgages and capital leases with similar terms and
remaining maturities that we believe the Partnership could obtain.
The fair
value estimates presented herein are based on information available to our
management as of December 31, 2009 and 2008. We determined the above
disclosure of estimated fair values using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessary to interpret market data and develop the related estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that could be realized upon disposition of the
financial instruments. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. Although our management is not aware of any factors that would
significantly affect the estimated fair value amount, such amount has not been
comprehensively revalued for purposes of these consolidated financial statements
since that date, and current estimates of fair value may differ significantly
from the amounts presented herein.
5.
|
Capitalized
Costs
|
On
November 8, 2004, we acquired a 70% interest in Hotel Palomar and Residences
through our direct and indirect partnership interests in Behringer Harvard
Mockingbird Commons LLC (the “Mockingbird Commons Partnership”). The site
was redeveloped as a 475,000 square foot (unaudited) mixed-use project with a
boutique hotel, high-rise luxury condominiums and retail stores. The hotel
began operations in September 2006 and the luxury condominiums and retail stores
were completed in the first quarter of 2007. Certain costs associated with
the redevelopment were capitalized by us until construction was completed.
For the year ended December 31, 2007 we capitalized $0.6 million in interest
costs for Hotel Palomar and Residences.
On March
3, 2005, we acquired an 80% interest in Bretton Woods, and on February 27, 2008,
we acquired the remaining 20% interest. The site was originally planned
for development into high-end residential lots for future sale to luxury home
builders. Our plans for this land changed slightly in 2008 in that we
decided to construct five speculative homes on this property while selling the
remaining open lots to luxury home builders. Development of the land was
completed in April 2007. Construction of the luxury homes with an
exclusive home builder began during the first quarter of 2008 and was completed
during the quarter ended June 30, 2009. We capitalized certain costs
associated with Bretton Woods development and construction. As a result of
the completed construction of speculative homes in 2009, additional costs will
no longer be capitalized. For the years ended December 31, 2009 and 2008,
we capitalized a total of $0.7 million and $3.6 million, respectively, in costs
associated with the development of Bretton Woods to real estate inventory.
During the years ended December 31, 2009, 2008 and 2007, we capitalized
approximately $54,000, $0.2 million and $0.1 million, respectively, in interest
costs for Bretton Woods.
On May
15, 2006, we acquired a 100% interest in Cassidy Ridge, a 1.56 acre site in
Telluride, Colorado on which we plan to construct 23 luxury condominium
units. Construction is expected to be completed in 2010. Certain
costs associated with Cassidy Ridge development were capitalized and will
continue to be capitalized by us until construction is completed. For the
years ended December 31, 2009 and 2008 we capitalized a total of $12.4 million
and $4.7 million, respectively, in costs associated with the development of
Cassidy Ridge to real estate inventory. During the years ended December
31, 2009, 2008 and 2007, we capitalized $1.3 million, $1.0 million and $1.1
million, respectively, in interest costs for Cassidy Ridge.
F-14
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
As
reported previously, during 2009 and 2008, the U.S. housing market and related
condominium sector continued to decline. We implemented a leasing program
beginning in the second quarter of 2009 for the unsold condominium units at
Hotel Palomar and Residences. As a result of the leasing program,
approximately $14.5 million in costs were reclassified from real estate
inventory to buildings on our consolidated balance sheet during the year ended
December 31, 2009. Although our strategy for the project continues to be
to sell the units, we will be generating rental income by leasing the units
until the condominium market improves.
6.
|
Leasing
Activity
|
Future minimum base rental payments due
to us over the next five years under non-cancelable leases in effect as of
December 31, 2009 are as follows (in thousands):
2010
|
$ | 6,843 | ||
2011
|
6,591 | |||
2012
|
6,154 | |||
2013
|
5,923 | |||
2014
|
5,675 | |||
Thereafter
|
12,018 | |||
Total
|
$ | 43,204 |
The above base payments are exclusive
of any contingent rent amounts. Rental revenue in 2009, 2008 and 2007 did
not include any amounts from contingent revenue.
As of
December 31, 2009, two tenants accounted for 10% or more of our aggregate annual
rental revenues from our consolidated properties. Tellabs, Inc., who
designs, develops, deploys, and supports telecommunications networking products
for telecommunications service providers worldwide, accounted for approximately
$2.4 million or 27% of our rental revenues for the ended December 31,
2009. Additionally, Avelo Mortgage, a subsidiary of Goldman Sachs,
accounted for approximately $2.0 million or 23% of our aggregate rental revenue
for the year ended December 31, 2009.
7.
|
Notes
Payable
|
The
following table sets forth the carrying values of our notes payable on our
consolidated properties as of December 31, 2009 and 2008 (dollar amounts in
thousands):
Balance
|
Interest
|
Maturity
|
|||||||||
Description
|
2009
|
2008
|
Rate
|
Date
|
|||||||
5050
Quorum Loan - Sterling Bank
|
$ | 10,000 | $ | 10,000 |
7.0%
|
1/23/2011
|
|||||
1222
Coit Road Loan - Meridian Bank Texas
|
4,000 | 4,000 |
7.0%
(1)
|
12/4/2011
|
|||||||
Plaza
Skillman Loan - Bank of America
|
9,436 | 9,578 |
7.34%
|
4/11/2011
|
|||||||
Plaza
Skillman Loan - unamortized premium
|
250 | 335 |
4/11/2011
|
||||||||
Hotel
Palomar and Residences - Credit Union Liquidity Services
|
24,950 | 25,390 |
Prime
+ 1.0% (2)
|
10/1/2011
|
|||||||
Hotel
Palomar and Residences - Bank of America Loan
|
41,218 | 41,081 |
30-day
LIBOR + 1.75% (3)
|
12/21/2012
|
|||||||
Mockingbird
Commons Partnership Loans
|
1,294 | 1,294 |
18.0%
|
10/9/2009
|
|||||||
Bretton
Woods Loan - Citibank, N.A.
|
1,306 | 2,366 |
6.0%
(4)
|
7/15/2011
|
|||||||
Bretton
Woods Loans - Dallas City Bank
|
5,521 | 4,826 |
6.0%
(5)
|
4/15/2010
|
|||||||
Landmark
I Loan - State Farm Bank
|
10,450 | 10,450 |
30-day
LIBOR + 1.4% (3)
|
10/1/2010
|
|||||||
Landmark
II Loan - State Farm Bank
|
11,550 | 11,550 |
30-day
LIBOR + 1.4% (3)
|
10/1/2010
|
|||||||
Melissa
Land Loan - Dallas City Bank
|
1,710 | 2,000 |
5.5%
(6)
|
7/29/2012
|
|||||||
Cassidy
Ridge Loan - Credit Union Liquidity Services
|
10,771 | 6,997 |
6.5%
(7)
|
10/1/2011
|
|||||||
Revolver
Agreement - Bank of America
|
9,650 | 10,850 |
30-day
LIBOR + 3.5% (3)
|
12/21/2012
|
|||||||
Notes
payable
|
142,106 | 140,717 | |||||||||
Amended
BHH Loan - related party
|
13,918 | 13,270 |
5.0%
|
11/13/2012
|
|||||||
$ | 156,024 | $ | 153,987 |
|
(1)
|
Rate
is the higher of prime plus 1.0% or
7.0%
|
F-15
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(2)
|
Prime
rate at December 31, 2009 was 3.25%
|
(3)
|
30-day
LIBOR was 0.2% at December 31, 2009
|
(4)
|
Rate
is the higher of prime plus 2.0% or
6.0%
|
(5)
|
Rate
is the higher of prime plus 0.5% or
6.0%
|
(6)
|
Rate
is the higher of prime plus 0.5% or
5.5%
|
(7)
|
Rate
is the higher of prime plus 1.5% or
6.5%
|
The
recent turbulent financial markets and disruption in the banking system, as well
as the nationwide economic downturn, has created a severe lack of credit and a
rising cost of any available debt. A continuing market downturn could
reduce cash flow, cause us to incur additional losses, or cause us not to be in
compliance with lender covenants. As of December 31, 2009, of our
$156.0 million in debt, $97.8 million is subject to variable interest rates,
excluding those notes subject to minimum interest rates, $38.0 million of which
is effectively fixed by an interest rate swap agreement. In addition, as
of December 31, 2009, $32.1 million of principal payments and notes payable is
due within the next twelve months. We are working with lenders to either
extend the maturity dates of the loans or refinance the loans under different
terms. Of that amount, only $5.5 million of the notes payable agreements
contain a provision to extend the maturity date for at least one additional year
if certain conditions are met. We were able to restructure or extend
approximately $108.0 million of our loan agreements during the year ended
December 31, 2009. We expect to use cash flows from operations, additional
borrowings and proceeds from the disposition of properties to continue making
our scheduled debt service payments until the maturity dates of the loans are
extended, the loans are refinanced, or the outstanding balance of the loans are
completely paid off. There is no guaranty that we will be able to
refinance our borrowings with more or less favorable terms or extend the
maturity dates of such loans.
