Behringer Harvard Opportunity REIT I, Inc. - FORM 10-Q

Attached files

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EX-32.1 - EX-32.1 - Behringer Harvard Opportunity REIT I, Inc.	a10-12884_1ex32d1.htm
EX-10.3 - EX-10.3 - Behringer Harvard Opportunity REIT I, Inc.	a10-12884_1ex10d3.htm
EX-31.1 - EX-31.1 - Behringer Harvard Opportunity REIT I, Inc.	a10-12884_1ex31d1.htm
EX-10.2 - EX-10.2 - Behringer Harvard Opportunity REIT I, Inc.	a10-12884_1ex10d2.htm
EX-31.2 - EX-31.2 - Behringer Harvard Opportunity REIT I, Inc.	a10-12884_1ex31d2.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

Commission File Number: 000-51961

Behringer Harvard Opportunity REIT I, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland		20-1862323
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

15601 Dallas Parkway, Suite 600, Addison, Texas 75001

(Address of Principal Executive Offices) (ZIP Code)

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

None

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

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

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

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

Large accelerated filer o		Accelerated filer o

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

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

As of July 30, 2010, the Registrant had 56,195,575 shares of common stock outstanding.

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BEHRINGER HARVARD OPPORTUNITY REIT I, INC.

FORM 10-Q

Quarter Ended June 30, 2010

		Page

PART I
FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009	3

	Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2010 and 2009	5

	Consolidated Statements of Equity for the Six Months Ended June 30, 2010 and 2009	6

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	45

	PART II
	OTHER INFORMATION

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	47

Item 4.	(Removed and Reserved)

Item 5.	Other Information	47

Item 6.	Exhibits	47

Signature		48

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

Behringer Harvard Opportunity REIT I, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(Unaudited)

	June 30,		December 31,
	2010 (1)		2009 (1)
Assets
Real estate
Land and improvements, net	$	94,495	$	130,254
Buildings and improvements, net	337,615		408,786
Real estate under development	33,969		20,701
Total real estate	466,079		559,741

Condominium inventory	67,196		86,485
Cash and cash equivalents	5,583		9,511
Restricted cash	7,261		8,585
Accounts receivable, net	9,902		8,169
Prepaid expenses and other assets	1,975		2,138
Leasehold interests, net	15,451		16,406
Investments in unconsolidated joint ventures	58,454		63,552
Furniture, fixtures and equipment, net	8,351		11,836
Deferred financing fees, net	2,335		3,827
Notes receivable, net	65,729		42,557
Lease intangibles, net	19,765		21,228
Other intangibles, net	8,009		8,348
Receivables from related parties	1,455		1,548
Total assets	$	737,545	$	843,931

(1) As a result of the adoption of Accounting Standards Codification (“ASC”) Topic 810, (“ASC 810”), effective as of January 1, 2010, the Company is required to separately disclose on its consolidated balance sheets the assets of consolidated variable interest entities (“VIEs”) that are owned by the VIEs and non-recourse liabilities of consolidated VIEs.

As of December 31, 2009, total assets include $91.4 million related to Alexan Black Mountain and Tanglewood at Voss (“Consolidated VIEs”) of which $25.2 million is included in land and improvements, net; $62 million in buildings and improvements, net; $1 million in cash and cash equivalents; $0.5 million in restricted cash; less than $0.1 million in accounts receivable, net; $2.4 million in furniture, fixtures and equipment, net; and $0.3 million in deferred financing fees, net.

As of January 1, 2010, we deconsolidated the assets and liabilities associated with Alexan Black Mountain and Tanglewood at Voss (see Note 8 to the Consolidated Financial Statements).

See Notes to Consolidated Financial Statements.

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Behringer Harvard Opportunity REIT I, Inc.

Consolidated Balance Sheets - Continued

(in thousands, except share and per share amounts)

(Unaudited)

	June 30,			December 31,
	2010 (1)			2009 (1)
Liabilities and Equity
Notes payable	$	352,069		$	429,787
Accounts payable	1,853			1,885
Payables to related parties	884			1,790
Acquired below-market leases, net	11,207			12,726
Accrued and other liabilities	16,898			23,322
Total liabilities	382,911			469,510

Commitments and contingencies

Equity

Behringer Harvard Opportunity REIT I, Inc. Equity:
Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none outstanding	—			—
Convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 shares issued and outstanding	—			—
Common stock, $.0001 par value per share; 350,000,000 shares authorized, and 56,247,176 55,825,078 shares issued and outstanding at June 30, 2010, and December 31, 2009, respectively	6			6
Additional paid-in capital	501,038			497,648
Accumulated distributions and net loss	(144,842		)	(115,496		)
Accumulated other comprehensive loss	(6,171		)	(3,412		)
Total Behringer Harvard Opportunity REIT I, Inc. equity	350,031			378,746
Noncontrolling interest	4,603			(4,325		)
Total equity	354,634			374,421
Total liabilities and equity	$	737,545		$	843,931

(1) As a result of the adoption of ASC 810, effective as of January 1, 2010, the Company is required to separately disclose on its consolidated balance sheets the assets of consolidated VIEs that are owned by the VIEs and non-recourse liabilities of consolidated VIEs.

As of December 31, 2009, total liabilities include $102 million related to Consolidated VIEs of which $68.5 million is included in notes payable; less than $0.1 million in accounts payable; $32.2 million in payables to related parties; and $1.3 million in accrued and other liabilities. .