Our 30%
noncontrolling partner previously entered into multiple loan agreements with
Behringer Harvard Mockingbird Commons LLC (“Mockingbird Commons Partnership”),
an entity in which we have a 70% direct and indirect ownership interest,
totaling $1.3 million. All of these loans are unsecured, subordinate to
payment of any mortgage debt and matured prior to December 31, 2009.
Interest rates under the loan agreements ranged from 6% to 12%. Nonpayment
of the outstanding balances due and payable on the maturity dates of the loan
agreements constitute an event of default. As a result, past due amounts
under the loan agreements bear interest up to 18% per annum during the default
period. We believe that we are in compliance with all other covenants
under these loan agreements.
On July
16, 2007, we entered into a loan agreement with Citibank, N.A. to borrow up to
$4.5 million for development of the land at Bretton Woods. Proceeds from
the loan were used to completely pay down an existing loan with the Frost
National Bank. The loan matured on July 15, 2009. On October 9,
2009, we entered into a modification agreement with Citibank, N.A., effective
July 15, 2009, whereby the maturity date was extended to July 15, 2011.
The interest rate under the modification agreement is the Prime rate plus two
percent (2.0%) per annum, subject to a minimum interest rate of six percent
(6.0%). A principal payment of $0.7 million was made upon closing of the
loan modification agreement. Payments of interest only are due monthly
with principal payments due upon sales of the residential lots, with the
remaining balance due and payable on the maturity date. The outstanding
principal balance of the loan was $1.3 million at December 31,
2009.
On July
29, 2009, we entered into an agreement with Dallas City Bank to extend the
maturity date of the Melissa Land Loan to July 29, 2012. The interest rate
under the amended loan agreement is the Prime rate plus one-half percent (0.5%)
per annum, but subject to a floor of 5.5% per annum. The amended agreement
requires monthly payments of principal in the amount of $10,000, together with
all accrued but unpaid interest, with the remaining balance due and payable on
the maturity date. The outstanding principal balance of the loan was $1.7
million at December 31, 2009.
On
October 28, 2009, the Mockingbird Commons Partnership entered into the Third
Amendment to Note and Construction Agreement (“Mockingbird CULS Loan Agreement”)
with Credit Union Liquidity Services, LLC f/k/a Texans Commercial Capital, LLC
(“CULS”), effective October 1, 2009. The Mockingbird Commons Partnership
entered into a promissory note to CULS on October 4, 2005, whereby it was
permitted to borrow up to $34 million to construct luxury high-rise
condominiums. The Mockingbird CULS Loan Agreement, among other things,
extended the maturity date of the loan from October 1, 2009 to October 1, 2011
and permits leasing of the residential condominium units pending their ultimate
sale. In addition, the loan agreement required a principal payment of $0.2
million, which was paid at closing from proceeds provided by borrowings from the
Fourth Amended BHH Loan, and an additional principal payment of at least $3.0
million on or before September 30, 2010. Payments of interest only
are due monthly with the unpaid principal balance and all accrued but unpaid
interest due on October 1, 2011. The Mockingbird CULS Loan Agreement
bears interest at the Prime rate plus one percent (1.0%). In addition, the
borrower was also required to deposit $0.3 million quarterly into a deposit
account for the benefit of CULS, up to a total of $1.2 million. We have
deposited $0.6 million of the $1.2 million as of March 19, 2009. These
amounts are pledged as additional collateral for the loan. The outstanding
balance of the Mockingbird CULS Loan Agreement was $25.0 million at December 31,
2009.
F-16
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
We have
guaranteed payment of the obligation under the Mockingbird CULS Loan Agreement
in the event that, among other things, the Mockingbird Commons Partnership
becomes insolvent or enters into bankruptcy proceedings. In addition, the
guaranty agreement assigns a second lien position on the Cassidy Ridge Property
to CULS in the amount of $12.6 million as additional security to the Mockingbird
CULS Loan Agreement and requires we maintain a minimum net worth.
Additionally,
on October 28, 2009, Behringer Harvard Mountain Village, LLC (“Cassidy Ridge
Borrower”), our wholly-owned subsidiary, entered into the Second Modification
Agreement (“Cassidy Ridge Loan Agreement”) with CULS, an unaffiliated third
party, effective October 1, 2009. The modification was entered into to
permit the second lien position as additional security for the Mockingbird CULS
Loan Agreement. On September 25, 2008, the Cassidy Ridge Borrower
entered into a promissory note payable to CULS, pursuant to which they were
permitted to borrow a total principal amount of $27.7 million. As of
December 31, 2009, total borrowings under the loan agreement were approximately
$10.8 million. The maturity date of the Cassidy Ridge Loan Agreement
remains October 1, 2011 and the interest rate continues to be equal to the
greater of the Prime Rate plus one and one-half percent (1.50%) or a fixed rate
of 6.5%, with interest being calculated on the unpaid principal. Monthly
payments of unpaid accrued interest are required through September 1, 2011, with
a final payment of the outstanding principal and unpaid accrued interest due on
the maturity date.
We have
guaranteed payment of the obligation under the Cassidy Ridge Loan Agreement in
the event that, among other things, the Cassidy Ridge Borrower becomes insolvent
or enters into bankruptcy proceedings. In addition, the guaranty agreement
waives all prior failure to comply with certain covenants and establishes new
covenants on our part. Specifically, the guaranty agreement removes a
liquidity covenant and adds a net worth covenant.
On
November 13, 2009, we entered into the Fourth Amended and Restated Unsecured
Promissory Note payable to Behringer Harvard Holdings, LLC (“Amended BHH Loan”),
pursuant to which we may borrow a maximum of $40.0 million. The
outstanding principal balance under the Amended BHH Loan as of December 30, 2009
was $28.9 million. On December 31, 2009, Behringer Holdings forgave $15.0
million of principal borrowings and all accrued interest thereon which has been
accounted for as a capital contribution by our General Partners. After
forgiveness of the $15.0 million in borrowings, the outstanding balance of the
loan was $13.9 million at December 31, 2009. Borrowings under the Amended
BHH Loan are being used principally to finance general working capital and
capital expenditures. While we would normally explore obtaining additional
liquidity of this sort in the debt market, the debt market has tightened and we
accessed support from our sponsor instead. The Amended BHH Loan is unsecured and
bears interest at a rate of 5% per annum, with the accrued and unpaid amount of
interest payable until the principal amount of each advance under the note is
paid in full. The maturity date of all borrowings under the Amended BHH
Loan is November 13, 2012.
While it
is unclear when the overall economy will recover, we do not expect conditions to
improve in the near future. Management expects that the current volatility
in the capital markets will continue, at least in the short-term. As a
result, we expect that we will continue to require this liquidity support from
our sponsor during 2010. Our sponsor, subject to their approval, may make
available to us additional funds under the Fourth Amended BHH Loan through 2010,
potentially up to the borrowing limits thereunder. There is no guarantee
that our sponsor will provide additional liquidity to us and if so, in what
amounts.
On
December 22, 2009, the Mockingbird Commons Partnership entered into the Second
Amendment Agreement (the “Loan Agreement”) with Bank of America, N.A. (“Bank of
America”), effective December 21, 2009. The Loan Agreement, among other
things, extends the maturity date of the loan from September 6, 2010 to
December 21, 2012 with options to extend the maturity date for two periods
of twelve months each if certain conditions are met and removes certain
financial covenants. Payments of interest only are due monthly with
the unpaid principal balance and all accrued but unpaid interest due on December
21, 2012. Amounts outstanding under the Loan Agreement will continue
to bear interest at the 30-day LIBOR plus one and three-fourths percent (1.75%)
until September 1, 2010, at which time the interest rate will increase to LIBOR
plus three and one-half percent (3.5%). The outstanding principal
balance of the Loan Agreement was approximately $41.2 million at December 31,
2009.
We have
guaranteed payment of the obligation under the Loan Agreement in the event that,
among other things, the borrower becomes insolvent or enters into bankruptcy
proceedings. Borrowings under the Loan Agreement are secured by Hotel
Palomar. We are also guarantor of the Revolver Agreement (as
referenced below) and have assigned a second lien position in the 250/290
Carpenter Property (as referenced below) to the Lender as additional security to
the Loan Agreement.
F-17
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
In
addition, on December 22, 2009, we entered into the Fifth Amendment to the
Credit Agreement (the “Revolver Agreement”) with Bank of America, effective
October 30, 2009. The Revolver Agreement, among other things, extends
the maturity date of borrowings under the loan agreement from October 30, 2009
to December 21, 2012 with options to extend the maturity date for two
periods of twelve months each if certain conditions are met and removes certain
financial covenants. Payments of interest only are due monthly with
the unpaid principal balance and all accrued but unpaid interest due on
December 21, 2012. Amounts outstanding under the Revolver
Agreement will continue to bear interest at LIBOR plus three and one-half
percent (3.5%). The outstanding principal balance under the Revolver
Agreement was $9.7 million at December 31, 2009.
In April
2005, we acquired a three-building office complex containing approximately
539,000 rentable square feet located on approximately 15.3 acres of land in
Irving, Texas, a suburb of Dallas, Texas (the “250/290 Carpenter Property”)
through our direct and indirect partnership interests in Behringer Harvard
250/290 Carpenter LP (the “Carpenter Partnership”). We have
guaranteed payment of the obligation under the Revolver
Agreement. The 250/290 Carpenter Property is subject to a deed of
trust to secure payment under the Revolver Agreement. In addition, as
noted above, we have assigned Bank of America a second lien position in the
250/290 Carpenter Property as additional security for the Loan
Agreement.
Generally,
our notes payable mature approximately three to five years from
origination. Most of our borrowings are on a recourse basis to us,
meaning that the liability for repayment is not limited to any particular
asset. The majority of our notes payable require payments of interest
only, with all unpaid principal and interest due at maturity. Our
loan agreements stipulate that we comply with certain reporting and financial
covenants. These covenants include, among other things, notifying the
lender of any change in management and maintaining minimum debt service
coverage.
We were
not in compliance with a liquidity covenant under the 1221 Coit Road Loan
Agreement at December 31, 2009. We have received a waiver from the
lender waiving any failure to comply with the liquidity covenant at December 31,
2009. Additionally, we did not make the full required mortgage
payments on the Plaza Skillman Loan due for the months of December 2009 and
January 2010. We expect to continue making partial mortgage payments
until the loan is restructured or modified. The loan matures on April
11, 2011 and the outstanding principal balance was approximately $9.4 million at
December 31, 2009. Failure to make the full mortgage payment
constitutes a default under the debt agreement and, absent a waiver or
modification of the debt agreement, the lender may accelerate maturity with all
unpaid interest and principal immediately due and payable. We are
currently in negotiations with the lender to waive the event of noncompliance or
modify the loan agreement. However, there are no assurances that we
will be successful in our negotiations with the lender.
We
believe that we were in compliance with all other debt covenants under our loan
agreements at December 31, 2009. Each loan is secured by the
associated real property and all loans, with the exception of the Plaza Skillman
Loan, are unconditionally guaranteed by us.
The
following table summarizes our contractual obligations for principal payments on
notes payable (excluding unamortized premiums) as of December 31, 2009 (in
thousands):
Year
|
Amount
|
|||
2010
|
$ | 32,122 | ||
2011
|
57,397 | |||
2012
|
66,255 | |||
Thereafter
|
- | |||
Total
principal
|
155,774 | |||
unamortized
premium
|
250 | |||
Total
notes payable
|
$ | 156,024 |
8.
|
Derivative
Instruments and Hedging Activities
|
We may be
exposed to the risk associated with variability of interest rates that might
impact our cash flows and results of operations. The hedging strategy
of entering into interest rate swaps, therefore, is to eliminate or reduce, to
the extent possible, the volatility of cash flows.
F-18
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
Interest
calculated on borrowings under our loan agreement related to Hotel Palomar and
Residences Bank of America Loan is based on the 30-day LIBOR plus an applicable
margin. In September 2007, we entered into an interest rate swap
agreement associated with the Hotel Palomar and Residences loan to hedge the
volatility of the designated benchmark interest rate, the 30-day
LIBOR. The swap agreement was designated as a hedging
instrument. Accordingly, changes in the fair value of the interest
rate swap agreement were recorded in accumulated other comprehensive income on
the consolidated balance sheet. We entered into an amendment to the
swap agreement in October 2008, thus terminating the original interest rate
swap. The amended interest rate swap was entered into as an economic
hedge against the variability of future interest rates on the variable interest
rate borrowings associated with the Bank of America loan financing the Hotel
Palomar and Residences. As a result, changes in the fair value of the
amended interest rate swap and related interest expense are recognized in “Loss
on derivative instruments, net” on our consolidated statement of
operations. For the year ended December 31, 2009, we recorded a gain
of $0.8 million to adjust the carrying amount of the Hotel Palomar and
Residences interest rate swap to its fair value and $1.3 million for related
interest expense. For the year ended December 31, 2008, we recorded a
gain of $0.9 million to adjust the carrying amount of the Hotel Palomar and
Residences interest rate swap to its fair value.
Derivative instruments
classified as liabilities were reported at their combined fair values of $0.9
million and $1.7 million in accrued liabilities at December 31, 2009 and 2008,
respectively. For the year ended December 31, 2008, we
recognized a comprehensive loss of $0.3 million to adjust the carrying value of
the interest rate swap qualifying as a hedge to its fair value. Over
time, the unrealized gains and losses held in accumulated other comprehensive
income (loss) related to the cash flow hedge were reclassified to
earnings. Realized losses on interest rate derivatives for the years
ended December 31, 2009 and 2008 reflect a reclassification of unrealized
losses from accumulated other comprehensive loss of $0.7 million and $0.2
million, respectively. This amortization of the unrealized loss held
in other comprehensive income to earnings took place over the remaining life of
the original interest rate swap agreement, which had a maturity date of
September 2009. During the year ended December 31, 2008, the swap
agreement designated as a cash flow hedge increased interest expense by
approximately $0.5 million.
The
following table summarizes the notional values of our derivative financial
instruments as of December 31, 2009. The notional values provide an
indication of the extent of our involvement in these instruments at December 31,
2009, but do not represent exposure to credit, interest rate, or market risks
(dollar amounts in thousands):
Interest Swap
|
Interest Swap
|
||||||||||||||
Hedge Type
|
Notional Amount
|
Pay Rate
|
Receive Rate
|
Maturity
|
Fair Value
|
||||||||||
Interest
rate swap - fair value
|
$ | 38,000 | 3.77 | % |
30-day
LIBOR
|
September
6, 2010
|
$ | (879 | ) |
The table
below presents the fair value of our derivative financial instruments as well as
their classification on the Consolidated Balance Sheet as of December 31, 2009
and 2008 (in thousands).