As of January 1, 2010, we deconsolidated the assets and liabilities associated with Alexan Black Mountain and Tanglewood at

Voss (see Note 8 to the Consolidated Financial Statements).

See Notes to Consolidated Financial Statements.

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Behringer Harvard Opportunity REIT I, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Revenues
Rental revenue	$	12,213		$	15,755		$	24,544		$	31,581
Hotel revenue	815			674			2,049			1,498
Condominium sales	2,207			8,109			25,564			11,929
Interest income from notes receivable	476			—			6,434			—

Total revenues	15,711			24,538			58,591			45,008

Expenses
Property operating expenses	5,066			6,870			10,994			13,557
Cost of condominium sales	2,417			8,178			25,937			12,020
Interest expense	3,555			4,057			7,233			8,191
Real estate taxes	1,934			2,125			3,759			4,435
Impairment charge	—			2,732			4,230			2,732
Provision for loan losses	—			—			7,136			—
Property management fees	528			599			1,087			1,199
Asset management fees	1,641			1,441			3,103			2,779
General and administrative	1,337			1,668			2,598			2,984
Depreciation and amortization	5,834			7,251			11,582			15,014

Total expenses	22,312			34,921			77,659			62,911

Interest income	41			36			69			79
Other income (expense), net	(1		)	—			41			—

Loss before income taxes and equity in losses of unconsolidated joint ventures	(6,561		)	(10,347		)	(18,958		)	(17,824		)

Benefit (provision) for income taxes	(3		)	(47		)	179			(98		)
Equity in losses of unconsolidated joint ventures	(640		)	(1,456		)	(1,583		)	(1,581		)
Net loss	(7,204		)	(11,850		)	(20,362		)	(19,503		)
Add: Net loss attributable to the noncontrolling interest	237			2,756			601			5,077
Net loss attributable to Behringer Harvard Opportunity REIT I, Inc.	$	(6,967	)	$	(9,094	)	$	(19,761	)	$	(14,426	)

Weighted average shares outstanding:
Basic and diluted	56,203			55,211			56,127			55,122

Loss per share attributable to Behringer Harvard Opportunity REIT I, Inc.
Basic and diluted	$	(0.12	)	$	(0.16	)	$	(0.35	)	$	(0.27	)

Comprehensive income (loss)
Net loss	$	(7,204	)	$	(11,850	)	$	(20,362	)	$	(19,503	)
Other comprehensive loss:
Foreign currency translation gain (loss)	(2,091		)	1,996			(3,477		)	210
Unrealized gain (loss) on interest rate derivatives	389			671			719			597
Reclassifications due to hedging activities	—			17			45			216
Total other comprehensive income (loss)	(1,702		)	2,684			(2,713		)	1,023
Comprehensive loss	(8,906		)	(9,166		)	(23,075		)	(18,480		)
Comprehensive income (loss) attributable to the noncontrolling interest	—			2,234			555			4,570
Comprehensive loss attributable to Behringer Harvard Opportunity REIT I, Inc.	$	(8,906	)	$	(6,932	)	$	(22,520	)	$	(13,910	)

See Notes to Consolidated Financial Statements.

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Behringer Harvard Opportunity REIT I, Inc.

Consolidated Statements of Equity

(in thousands, except share amounts)

(Unaudited)

											Accumulated			Accumulated
	Convertible Stock			Common Stock				Additional			Distributions			Other
	Number of	Par		Number of		Par		Paid-In			and			Comprehensive			Noncontrolling			Total
	Shares	Value		Shares		Value		Capital			Net Loss			Income (Loss)			Interest			Equity
Balance at January 1, 2009	1,000	$	—	54,836,985		$	5	$	489,139		$	(66,085	)	$	(5,194	)	$	5,502		$	423,367

Issuance of common stock, net

Redemption of common stock				(72,537	)			(724		)										(724		)

Distributions declared on common stock											(4,070		)							(4,070		)

Contributions from non-controlling interest																	118			118

Shares issued pursuant to Distribution Reinvestment Plan, net				426,164		1		4,049												4,050

Comprehensive loss:
Net loss											(14,426		)				(5,077		)	(19,503		)

Other comprehensive income:
Foreign currency translation gain (loss)														(229		)	439			210
Unrealized losses on interest rate derivatives														529			68			597
Reclassifications due to hedging activities														216			—			216

Total comprehensive loss																	(4,570		)	(18,480		)

Balance at June 30, 2009	1,000	$	—	55,190,612		$	6	$	492,464		$	(84,581	)	$	(4,678	)	$	1,050		$	404,261

Balance at January 1, 2010	1,000	$	—	55,825,078		$	6	$	497,648		$	(115,496	)	$	(3,412	)	$	(4,325	)	$	374,421

Cumulative effect of adoption of accounting standard											(3,994		)				9,413			5,419

Issuance of common stock, net																				—

Redemption of common stock				(52,899	)			(425		)										(425		)

Distributions declared on common stock											(5,591		)							(5,591		)

Contributions from noncontrolling interest																	70			70

Shares issued pursuant to Distribution Reinvestment Plan, net				474,997				3,815												3,815

Comprehensive loss:
Net loss											(19,761		)				(601		)	(20,362		)

Other comprehensive income:
Foreign currency translation gain (loss)														(3,504		)	27			(3,477		)
Unrealized gain on interest rate derivatives														700			19			719
Reclassifications due to hedging activities														45			—			45

Total comprehensive loss																	(555		)	(23,075		)

Balance at June 30, 2010	1,000	$	—	56,247,176		$	6	$	501,038		$	(144,842	)	$	(6,171	)	$	4,603		$	354,634

See Notes to Consolidated Financial Statements.

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Behringer Harvard Opportunity REIT I, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Six months ended June 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(20,362	)	$	(19,503	)
Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities:
Depreciation and amortization	10,220			12,697
Amortization of deferred financing fees	1,427			1,609
Impairment charge	4,230			2,732
Provision for loan losses	7,136			—
Bad debt expense	277			—
Equity in losses of unconsolidated joint ventures	1,583			1,581
Loss (gain) on derivatives	904			(306		)
Change in accounts receivable	(2,017		)	(1,640		)
Change in condominium inventory	19,050			6,021
Change in prepaid expenses and other assets	151			531
Change in accounts payable	(454		)	(1,049		)
Change in accrued and other liabilities	(3,183		)	1,828
Change in payables to related parties	(813		)	1,642
Addition of lease intangibles	(1,017		)	(868		)
Cash provided by operating activities	17,132			5,275

Cash flows from investing activities:
Investment in unconsolidated joint ventures	(69		)	(2,256		)
Capital expenditures for real estate under development	(3,714		)	(8,827		)
Capital expenditures for real estate under development of consolidated borrowers	—			(583		)
Additions of property and equipment	(1,748		)	(5,032		)
Change in restricted cash	795			(2,027		)
Investment in notes receivable	(3,303		)	(5,084		)
Cash used in investing activities	(8,039		)	(23,809		)

Cash flows from financing activities:
Financing costs	—			(470		)
Proceeds from notes payable	7,015			16,437
Proceeds from mortgages of consolidated borrowers	—			1,700
Net borrowings on senior secured revolving credit facility	6,496			8,600
Payments on notes payable	(21,614		)	(11,674		)
Redemptions of common stock	(425		)	(724		)
Distributions	(1,776		)	(1,419		)
Contributions from noncontrolling interest holders	78			1,339
Distributions to noncontrolling interest holders	(3		)	(250		)
Cash provided by (used in) financing activities	(10,229		)	13,539
Effect of exchange rate changes on cash and cash equivalents	(1,781		)	(2,182		)
Net change in cash and cash equivalents	(2,917		)	(7,177		)
Cash and cash equivalents at beginning of the period	9,511			25,260
Decrease in cash from deconsolidation due to adoption of accounting standard	(1,011		)	—
Cash and cash equivalents at end of the period	$	5,583		$	18,083

See Notes to Consolidated Financial Statements.

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Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1. Business

Organization

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

We operate commercial real estate or real estate-related assets located in and outside the United States on an opportunistic basis. In particular, we have focused on acquiring properties with significant possibilities for short-term capital appreciation, such as those requiring development, redevelopment, or repositioning, or those located in markets and submarkets with higher volatility, lower barriers to entry, and high growth potential. We have acquired a wide variety of properties, including office, industrial, retail, hospitality, recreation and leisure, multifamily, and other properties. We have purchased existing and newly constructed properties and properties under development or construction, including multifamily properties. We have also originated two mezzanine loans related to two multifamily properties. We completed our first property acquisition in March 2006, and, as of June 30, 2010, we wholly owned 11 properties and consolidated five properties through investments in joint ventures. In addition, we are the mezzanine lender for two multifamily properties. We also have noncontrolling, unconsolidated ownership interests in three properties and one investment in a joint venture consisting of 22 properties that are accounted for using the equity method.

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

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

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

2. Interim Unaudited Financial Information

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission (“SEC”) on March 19, 2010. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet and consolidated statement of equity as of June 30, 2010, the consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2010 and 2009, and the consolidated statements of cash flows and equity for the six months ended June 30, 2010 and 2009 have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to fairly present our consolidated financial position as of June 30, 2010 and our consolidated results of operations, equity, and cash flows for the periods ended June 30, 2010 and 2009. Such adjustments are of a normal recurring nature.

3. Summary of Significant Accounting Policies

Use of Estimates in the Preparation of Financial Statements

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

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Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

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

Principles of Consolidation and Basis of Presentation

Our consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control. All inter-company transactions, balances, and profits have been eliminated in consolidation. Interests in entities acquired will be evaluated based on applicable GAAP, which includes the requirement to consolidate entities deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary. If the interest in the entity is determined not to be a VIE, then the entities will be evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.

There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and, if so, whether we are the primary beneficiary. The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity. Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility and using a discount rate to determine the net present value of those future losses. A change in the judgments, assumptions, and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment using the equity method that should in fact be consolidated, the effects of which could be material to our financial statements.

To conform to the current year presentation, which presents advertising expense as a component of property operating expense on our consolidated statements of operations and comprehensive income, we reclassified from advertising expense into property operating expense, $0.2 million and $0.4 million for the three and six months ended June 30, 2009, respectively.

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

Real Estate

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

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

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

The fair value of any tangible assets acquired, consisting of land, land improvements, buildings, building improvements, tenant improvements, and furniture, fixtures and equipment, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets. Land values are derived from appraisals and building values are calculated as replacement cost less depreciation or management’s estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods. Furniture, fixtures, and equipment values are determined based on current reproduction or replacement cost less depreciation and other estimated allowances based on physical, functional, or economic factors. The values of the buildings are depreciated over their respective estimated useful lives ranging from 25 years for commercial office property to 39 years for hotel/mixed-use property using the straight-line method. Building improvements are depreciated over their estimated useful lives ranging from 7 to 25 years. Tenant improvements are depreciated over the term of the respective leases. Land improvements are depreciated over the estimated useful life of 15 years, and furniture, fixtures, and equipment are depreciated over estimated useful lives ranging

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Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

from five to seven years using the straight-line method. Our leasehold interest is depreciated over its remaining contractual life, or approximately 100 years.