2009
|
2008
|
||||||||||
Derivatives not designated as
hedging instruments
|
Balance Sheet
Location
|
Fair Value
|
Balance Sheet
Location
|
Fair Value
|
|||||||
Interest
rate swap
|
Accrued
liabilities
|
$ | (879 | ) |
Accrued
liabilities
|
$ | (1,697 | ) |
The table
below presents the effect of the change in fair value of our derivative
financial instruments on the Consolidated Statements of Equity and Comprehensive
Loss for the years ended December 31, 2009 and 2008 (in thousands).
|
Amount of Loss on Derivative (Effective
|
|||||||
Derivatives in Cash
Flow
|
Portion) Recognized in OCI
|
|||||||
Hedging
Relationships
|
2009
|
2008
|
||||||
Interest
rate swap
|
$ | - | $ | (318 | ) |
The
tables below present the effect of our derivative financial instruments on the
Consolidated Statements of Operations for the years ended December 31, 2009 and
2008 (in thousands).
F-19
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
Amount of Gain or (Loss) on Derivatives
|
||||||||||
Recognized in Income
|
||||||||||
Derivatives not designated
as
|
Location of Gain or (Loss) on Derivatives
|
Year ended December 31,
|
||||||||
hedging instruments
|
Recognized in Income
|
2009
|
2008
|
|||||||
Interest
rate swap
|
Gain
(loss) on derivative instruments, net
|
$ | 818 | $ | 883 | |||||
Interest
rate swap
|
Interest
expense
|
(735 | ) | (162 | ) | |||||
Total
|
$ | 83 | $ | 721 |
Credit
risk and collateral
Our
credit exposure related to interest rate instruments is represented by the fair
value of contracts with a net liability fair value at the reporting
date. These outstanding instruments may expose us to credit loss in
the event of nonperformance by the counterparties to the
agreements. However, we have not experienced any credit loss as a
result of counterparty nonperformance in the past. To manage credit
risk, we select and periodically review counterparties based on credit ratings
and limit our exposure to any single counterparty. We have an
agreement with a derivative counterparty that incorporates the loan covenant
provisions of the related indebtedness. We would be in default on the
derivative instrument obligations covered by the agreement if we fail to comply
with the related loan covenant provisions. See Note 2, “Summary of
Significant Accounting Policies” and Note 4, “Fair Value Measurements” and Note
7, “Notes Payable” for further information regarding our compliance with debt
covenants and our hedging instruments.
9.
|
Commitments
and Contingencies
|
We have
capital leases covering certain equipment. Future minimum lease
payments for all capital leases with initial or remaining terms of one year or
more at December 31, 2009 are as follows (in thousands):
Year
ending
|
Amount
|
|||
2010
|
$ | 74 | ||
2011
|
56 | |||
Total
minimum future lease payments
|
130 | |||
Less: amounts
representing interest
|
11 | |||
Total
future lease principal payments
|
$ | 119 |
10.
|
General
and Administrative Expenses
|
General
and administrative expenses for the years ended December 31, 2009, 2008 and 2007
consisted of the following (in thousands):
2009
|
2008
|
2007
|
||||||||||
Auditing
expense
|
$ | 601 | $ | 448 | $ | 518 | ||||||
Advisor
administrative services
|
243 | 275 | - | |||||||||
Tax
preparation fees
|
227 | 49 | 28 | |||||||||
Transfer
agent fees
|
146 | 161 | 110 | |||||||||
Directors'
and officers' insurance
|
112 | 91 | 39 | |||||||||
Legal
fees
|
105 | 153 | 56 | |||||||||
Printing
|
73 | 93 | 85 | |||||||||
Investor
relations
|
1 | 143 | 11 | |||||||||
Other
|
42 | 29 | 78 | |||||||||
$ | 1,550 | $ | 1,442 | $ | 925 |
11.
|
Partners’
Capital
|
We
initiated the declaration of monthly distributions in March 2004 in the amount
of a 3% annualized rate of return, based on an investment in our limited
partnership units of $10.00 per unit. We record all distributions
when declared. We have paid special distributions of a portion of the
net proceeds from the sale of properties. Beginning with the November
2006 monthly distribution, distributions in the amount of a 3% annualized rate
of return were based on an investment in our limited partnership units of $9.44
per unit as a result of the special distributions.
F-20
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
In light
of cash needs required to meet maturing debt obligations and our ongoing
operating capital needs, our General Partners determined it necessary to
discontinue payment of monthly distributions beginning with the 2009 third
quarter. We do not anticipate that payment of distributions will
resume in the near-term. Our General Partners, in their discretion,
may defer fees payable by us to them and make supplemental payments to us or to
our limited partners, or otherwise support our
operations. Accordingly, all or some of our distributions may
constitute a return of capital to our investors to the extent that distributions
exceed net cash from operations, or may be recognized as taxable income by our
investors.
The
following are the total distributions declared during the years ended December
31, 2009 and 2008 (in thousands):
2009
|
2008
|
|||||||
Fourth
Quarter
|
$ | - | $ | 771 | ||||
Third
Quarter
|
- | 771 | ||||||
Second
Quarter
|
762 | 763 | ||||||
First
Quarter
|
755 | 763 | ||||||
$ | 1,517 | $ | 3,068 |
12.
|
Related
Party Arrangements
|
The
General Partners and certain of their affiliates are entitled to receive fees
and compensation in connection with the management and sale of our assets, and
have received fees in the past in connection with the Offering and
acquisitions. Our General Partners have agreed that all of these fees
and compensation will be allocated to Behringer Advisors II since the day-to-day
responsibilities of serving as our general partner are performed by Behringer
Advisors II through the executive officers of its general partner.
Behringer
Advisors II or its affiliates receive acquisition and advisory fees of up to 3%
of the contract purchase price of each asset for the acquisition, development or
construction of real property. Behringer Advisors II or its
affiliates also receive up to 0.5% of the contract purchase price of the assets
acquired by us for reimbursement of expenses related to making
investments. During the years ended December 31, 2009 and 2008,
Behringer Advisors II earned no acquisition and advisory fees nor were they
reimbursed for acquisition related expenses. During the year ended
December 31, 2007, Behringer Advisors II earned $1.0 million of acquisition and
advisory fees and was reimbursed $0.2 million for acquisition-related expenses
primarily related to the development of Cassidy Ridge.
For the
management and leasing of our properties, we pay HPT Management Services LLC,
Behringer Harvard Short-Term Management Services, LLC or Behringer Harvard Real
Estate Services, LLC, or their affiliates (individually or collectively referred
to as ”Property Manager”), affiliates of our General Partners, property
management and leasing fees equal to the lesser of: (a) the
amounts charged by unaffiliated persons rendering comparable services in the
same geographic area or (b)(1) for commercial properties that are not leased on
a long-term net lease basis, 4.5% of gross revenues, plus separate leasing fees
of up to 1.5% of gross revenues based upon the customary leasing fees applicable
to the geographic location of the properties, and (2) in the case of
commercial properties that are leased on a long-term net lease basis (ten or
more years), 1% of gross revenues plus a one-time initial leasing fee of 3% of
gross revenues payable over the first five years of the lease
term. We reimburse the costs and expenses incurred by our Property
Manager on our behalf, including the wages and salaries and other
employee-related expenses of all on-site employees who are engaged in the
operation, management, maintenance and leasing or access control of our
properties, including taxes, insurance and benefits relating to such employees,
and legal, travel and other out-of-pocket expenses that are directly related to
the management of specific properties. During the year ended December
31, 2009 and 2008, we incurred property management fees payable to our Property
Manager of $0.4 million and $0.5 million, respectively, of which approximately
$2,000 and $40,000 is included in loss from discontinued operations,
respectively. During the year ended December 31, 2007, we incurred
property management fees payable to our Property Manager of $0.6 million of
which approximately $55,000 is included in loss from discontinued
operations.