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

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

We amortize the value of in-place leases acquired in the future to expense over the term of the respective leases. The value of tenant relationship intangibles is amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and tenant relationship intangibles would be charged to expense. As of June 30, 2010, the estimated remaining useful lives for acquired lease intangibles range from less than one year to approximately 11 years.

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

Anticipated amortization expense associated with the acquired lease intangibles and acquired other intangible assets for each of the following five years as of June 30, 2010 is as follows:

	Lease / Other Intangibles
July 1, 2010 - December 31, 2010	$	782
2011	1,305
2012	1,004
2013	833
2014	881

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

										Acquired
	Buildings and			Land and			Lease			Below-Market			Leasehold			Other
As of June 30, 2010	Improvements			Improvements			Intangibles			Leases			Interest			Intangibles
Cost	$	380,462		$	94,942		$	34,335		$	(21,040	)	$	16,073		$	10,439
Less: depreciation and amortization	(42,847		)	(447		)	(14,570		)	9,833			(622		)	(2,430		)

Net	$	337,615		$	94,495		$	19,765		$	(11,207	)	$	15,451		$	8,009

										Acquired
	Buildings and			Land and			Lease			Below-Market			Leasehold			Other
As of December 31, 2009	Improvements			Improvements			Intangibles			Leases			Interest			Intangibles
Cost	$	448,121		$	130,786		$	34,151		$	(21,392	)	$	16,981		$	10,439
Less: depreciation and amortization	(39,335		)	(532		)	(12,923		)	8,666			(575		)	(2,091		)

Net	$	408,786		$	130,254		$	21,228		$	(12,726	)	$	16,406		$	8,348

Condominium Inventory

Condominium inventory is stated at the lower of cost or fair market value. In addition to land acquisition costs, land development costs, and construction costs, costs include interest and real estate taxes, which are capitalized during the period beginning with the commencement of development and ending with the completion of construction. At June 30, 2010, condominium inventory consisted of $34.1 million of finished units and $33.1 million of work in progress. As of December 31, 2009, condominium inventory consisted of $31.5 million of finished units and $55 million of work in progress.

For condominium inventory, at each reporting date, management compares the estimated fair value less costs to sell to the carrying value. An adjustment is recorded to the extent that the fair value less costs to sell is less than the carrying value. We determine the estimated fair value of condominiums based on comparable sales in the normal course of business under existing and anticipated market conditions. This evaluation takes into consideration estimated future selling prices, costs incurred to date, estimated additional future costs, and management’s plans for the property. There were no impairment charges related to our condominium inventory for the six months ended June 30, 2010 or 2009. However, we may experience impairment of our condominium inventory in the future.

Cash and Cash Equivalents

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

Restricted Cash

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

Accounts Receivable

Accounts receivable primarily consist of straight-line rental revenue receivables of $7.4 million and $5.6 million as of June 30, 2010 and December 31, 2009, respectively, and receivables from our hotel operators and tenants related to our other consolidated properties of $3 million and $2.9 million as of June 30, 2010 and December 31, 2009, respectively. The allowance for doubtful accounts was $0.5 million and $0.3 million as of June 30, 2010 and December 31, 2009, respectively.

Prepaid Expenses and Other Assets

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

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Furniture, Fixtures, and Equipment

Furniture, fixtures, and equipment are recorded at cost and are depreciated using the straight-line method over their estimated useful lives of five to seven years. Maintenance and repairs are charged to operations as incurred while renewals or improvements to such assets are capitalized. Accumulated depreciation associated with our furniture, fixtures, and equipment was $6.7 million and $6.1 million as of June 30, 2010 and December 31, 2009, respectively.

Investment Impairment

For real estate we wholly own, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable. When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset. In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value. We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

In the first quarter of 2010, we evaluated Ferncroft Corporate Center for impairment, and accordingly, recognized a $4.2 million impairment charge for the three months ended March 31, 2010. No impairment charges were recognized in the second quarter of 2010.

We also evaluate our investments in unconsolidated joint ventures at each reporting date and if we believe there is an other than temporary decline in market value, we will record an impairment charge based on these evaluations. We assess potential impairment by comparing our portion of estimated future undiscounted operating cash flows expected to be generated by the joint venture over the life of the joint venture’s assets to the carrying amount of the joint venture. In the event that the carrying amount exceeds our portion of estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the joint venture to its estimated fair value.

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

In the first quarter of 2010, we recorded a reserve for loan losses totaling $11.1 million related to the mezzanine loan associated with Alexan Black Mountain, including $7.1 million recognized as a provision to loan losses on our consolidated statement of operations and comprehensive loss, for the three months ended March 31, 2010, and the remaining $4 million as a cumulative effect adjustment to the opening balance of accumulated distributions and net loss in our consolidated statement of equity for the six months ended June 30, 2010. There was no such provision or reserve recorded for the three months ended June 30, 2010.

In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, 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. The value of our properties held for development depends on market conditions, including estimates of the project start date as well as estimates of future demand for the property type under development. We have analyzed trends and other information related to each potential development and incorporated this information as well as our current outlook into the assumptions we use in our impairment analyses. Due to the judgment and assumptions applied in the estimation process with respect to impairments, including the fact that limited market information regarding the value of comparable land exists at this time, it is possible actual results could differ substantially from those estimated.

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decrease, or if changes in our development strategy significantly affect any key assumptions used in our fair value calculations, we may need to take additional charges in future periods for impairments related to existing assets. Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.

Deferred Financing Fees

Deferred financing fees are recorded at cost and are amortized to interest income for notes receivable and interest expense for notes payable using a straight-line method that approximates the effective interest method over the life of the related debt. Accumulated amortization of deferred financing fees was $7.2 million and $7.4 million as of June 30, 2010 and December 31, 2009, respectively.

Derivative Financial Instruments

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

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

As of June 30, 2010, we do not have any derivatives designated as fair value hedges, nor are derivatives being used for trading or speculative purposes. See Notes 5 and 13 for further information regarding our derivative financial instruments.

Foreign Currency Translation

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

The British pound is the functional currency for our Becket House investment operating in London, England and the Euro is the functional currency for the operations of our Central Europe Joint Venture. We also maintain Euro-denominated bank accounts that are translated into U.S. dollars at the current exchange rate at each reporting period. The resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss) in our consolidated statement of equity. The foreign currency translation adjustment was a loss of $3.5 million and a gain of $0.2 million for the six months ended June 30, 2010 and 2009, respectively.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) (“AOCI”), which is reported in the accompanying consolidated statement of equity, consists of gains and losses affecting equity that are excluded from net income (loss) under GAAP. The components of AOCI consist of foreign currency translation gains and losses and unrealized gains and losses on derivatives designated as hedges.

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Revenue Recognition

We recognize rental income generated from leases on real estate assets on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any. Straight-line rental revenue of $1.8 million and $1.1 million was recognized in rental revenues for the six months ended June 30, 2010 and 2009, respectively. Hotel revenue is derived from the operations of The Lodge & Spa at Cordillera and consists of guest room, food and beverage, and other revenue, and is recognized as the services are rendered.

Revenues from the sales of condominiums are recognized when sales are closed and title passes to the new owner, the new owner’s initial and continuing investment is adequate to demonstrate a commitment to pay for the condominium, the new owner’s receivable is not subject to future subordination, and we do not have a substantial continuing involvement with the new condominium. Amounts received prior to closing on sales of condominiums are recorded as deposits in our financial statements.

We recognize interest income from notes receivable on an accrual basis over the life of the loan using the interest method. Direct loan origination fees and origination or acquisition costs, as well as acquisition premiums or discounts, are amortized over the life of the loan as an adjustment to interest income. We will stop accruing interest on loans when there is concern as to the ultimate collection of principal or interest of the loan. In the event that we stop accruing interest on a loan, we will generally not recognize subsequent interest income until cash is received or we make the decision to restart interest accrual on the loan.

Income Taxes

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

We have reviewed our tax positions under GAAP guidance that clarifies the relevant criteria and approach for the recognition and measurement of uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination. We believe it is more likely than not that the tax positions taken relative to our status as a REIT will be sustained in any tax examination. In addition, we believe that it is more likely than not that the tax positions taken relative to the taxable REIT subsidiaries will be sustained in any tax examination.

On May 18, 2006, the State of Texas enacted a law which replaced the existing state franchise tax with a “margin tax,” effective January 1, 2007. For the six months ended June 30, 2010 and 2009, we recognized a current and deferred tax benefit (provision) related to the Texas margin tax of approximately $0.2 million and ($0.1) million, respectively.

Stock-Based Compensation

We have a stock-based incentive award plan for our directors and consultants and for employees, directors, and consultants of our affiliates. Awards are granted at the fair market value on the date of grant with fair value estimated using the Black-Scholes-Merton option valuation model, which incorporates assumptions surrounding volatility, dividend yield, the risk-free interest rate, expected life, and the exercise price as compared to the underlying stock price on the grant date. The tax benefits associated with these share-based payments are classified as financing activities in the consolidated statement of cash flows. For the six months ended June 30, 2010 and 2009, we had no significant compensation cost related to our incentive award plan.

Concentration of Credit Risk

At June 30, 2010 and December 31, 2009, we had cash and cash equivalents deposited in certain financial institutions in excess of federally insured levels. 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 regularly monitor the financial

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stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents or restricted cash.

Noncontrolling Interest

Noncontrolling interest represents the noncontrolling ownership interest’s proportionate share of the equity in our consolidated real estate investments including the less than 1%, 5%, 6%, 9%, and 20% unaffiliated partners’ share of the equity in Rio Salado Business Center, Chase Park Plaza, The Lodge & Spa at Cordillera, Frisco Square, and Becket House, respectively. Income and losses are allocated to noncontrolling interest holders based on their ownership percentage.

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 six months ended June 30, 2010 and 2009. Our chief operating decision maker evaluates operating performance on an individual property level. Therefore, our properties are aggregated into one reportable segment.

Earnings per Share

Earnings (loss) per share is calculated based on the weighted average number of shares outstanding during each period. As of each period ended June 30, 2010 and 2009, we had options to purchase 69,583 shares of common stock outstanding at a weighted average exercise price of $8.99. These options are excluded from the calculation of earnings per share for the six months ended June 30, 2010 and 2009 because the effect would be anti-dilutive.