We pay
Behringer Advisors II or its affiliates an annual asset management fee of 0.5%
of the contract purchase price of our assets. Any portion of the
asset management fee may be deferred and paid in a subsequent
year. During the year ended December 31, 2009, we incurred asset
management fees of $1.1 million, of which $0.1 million was capitalized to real
estate and $31,000 million was waived. For the year ended December
31, 2008, we incurred asset management fees of $1.1 million of which
approximately $30,000 was included in loss from discontinued operations and $0.1
million was capitalized to real estate inventory. During the year
ended December 31, 2007, asset management fees of $1.0 million were waived, of
which approximately $40,000 was included in loss from discontinued operations
and $0.1 million was previously capitalized to real estate
inventory.
F-21
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
In
connection with the sale of our properties, we will pay to the General Partners
or their affiliates a real estate commission in an amount not exceeding the
lesser of: (a) 50% of the reasonable, customary and competitive real
estate brokerage commissions customarily paid for the sale of a comparable
property in light of the size, type and location of the property, or (b) 3% of
the gross sales price of each property, subordinated to distributions to limited
partners from the sale proceeds of an amount which, together with prior
distributions to the limited partners, will equal (1) 100% of their capital
contributions plus (2) a 10% annual cumulative (noncompounded) return of their
net capital contributions. Subordinated real estate commissions that
are not payable at the date of sale, because limited partners have not yet
received their required minimum distributions, will be deferred and paid at such
time as these subordination conditions have been satisfied. In
addition, after the limited partners have received a return of their net capital
contributions and a 10% annual cumulative (noncompounded) return on their net
capital contributions, then the General Partners are entitled to receive 15% of
the remaining residual proceeds available for distribution (a subordinated
participation in net sale proceeds and distributions); provided, however, that
in no event will the General Partners receive in the aggregate more than 15% of
sale proceeds remaining after the limited partners have received a return of
their net capital contributions. Since the conditions above have not
been met at this time, we incurred no such real estate commissions for the years
ended December 31, 2009, 2008 or 2007.
We will
pay Behringer Advisors II or its affiliates a debt financing fee for certain
debt made available to us. We incurred $0.1 million of such debt
financing fees for the year ended December 31, 2008. We incurred no
such debt financing fees for the years ended December 31, 2009 and
2007.
We may
reimburse Behringer Advisors II for costs and expenses paid or incurred to
provide services to us including direct expenses and the costs of salaries and
benefits of certain persons employed by those entities and performing services
for us, as permitted by our Partnership Agreement. For the year ended
December 31, 2009 and 2008, we incurred such costs for administrative services
totaling $0.5 million and $0.3 million, respectively, of which approximately
$0.2 million was waived for the year ended December 31, 2009. In
addition, Behringer Advisors II waived $0.1 million for reimbursement of
expenses for the year ended December 31, 2009. We incurred and expensed no
such costs for the year ended December 31, 2007.
On
November 13, 2009, we entered into the Fourth Amended BHH Loan, pursuant to
which we may borrow a maximum of $40.0 million. The outstanding principal
balance under the Fourth Amended BHH Loan as of December 30, 2009 was $28.9
million. On December 31, 2009, Behringer Holdings forgave $15.0
million of principal borrowings and all accrued interest thereon which has been
accounted for as a capital contribution by our General
Partners. The Fourth Amended BHH Loan is unsecured and bears
interest at a rate of 5.0% per annum, with the accrued and unpaid amount of
interest payable until the principal amount of each advance under the note is
paid in full. The maturity date of all borrowings under the Fourth Amended
BHH Loan is November 13, 2012. All proceeds from such borrowings are
being used for cash flow needs related principally to working capital purposes
and capital expenditures.
At
December 31, 2009, we had payables to related parties of approximately $1.2
million. This balance consists primarily of interest accrued on the
Fourth Amended BHH Loan and management fees payable to our property
managers.
We are
dependent on Behringer Advisors II, our Property Manager, or their affiliates,
for certain services that are essential to us, including disposition decisions,
property management and leasing services and other general and administrative
responsibilities. In the event that these companies were unable to
provide the respective services to us, we would be required to obtain such
services from other sources.
13.
|
Discontinued
Operations
|
On
September 30, 2008, we sold 4245 N. Central through our 62.5% ownership interest
in Behringer Harvard 4245 Central LP. The property was sold to
Behringer Harvard Holdings, LLC (“BHH”), an affiliate of our General Partners,
for a contract sales price of $12.0 million. The property was
then sold by BHH to an unaffiliated third party for a contract sales price of
$10.2 million. Proceeds from the sale were used to completely pay off
the then outstanding balance on the debt associated with the property of
approximately $6.7 million, with the remaining proceeds to be used for working
capital purposes. Because the property was sold to an affiliate of
our General Partners and was subsequently sold to an unaffiliated third party,
we realized a gain of $1.6 million, based on the market value sales price to the
third party of $10.2 million, and recorded the remaining proceeds of $1.7
million as a capital contribution by our General Partners during the year ended
December 31, 2008.
The
results of operations for 4245 N. Central are classified as discontinued
operations in the accompanying consolidated statements of operations. Amounts
for the year ended December 31, 2009 represent final settlements for operations
of 4245 N. Central. Certain amounts in the accompanying financial
statements have been recast to conform to the current
presentation. The following table summarizes the results of
discontinued operations for the years ended December 31, 2009, 2008 and
2007 (in thousands):
F-22
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
2009
|
2008
|
2007
|
||||||||||
Rental
revenue
|
$ | 26 | $ | 1,140 | $ | 1,227 | ||||||
Expenses
|
||||||||||||
Property
operating expenses
|
14 | 527 | 671 | |||||||||
Interest
expense
|
- | 292 | 516 | |||||||||
Real
estate taxes
|
9 | 163 | 185 | |||||||||
Property
and asset management fees
|
1 | 71 | 93 | |||||||||
Advertising
costs
|
- | 1 | 2 | |||||||||
Depreciation
and amortization
|
- | 517 | 536 | |||||||||
Total
expenses
|
24 | 1,571 | 2,003 | |||||||||
Interest
income
|
- | 3 | 5 | |||||||||
Net
income (loss)
|
$ | 2 | $ | (428 | ) | $ | (771 | ) | ||||
Gain
on sale of assets
|
- | 1,612 | - | |||||||||
Noncontrolling
interest
|
(9 | ) | (568 | ) | 287 | |||||||
Gain
(loss) from discontinued operations attributable to the
Partnership
|
$ | (7 | ) | $ | 616 | $ | (484 | ) |
14.
|
Noncontrolling
Interest
|
Current
GAAP establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. It requires that the noncontrolling interest continue to
be attributed its share of losses even if it results in a deficit noncontrolling
interest balance. Previous accounting standards required that
noncontrolling interest not be allocated losses that result in a deficit
noncontrolling interest balance. The adoption of new accounting
standards on January 1, 2009 resulted in a deficit noncontrolling interest
balance at one of our consolidated real estate partnerships for the year ended
December 31, 2009. The following table presents the pro forma results
for the year ended December 31, 2009 as if the previous accounting standard had
been applied (in thousands):
Year ended December 31, 2009
|
||||||||||||
Noncontrolling interest
|
Pro forma
|
|||||||||||
As reported
|
loss in excess of equity
|
amounts
|
||||||||||
Net
loss attributable to the Partnership
|
$ | (13,038 | ) | $ | (2,027 | ) | $ | (15,065 | ) | |||
Basic
and diluted weighted average limited partnership units
outstanding
|
10,804 | - | 10,804 | |||||||||
Basic
and diluted net loss per limited partnership unit attributable to the
Partnership
|
$ | (1.21 | ) | $ | (0.19 | ) | $ | (1.40 | ) |
F-23
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
15.
|
Income
Tax Basis Net Income (Unaudited)
|
Our
income tax basis net income for the years ended December 31, 2009, 2008 and 2007
is recalculated as follows (in thousands):
2009
|
2008
|
2007
|
||||||||||
Net
loss attributable to the Partnership for financial statement
purposes
|
$ | (13,038 | ) | $ | (30,544 | ) | $ | (13,460 | ) | |||
Adjustments:
|
||||||||||||
Organization
and start-up costs
|
(3 | ) | (34 | ) | (34 | ) | ||||||
Bad
debt expense
|
(24 | ) | 21 | (58 | ) | |||||||
Straight
line rent
|
106 | (1,683 | ) | (1,286 | ) | |||||||
Prepaid
rent
|
(137 | ) | 504 | 34 | ||||||||
Other
|
(250 | ) | 156 | (3 | ) | |||||||
Forgiveness
of debt by affiliate
|
15,458 | - | 7,537 | |||||||||
Depreciation
|
(86 | ) | 85 | (181 | ) | |||||||
Amortization
|
231 | 2,272 | 2,706 | |||||||||
Inventory
valuation adjustment
|
541 | 12,321 | 1,564 | |||||||||
Income/loss
from investments in partnerships
|
(993 | ) | 6,253 | 2,288 | ||||||||
Net
income (loss) for income tax purposes (unaudited)
|
$ | 1,805 | $ | (10,649 | ) | $ | (893 | ) |
The
following table presents selected unaudited quarterly financial data for each
quarter during the years ended December 31, 2009 and 2008 (in thousands, except
per unit amounts).
2009
Quarters Ended
|
||||||||||||||||
March 31
|
June 30
|
September 30
|
December 31
|
|||||||||||||
Total
revenues
|
$ | 5,175 | $ | 5,412 | $ | 5,466 | $ | 5,629 | ||||||||
Loss
from continuing operations
|
(3,794 | ) | (3,706 | ) | (4,138 | ) | (3,836 | ) | ||||||||
Income
(loss) from discontinued operations
|
7 | 1 | (5 | ) | (1 | ) | ||||||||||
Net
loss attributable to noncontrolling interest
|
580 | 564 | 766 | 524 | ||||||||||||
Net
loss attributable to the Partnership
|
$ | (3,207 | ) | $ | (3,141 | ) | $ | (3,377 | ) | $ | (3,313 | ) | ||||
Weighted
average number of limited partnership units outstanding
|
10,804 | 10,804 | 10,804 | 10,804 | ||||||||||||
Basic
and diluted net loss per limited partnership unit
|
$ | (0.30 | ) | $ | (0.29 | ) | $ | (0.31 | ) | $ | (0.31 | ) |
2008
Quarters Ended
|
||||||||||||||||
March 31
|
June 30
|
September 30
|
December 31
|
|||||||||||||
Total
revenues
|
$ | 8,272 | $ | 7,756 | $ | 6,582 | $ | 5,607 | ||||||||
Loss
from continuing operations
|
(5,558 | ) | (2,984 | ) | (10,547 | ) | (13,798 | ) | ||||||||
Income
(loss) from discontinued operations
|
(145 | ) | (111 | ) | 1,446 | (6 | ) | |||||||||
Net
(income) loss attributable to noncontrolling interest
|
901 | 630 | (336 | ) | (36 | ) | ||||||||||
Net
loss attributable to the Partnership
|
$ | (4,802 | ) | $ | (2,465 | ) | $ | (9,437 | ) | $ | (13,840 | ) | ||||
Weighted
average number of limited partnership units outstanding
|
10,804 | 10,804 | 10,804 | 10,804 | ||||||||||||
Basic
and diluted net loss per limited partnership unit
|
$ | (0.44 | ) | $ | (0.23 | ) | $ | (0.88 | ) | $ | (1.28 | ) |
******
F-24
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Partners of
Behringer
Harvard Short-Term Opportunity Fund I LP
Addison,
Texas
We have
audited the consolidated financial statements of Behringer Harvard Short-Term
Opportunity Fund I LP and subsidiaries (the “Partnership”) as of
December 31, 2009 and 2008, and for each of the three years in the period
ended December 31, 2009, and have issued our report thereon dated
March 31, 2010 (which report expresses an unqualified opinion and includes
an explanatory paragraph concerning the adoption of a new accounting principle
in 2009); such financial statements and report are included elsewhere in this
Form 10-K. Our audits also included the consolidated financial
statement schedules of the Partnership listed in Item 15. The financial
statement schedules are the responsibility of the Partnership’s
management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
/s/
Deloitte & Touche LLP
Dallas,
Texas
March 31,
2010
F-25
Behringer
Harvard Short-Term Opportunity Fund I LP
Valuations
and Qualifying Accounts
Schedule
II
(in
thousands)
Allowance for Doubtful Accounts
|
Balance at
Beginning of
Year
|
Charged to
Costs and
Expenses
|
Charged to
Other Accounts
|
Deductions
|
Balance at
End of Year
|
|||||||||||||||
Year
ended December 31, 2009
|
$ | 254 | $ | 279 | $ | - | $ | 391 | $ | 142 | ||||||||||
Year
ended December 31, 2008
|
217 | 851 | - | 814 | 254 | |||||||||||||||
Year
ended December 31, 2007
|
170 | 97 | - | 50 | 217 |
F-26
Behringer
Harvard Short-Term Opportunity Fund I LP
Real
Estate and Accumulated Depreciation
Schedule
III
December
31, 2009
(in
thousands)
|
Cost capitalized
|
Gross amount
|
|||||||||||||||||||||||||||||||||||
Initial cost
|
subsequent
|
carried at
|
Accumulated
|
Year of
|
Date
|
Depreciable
|
|||||||||||||||||||||||||||||||
Property Name
|
Market
|
Encumbrances
|
Land
|
Buildings
|
to acquisition
|
Transfers
|
close of period
|
depreciation
|
construction
|
acquired
|
life
|
||||||||||||||||||||||||||
5050
Quorum
|
Dallas,
TX
|
$ | 10,000 | $ | 2,197 | $ | 6,660 | $ | 1,480 | $ | - | $ | 10,337 | $ | 2,157 |
1981
|
7/2/2004
|
(1)
|
|||||||||||||||||||
Plaza
Skillman
|
Dallas,
TX
|
9,686 | (2) | 3,369 | 7,669 | 764 | - | 11,802 | 1,860 |
1986
|
7/23/2004
|
(1)
|
|||||||||||||||||||||||||
1221
Coit Road
|
Dallas,
TX
|
4,000 | 3,500 | 2,955 | 218 | - | 6,673 | 630 |
1986
|
10/4/2004
|
(1)
|
||||||||||||||||||||||||||
Hotel
Palomar and Residences
|
Dallas,
TX
|
66,168 | 7,356 | 31,920 | 49,554 | (34,400 | ) (3) | 54,430 | 3,260 |
2006
|
11/8/2004
|
(4)
|
|||||||||||||||||||||||||
Bretton
Woods
|
Dallas,
TX
|
6,827 | - | - | 8,774 | (8,774 | ) (3) | - | - |
-
|
3/3/2005
|
||||||||||||||||||||||||||
250/290
John Carpenter Freeway
|
Dallas,
TX
|
9,650 | 4,797 | 16,991 | 13,817 | - | 35,605 | 5,149 |
1976
|
4/4/2005
|
(1)
|
||||||||||||||||||||||||||
Landmark
I
|
Dallas,
TX
|
10,450 | 3,185 | 10,602 | 50 | - | 13,837 | 1,882 |
1998
|
7/6/2005
|
(1)
|
||||||||||||||||||||||||||
Landmark
II
|
Dallas,
TX
|
11,550 | 3,687 | 10,383 | 80 | - | 14,150 | 1,845 |
1998
|
7/6/2005
|
(1)
|
||||||||||||||||||||||||||
Melissa
Land
|
Dallas,
TX
|
1,710 | 2,909 | - | - | - | 2,909 | - | - |
10/5/2005
|
(5)
|
||||||||||||||||||||||||||
Cassidy
Ridge
|
Telluride, CO
|
10,771 | - | - | 34,665 | (34,665 | ) (3) | - | - | - |
5/15/2006
|
||||||||||||||||||||||||||
Totals
|
$ | 140,812 | $ | 31,000 | $ | 87,180 | $ | 109,402 | $ | (77,839 | ) | $ | 149,743 | $ | 16,783 |
(1)
Buildings are 25 years
(2)
Includes unamortized premium of $0.3 million
(3)
Transferred to real estate inventory
(4) Hotel
is 39 years
(5) Land
only
A summary
of activity for real estate and accumulated depreciation for the years ended
December 31, 2009, 2008 and 2007 is as follows (in thousands):
Year
ended
|
Year
ended
|
Year
ended
|