Inflation

The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. However, we include provisions in the majority of our tenant leases that would protect us from the impact of inflation. These provisions include 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.

4. New Accounting Pronouncements

In January 2010, the FASB updated the disclosure requirements for fair value measurements. The updated guidance requires companies to disclose separately the investments that transfer in and out of Levels 1 and 2 and the reasons for those transfers. Additionally, in the reconciliation for fair value measurements using significant observable inputs (Level 3), companies should present separately information about purchases, sales, issuances and settlements. We adopted the guidance on January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements n the Level 3 reconciliation, which are effective for fiscal years beginning after December 15, 2010. We will adopt the remaining guidance on January 1, 2011. The adoption of the required guidance did not have a material impact on our financial statements or disclosures. We do not expect that the adoption of the remaining guidance will have an impact on our financial statements or disclosures.

5. Assets and Liabilities Measured at Fair Value

Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.

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

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

We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s performance risk in the fair value measurements. Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2010 and 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 fair value hierarchy table presents information about our assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009:

June 30, 2010	Level 1		Level 2		Level 3		Total
Assets
Derivative financial instruments	$	—	$	2	$	—	$	2

Liabilities
Derivative financial instruments	$	—	$	1,448	$	—	$	1,448

December 31, 2009	Level 1		Level 2		Level 3		Total
Assets
Derivative financial instruments	$	—	$	204	$	—	$	204

Liabilities
Derivative financial instruments	$	—	$	3,081	$	—	$	3,081

Derivative financial instruments classified as assets are included in other assets on the balance sheet while derivative financial instruments classified as liabilities are included in other liabilities. See Notes 3 and 13 for further information regarding our use of hedging instruments.

Nonrecurring Fair Value Measurements:

Impairments

In the first quarter of 2010, we recorded a provision to the reserve for loan losses of $7.1 million related to our Alexan Black Mountain note receivable to reflect our current estimate of potential loan loss. We also recorded an impairment charge of $4.2 million related to Ferncroft Corporate Center. There were no such provisions or impairment charges recorded for the second quarter of 2010. The inputs used to calculate the fair value of these assets included projected cash flows and a risk-adjusted rate of return that we estimated would be used by a market participant in valuing these assets. This fair value estimate is considered Level 3 of the fair value hierarchy.

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The following fair value hierarchy table presents information about our assets measured at fair value on a nonrecurring basis during the six months ended June 30, 2010:

									Gain
June 30, 2010	Level 1		Level 2		Level 3		Total Fair Value		(Loss)
Asset
Note receivable, net	$	—	$	—	$	2,540	$	2,540	$	(7,136	)
Buildings and improvements, net	—		—		13,328		13,328		(4,230		)
Total	$	—	$	—	$	15,868	$	15,868	$	(11,366	)

6. Fair Value Disclosure of Financial Instruments

We determined the following 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.

As of June 30, 2010 and December 31, 2009, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses, other liabilities, payables/receivables from related parties, and distributions payable were at amounts that reasonably approximated their fair value based on their highly-liquid nature and/or short-term maturities and the carrying value of notes receivable reasonably approximated fair value based on expected interest rates for notes to similar borrowers with similar terms and remaining maturities.

The notes payable totaling $352.1 million and $429.8 million as of June 30, 2010 and December 31, 2009, respectively, have a fair value of approximately $358.6 million and $435.3 million, respectively, based upon interest rates for mortgages with similar terms and remaining maturities that management believes we could obtain. Interest rate swaps and caps along with our foreign currency exchange forward contract are recorded at their respective fair values in prepaid expenses and other assets for those derivative instruments that have an asset balance and in other liabilities for those derivative instruments that are liabilities (see Note 5).

The fair value estimates presented herein are based on information available to our management as of June 30, 2010 and December 31, 2009. Although our management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein.

7. Real Estate Investments

As of June 30, 2010, we wholly owned 11 properties and consolidated five properties through investments in joint ventures. We are the mezzanine lender for two multifamily properties which, prior to January 1, 2010, we consolidated as the primary beneficiary of the VIEs (see Note 8). In addition, we have noncontrolling, unconsolidated ownership interests in three properties and one investment in a joint venture consisting of 22 properties that are accounted for using the equity method. Capital contributions, distributions, and profits and losses of these properties are allocated in accordance with the terms of the applicable partnership agreement.

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Investments in Unconsolidated Joint Ventures

The following table presents certain information about our unconsolidated investments as of June 30, 2010 and December 31, 2009:

			Carrying Value of Investment
Property Name	Ownership Interest		June 30, 2010		December 31, 2009
Royal Island	30.38	%	$	22,932	$	22,594
GrandMarc at Westberry Place	50.00	%	6,885		7,348
GrandMarc at the Corner	50.00	%	6,243		6,559
Central Europe Joint Venture	47.27	%	22,394		27,051
Total			$	58,454	$	63,552

Our investments in unconsolidated joint ventures as of June 30, 2010 and December 31, 2009 consisted of our proportionate share of the combined assets and liabilities of our investment properties as follows:

	June 30, 2010		December 31, 2009
Real estate assets, net	$	365,143	$	382,061
Cash and cash equivalents	4,908		15,628
Other assets	2,842		3,528
Total assets	$	372,893	$	401,217

Notes payable	$	228,309	$	246,176
Other liabilities	19,043		19,846
Total liabilities	247,352		266,022