||||||||||
Real estate:
|
December 31, 2009
|
December 31, 2008
|
December 31, 2007
|
|||||||||
Balance
at beginning of year
|
$ | 135,009 | $ | 150,363 | $ | 196,111 | ||||||
Additions
|
399 | 874 | 21,121 | |||||||||
Disposals
and write-offs
|
(149 | ) | (17 | ) | (393 | ) | ||||||
Cost
of real estate sold
|
- | (9,053 | ) | - | ||||||||
Reclass
from real estate inventory
|
14,484 | - | - | |||||||||
Less: real
estate inventory
|
- | (7,158 | ) | (66,476 | ) | |||||||
Balance
at end of the year
|
$ | 149,743 | $ | 135,009 | $ | 150,363 | ||||||
Accumulated depreciation:
|
||||||||||||
Balance
at beginning of year
|
$ | 12,466 | $ | 9,285 | $ | 5,280 | ||||||
Depreciation
expense
|
4,466 | 4,614 | 4,105 | |||||||||
Disposals
and write-offs
|
(149 | ) | (1,433 | ) | (100 | ) | ||||||
Balance
at end of the year
|
$ | 16,783 | $ | 12,466 | $ | 9,285 |
******
F-27
Index
to Exhibits
Exhibit Number
|
Description
|
|
3.1
|
Second
Amended and Restated Agreement of Limited Partnership of the Registrant
dated September 5, 2008 (previously filed and incorporated by reference to
Form 8-K filed September 5, 2008)
|
|
3.2
|
Certificate
of Limited Partnership of Registrant (previously filed and incorporated by
reference to Registrant’s Registration Statement on Form S-11, Commission
File No. 333-100125, filed on September 27, 2002)
|
|
4.1
|
Subscription
Agreement and Subscription Agreement Signature Page (previously filed in
and incorporated by reference to Exhibit C to Supplement No. 1 to the
prospectus of the Registrant contained within Post-Effective Amendment No.
1 to the Registrant’s Registration Statement on Form S-11, Commission File
No. 333-100125, filed June 3, 2003)
|
|
10.1
|
Amended
and Restated Property Management and Leasing Agreement between Registrant
and HPT Management Services LLC (previously filed and incorporated by
reference to Post-Effective Amendment No. 4 to Registrant’s Registration
Statement on Form S-11, Commission File No. 333-100125, filed on June 30,
2004)
|
|
10.2
|
Agreement
of Limited Partnership of Behringer Harvard Mockingbird Commons GP, LLC,
Behringer Harvard Mockingbird Commons Investors LP and Realty America
Group regarding the Mockingbird Commons Property (previously filed and
incorporated by reference to Form 10-Q for the period ended September 30,
2004)
|
|
10.3
|
Loan
Agreement made between Texans Commercial Capital, LLC and Behringer
Harvard Mockingbird Commons LP regarding the Mockingbird Commons Property
(previously filed and incorporated by reference to Form 10-Q for the
period ended September 30, 2004)
|
|
10.4
|
Guaranty
Agreement made by Registrant to Texans Commercial Capital, LLC regarding
the Mockingbird Commons Property (previously filed and incorporated by
reference to Form 10-Q for the period ended September 30,
2004)
|
|
10.5
|
Deed
of Trust, Security Agreement and Financing Statement by Behringer Harvard
Mockingbird Commons LP, as grantor, to Gerald W. Gurney and/or John C.
O’Shea as Trustee for the benefit of Texans Commercial Capital, LLC
regarding the Mockingbird Commons Property (previously filed and
incorporated by reference to Form 10-Q for the period ended September 30,
2004)
|
|
10.6
|
Guaranty
Agreement made between Behringer Harvard 250/290 Carpenter LP in favor of
Bank of America, N.A. (previously filed and incorporated by reference to
Form 8-K filed September 8, 2005)
|
|
10.7
|
Deed
of Trust, Assignment of Rents and Leases, Security Agreement Fixture
Filing and Financing Statement by Behringer Harvard 250/290 Carpenter LP,
as grantor, to PRLP, Inc. as trustee for the benefit of Bank of America,
N.A. (previously filed and incorporated by reference to Form 8-K filed
September 8, 2005)
|
|
10.8
|
Promissory
Note made between Registrant and Bank of America, N.A. (previously filed
and incorporated by reference to Form 8-K filed September 8,
2005)
|
|
10.9
|
Credit
Agreement between Bank of America, N.A. and Registrant and Behringer
Harvard 250/290 Carpenter LP (previously filed and incorporated by
reference to Form 8-K Filed September 8, 2005)
|
|
10.10
|
Limited
Guaranty made by Registrant in favor of State Farm Bank, F.S.B. regarding
the Landmark I & II Property (previously filed and incorporated by
reference to Form 8-K filed September 14, 2005)
|
|
10.11
|
Deed
of Trust and Security Agreement by Behringer Harvard Landmark LP, as
grantor, to Alfred G. Kyle, as trustee, for the benefit of State Farm
Bank, F.S.B. regarding the Landmark I & II Property (previously filed
and incorporated by reference to Form 8-K filed September 14,
2005)
|
|
10.12
|
Assignment
and Subordination of Management Agreement by Behringer Harvard Landmark,
LP in favor of State Farm Bank, F.S.B. regarding the Landmark I & II
Property (previously filed and incorporated by reference to Form 8-K filed
September 14, 2005)
|
|
10.13
|
Assignment
of Rents and Leases by Behringer Harvard Landmark LP in favor of State
Farm Bank, F.S.B. regarding the Landmark I & II Property (previously
filed and incorporated by reference to Form 8-K filed September 14,
2005)
|
|
10.14
|
Promissory
Note made between Behringer Harvard Landmark LP and State Farm Bank,
F.S.B. regarding the Landmark I & II Property (previously
filed and incorporated by reference to Form 8-K filed September 14,
2005)
|
10.15
|
Construction
Loan Agreement between Behringer Harvard Mockingbird Commons LP and Texans
Commercial Capital, LLC regarding the Mockingbird Commons Property
(previously filed and incorporated by reference to Form 8-K filed October
11, 2005)
|
|
10.16
|
Deed
of Trust, Security Agreement and Assignment of Rents, Leases, Incomes and
Agreements by BHDGI, Ltd., as grantor, to Robert Wightman, as trustee, for
the benefit of Dallas City Bank regarding the Melissa Land (previously
filed and incorporated by reference to Form 8-K filed October 12,
2005)
|
|
10.17
|
Guaranty
Agreement made between Registrant and Dallas City Bank regarding the
Melissa Land (previously filed and incorporated by reference to Form 8-K
filed October 12, 2005)
|
|
10.18
|
Promissory
Note made between BHDGI, Ltd. and Dallas City Bank regarding the Melissa
Land Property (previously filed and incorporated by reference to Form 8-K
filed October 12, 2005)
|
|
10.19
|
Loan
Agreement by and between Dallas City Bank and BHDGI, Ltd. and Registrant
regarding the Melissa Land Property (previously filed and incorporated by
reference to Form 8-K filed October 12, 2005)
|
|
10.20
|
Agreement
of Limited Partnership of BHDGI, Ltd., by and among Graybird Developers,
LLC, Registrant and David L. Gray regarding the Melissa Land Property
(previously filed and incorporated by reference to Form 8-K filed October