Equity	125,541		135,195
Total liabilities and equity	$	372,893	$	401,217

For the three and six months ended June 30, 2010, we recognized $0.6 million and $1.6 million, respectively, of equity in losses. Our equity in losses from these investments is our proportionate share of the combined losses of our unconsolidated joint ventures for the three and six months ended June 30, 2010 and 2009 as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Revenue	$	5,853		$	5,772		$	12,411		$	11,372

Operating expenses:
Operating expenses	1,306			1,726			2,776			3,072
Property taxes	205			201			411			407
Total operating expenses	1,511			1,927			3,187			3,479

Operating income	4,342			3,845			9,224			7,893

Non-operating expenses:
Depreciation and amortization	2,308			2,486			4,708			4,905
Interest and other, net	3,517			4,333			7,802			6,244
Total non-operating expenses	5,825			6,819			12,510			11,149

Net loss	$	(1,483	)	$	(2,974	)	$	(3,286	)	$	(3,256	)

Company’s share of net loss	$	(640	)	$	(1,456	)	$	(1,583	)	$	(1,581	)

8. Variable Interest Entities

GAAP requires the consolidation of VIEs in which an enterprise has a controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most

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significantly impact the VIEs’ economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

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

Tanglewood at Voss and Alexan Black Mountain

In 2006, we agreed to provide secured mezzanine financing with an aggregate principal amount of up to $22.7 million to unaffiliated third-party entities that own multifamily communities under development, Tanglewood at Voss in Houston, Texas and Alexan Black Mountain in Henderson, Nevada properties. These entities also have secured construction loans with third-party lenders, with an aggregate principal amount of up to $68.6 million. Our mezzanine loans are subordinate to the construction loans. In addition, we entered into option agreements allowing us to purchase the ownership interests in Tanglewood at Voss and Alexan Black Mountain after each project’s substantial completion and upon notification of completion from the developer. In the second quarter of 2009, the option agreement allowing us to purchase Alexan Black Mountain expired.

In February 2009, we received the notice of completion on Tanglewood at Voss. Accordingly, pursuant to the option agreement, we had ninety days from the delivery of the notice of completion to exercise our option to purchase the completed property. We have waived our rights to purchase the property. Therefore, the general partner and mezzanine borrower at its sole discretion may elect to exercise its put option requiring us to purchase the property within 120 days upon the delivery of a written notice. In July 2010, we agreed to an extension of the put option agreement that extends the date through which the general partner and mezzanine borrower may elect to exercise the put option through August 22, 2010. As of June 30, 2010, the general partner and mezzanine borrower have not elected to provide us with the put notice. However, we are working with the general partner and mezzanine borrower to acquire Tanglewood at Voss.

Based on our evaluation, we have determined that these entities meet the criteria of VIEs under GAAP and, prior to January 1, 2010, we were the primary beneficiary of these variable interest entities. Therefore, prior to January 1, 2010, we consolidated the entities, including the related real estate assets and third-party construction financing. As of December 31, 2009, there was $87.2 million of related real estate assets related to Tanglewood at Voss and Alexan Black Mountain, which collateralize the outstanding principal balance of the construction loans. The third-party construction lenders have no recourse to the general credit of us, but their loans are guaranteed by the owners of the variable interest entities. As of December 31, 2009, the outstanding principal balance under our mezzanine loans was $22.7 million, which was eliminated, along with accrued interest and loan origination fees, upon consolidation.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities. The guidance eliminates exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. It also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its rights to receive benefits of an entity must be disregarded.

As a result of this new accounting guidance, on January 1, 2010, we deconsolidated the assets and liabilities of Tanglewood at Voss and Alexan Black Mountain along with the associated revenue and expenses, resulting in neither a net gain or loss as we had no equity interest in these investments. While these entities are VIEs, we have determined that the power to direct the activities that most significantly impact the VIEs’ economic performance generally resides with the general partner and mezzanine borrowers. Following the deconsolidation of Tanglewood at Voss and Alexan Black Mountain, our continuing involvement with these entities is limited to our mezzanine loans. The deconsolidation did not result in either Tanglewood at Voss or Alexan Black Mountain becoming one of our related parties.

Royal Island

In May 2007, for an initial cash investment of $20 million, we acquired an approximate 31% equity interest as a limited partner in the development and construction of a resort hotel, spa, golf course, marina, and residences on three islands located in the Commonwealth of Bahamas (“Royal Island”). In December 2007, we participated in a bridge loan

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financing arrangement and committed up to $40 million as a bridge loan to the Royal Island entity for the continuing construction and development of the property. In June 2009, we purchased the interest in the first of two superior tranches (“A-1”) for $3.1 million. In March 2010, we purchased the interest in two notes in the second tranche (“A-2”) for $2.2 million. The total amount outstanding to us at June 30, 2010, including accrued interest and fees, was $44.4 million (see Note 9). Based on our evaluation, we have determined that the entity meets the criteria of a variable interest entity but that we are not the primary beneficiary because we do not have the power to direct the activities of Royal Island that most significantly affect the entity’s economic performance. The power to direct these activities resides with the general partner. Accordingly, we do not consolidate the Royal Island entity and instead account for our equity investment under the equity method of accounting. At June 30, 2010, there was approximately $154.5 million of real estate assets under development related to Royal Island.