12, 2005)
|
|
10.21
|
Construction
Loan Agreement by and between Behringer Harvard Mountain Village, LLC and
Texans Commercial Capital, LLC (previously filed and incorporated by
reference to Form 8-K filed October 18, 2006)
|
|
10.22
|
Promissory
Note made between Registrant and Texans Commercial Capital, LLC
(previously filed and incorporated by reference to Form 8-K filed October
18, 2006)
|
|
10.23
|
Guaranty
Agreement made between Registrant and Texans Commercial Capital, LLC
regarding the Telluride Property (previously filed and incorporated by
reference to Form 8-K filed October 18, 2006)
|
|
10.24
|
Deed
of Trust, Security Agreement, Financing Statement and Assignment of Rental
by Behringer Harvard Mountain Village, LLC, as grantor, to the Public
Trustee of San Miguel County, Colorado, as trustee, for the benefit of
Texans Commercial Capital, LLC (previously filed and incorporated by
reference to Form 8-K filed October 18, 2006)
|
|
10.25
|
Loan
Agreement by and between Behringer Harvard Mockingbird Commons, LLC and
Bank of America, N.A. (previously filed in and incorporated by reference
to Form 8-K filed on September 12, 2007)
|
|
10.26
|
Deed
of Trust Note made between Behringer Harvard Mockingbird Commons, LLC and
Bank of America, N.A. (previously filed in and incorporated by reference
to Form 8-K filed on September 12, 2007)
|
|
10.27
|
Guaranty
Agreement made between Registrant and Bank of America, N.A. (previously
filed in and incorporated by reference to Form 8-K filed on September 12,
2007)
|
|
10.28
|
Deed
of Trust, Security Agreement, Fixture Filing and Financing Statement by
Behringer Harvard Mockingbird Commons, LLC, as grantor, to PLRAP, Inc., as
trustee, for the benefit of Bank of America, N.A. (previously filed in and
incorporated by reference to Form 8-K filed on September 12,
2007)
|
|
10.29
|
Assignment
of Rents, Leases and Receivables by Behringer Harvard Mockingbird Commons,
LLC to Bank of America, N.A. (previously filed in and incorporated by
reference to Form 8-K filed on September 12, 2007)
|
|
10.30
|
Amended
and Restated Unsecured Promissory Note by and between the Registrant and
Behringer Harvard Holdings, LLC (previously filed in and incorporated by
reference to Form 10-Q filed on May 15, 2008)
|
|
10.31
|
Second
Amended and Restated Unsecured Promissory Note by and between the
Registrant and Behringer Harvard Holdings, LLC (previously filed and
incorporated by reference to Form 8-K filed on August 26,
2008)
|
|
10.32
|
First
Amendment to Note and Construction Loan Agreement by and between Behringer
Harvard Mockingbird Commons LLC and Credit Union Liquidity Services, LLC
(previously filed and incorporated by reference to Form 8-K filed on
October 1, 2008)
|
|
10.33
|
First
Amendment to Amended and Restated Deed of Trust, Security Agreement,
Financing Statement and Assignment of Rental by Behringer Harvard
Mockingbird Commons LLC, as grantor, to Credit Union Liquidity Services,
LLC (previously filed and incorporated by reference to Form 8-K filed on
October 1, 2008)
|
|
10.34
|
First
Modification Agreement by and between Behringer Harvard Mountain Village,
LLC and Credit Union Liquidity Services, LLC (previously filed and
incorporated by reference to Form 8-K filed on October 1,
2008)
|
10.35
|
First
Amendment to Guaranty Agreement by and between the Registrant and Credit
Union Liquidity Services, LLC (previously filed and incorporated by
reference to Form 8-K filed on October 1, 2008)
|
|
10.36
|
First
Amendment and Deed of Trust, Security Agreement, Financing Statement, and
Assignment of Rental by Behringer Harvard Mountain Village, LLC, as
grantor, to Credit Union Liquidity Services, LLC (previously filed and
incorporated by reference to Form 8-K filed on October 1,
2008)
|
|
10.37
|
Third
Amendment to Credit Agreement by and among Bank of America, N.A. and the
Registrant dated October 30, 2008 (previously filed and incorporated
by reference to Form 10-Q filed on November 14, 2008)
|
|
10.38
|
Purchase
Agreement between Behringer Harvard Mockingbird Commons, LLC and Jel
Investments Ltd regarding the Hotel Palomar and Residences
(previously filed and incorporated by reference to Form 8-K filed on
December 3, 2008)
|
|
10.39
|
Third
Amendment to Note and Construction Loan Agreement by and between Behringer
Harvard Mockingbird Commons LLC and Credit Union Liquidity Services, LLC
(previously filed and incorporated by reference to Form 8-K filed on
November 3, 2009)
|
|
10.40
|
First
Amendment to Guaranty Agreement by and between the Registrant and Credit
Union Liquidity Services, LLC (previously filed and incorporated by
reference to Form 8-K filed on November 3, 2009)
|
|
10.41
|
Second
Modification Agreement by and between Behringer Harvard Mountain Village,
LLC and Credit Union Liquidity Services, LLC (previously filed and
incorporated by reference to Form 8-K filed on November 3,
2009)
|
|
10.42
|
Second
Amendment to Guaranty Agreement by and between the Registrant and Credit
Union Liquidity Services, LLC (previously filed and incorporated by
reference to Form 8-K filed on November 3, 2009)
|
|
10.43
|
Second
Deed of Trust, Security Agreement, Financing Statement, and Assignment of
Rental by Behringer Harvard Mockingbird Commons LLC, as grantor, to Credit
Union Liquidity Services, LLC (previously filed and incorporated by
reference to Form 8-K filed on November 3, 2009)
|
|
10.44
|
Fourth
Amended and Restated Unsecured Promissory Note dated November 13, 2009 by
and between the Registrant and Behringer Harvard Holdings, LLC (filed
herewith)
|
|
10.45
|
Second
Amendment Agreement by and between Behringer Harvard Mockingbird Commons,
LLC and Bank of America, N.A. (previously filed and incorporated by
reference to Form 8-K filed on December 29, 2009)
|
|
10.46
|
Fifth
Amendment to Credit Agreement by and between the Registrant and Bank of
America, N.A. (previously filed and incorporated by reference to Form 8-K
filed on December 29, 2009)
|
|
10.47
|
Deed
of Trust, Assignment of Rents and Leases, Security Agreement, Fixture
Filing and Financing Statement by Behringer Harvard 250/290 Carpenter LP
in favor of PRLAP for the benefit of Bank of America, N.A. (previously
filed and incorporated by reference to Form 8-K filed on December 29,
2009)
|
|
10.48
|
Guaranty
Agreement by Behringer Harvard 250/290 Carpenter LP and Bank of America,
N.A. (previously filed and incorporated by reference to Form 8-K filed on
December 29, 2009)
|
|
21.1*
|
List
of Subsidiaries
|
|
31.1*
|
Rule
13a-14(a) or Rule 15d-14(a) Certification
|
|
31.2*
|
Rule
13a-14(a) or Rule 15d-14(a) Certification
|
|
32.1*
|
Section
1350 Certifications
|
*filed
herewith