At June 30, 2010 and December 31, 2009, our recorded investment in VIEs that are unconsolidated and our maximum exposure to loss were as follows:

As of June 30, 2010

	Investments in Unconsolidated VIEs		Our Maximum Exposure to Loss
Tanglewood at Voss (1)	$	—	$	18,265
Alexan Black Mountain (1)	—		2,540
Royal Island (2)	22,932		67,367
	$	22,932	$	88,172

As of December 31, 2009

	Investment in Unconsolidated VIE		Our Maximum Exposure to Loss
Royal Island (2)	$	22,594	$	64,661

(1) We have no equity investment in either Tanglewood at Voss or Alexan Black Mountain. Our maximum exposure to loss is limited to the net outstanding balance of the notes receivable for Tanglewood at Voss and Alexan Black Mountain. Prior to January 1, 2010, we consolidated Tanglewood at Voss and Alexan Black Mountain.

(2) Our maximum exposure to loss for Royal Island is limited to the investment in the unconsolidated VIE of $22.9 million and $22.6 million as of June 30, 2010 and December 31, 2009, respectively, plus the net outstanding balance of the notes receivable for Royal Island of $44.4 million and $42.1 million as of June 30, 2010 and December 31, 2009, respectively.

9. Notes Receivable

Chase Park Plaza Working Capital Loan

We lease the hotel portion of the Chase Park Plaza property to the hotel operator, an unaffiliated entity that owns the remaining 5% of Chase Park Plaza. In conjunction with the lease agreement, we made a working capital and inventory loan of up to $1.9 million to the hotel operator in December 2006. The interest rate under the note is fixed at 5% per annum. The term of the note is the earlier of December 31, 2016 or the termination of the related hotel lease agreement. Annual payments of interest only are required each December with any remaining balance payable at the maturity date. In accordance with the hotel lease agreement, the tenant will receive a reduction in its base rental payment due in January in the amount of the interest paid on the promissory note in the previous December. This reduction in the lease payment is reflected as a straight-line adjustment to base rental revenue. At June 30, 2010, the note receivable balance was $1.9 million.

Tanglewood at Voss and Alexan Black Mountain Mezzanine Loans

In 2006, we agreed to provide secured mezzanine financing with an aggregate principal amount of up to $22.7 million to unaffiliated third-party entities that own Tanglewood at Voss and Alexan Black Mountain. These entities also have secured construction loans with third-party lenders, with an aggregate principal amount of $68.6 million at June 30, 2010. Our mezzanine loans are subordinate to the construction loans.

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At June 30, 2010, the carrying amount of the Tanglewood at Voss mezzanine loan was $18.3 million, which includes $5.3 million of interest and fees. The carrying amount of the Alexan Black Mountain mezzanine loan was $2.5 million, net of $11.1 million allowance for loan losses.

Royal Island Bridge Loan

In December 2007, we participated in a bridge loan financing arrangement for the continuing development and construction of Royal Island. The aggregate principal amount available under the bridge loan was $60 million consisting of three tranches. Under the bridge loan we agreed to lend a tranche of up to $40 million, which is subordinate to the other two tranches. The bridge loan accrued interest at the one-month LIBOR rate plus 8% per annum with accrued interest and principal payable at the maturity date, December 20, 2008, and is secured by the Royal Island property. In June 2009, we purchased the interest in the first of the two superior tranches, the A-1, for $3.1 million. In March 2010, we purchased the interest in two notes in the A-2 tranche for $2.2 million.

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

In January 2010, we collected $5.5 million in unpaid interest and fees from the borrower. At June 30, 2010, the loan balance owed to us was $44.4 million, which includes $1.5 million of accrued interest and fees included in receivables from related parties at June 30, 2010. We have not recorded an allowance against the recorded balance as our estimate of the fair value of the Royal Island property securing the bridge loan exceeds the current carrying value of the loan, and accordingly, we believe it is probable that all of the outstanding balance is collectible.

Current market conditions with respect to credit availability and to fundamentals within the real estate markets instill significant levels of uncertainty. Accordingly, future adverse developments in market conditions would cause us to re-evaluate our conclusions, regarding the collectability of our notes receivable and could result in material impairment charges.

10. Capitalized Costs

We capitalize interest, property taxes, insurance, and construction costs to real estate under development. During the six months ended June 30, 2010 we capitalized $2.7 million of such costs associated with real estate under development and certain investments accounted for by the equity method. During the six months ended June 30, 2009 we capitalized $6.7 million of such costs associated with real estate under development and certain investments accounted for by the equity method, including $1.2 million in interest costs. Capitalized interest costs include interest expense and amortization of deferred financing costs.

Certain redevelopment costs including interest, property taxes, insurance, and construction costs associated with Chase Park Plaza and The Lodge & Spa at Cordillera have been capitalized to condominium inventory on our consolidated balance sheet at June 30, 2010. During the six months ended June 30, 2010, we capitalized a total of $6 million of such costs associated with the condominium redevelopment at Chase Park Plaza and The Lodge & Spa at Cordillera. During the six months ended June 30, 2009, we capitalized a total of $5.1 million of such costs associated with the condominium redevelopment at Chase Park Plaza and The Lodge & Spa at Cordillera.

11. Notes Payable

Our notes payable balance was $352.1 million at June 30, 2010, as compared to $429.8 million at December 31, 2009 and consists of borrowings and assumptions of debt related to our property acquisitions and our borrowings under our $75 million senior secured credit facility. As of December 31, 2009, notes payable also included the notes payable of our mezzanine borrowers that we consolidated as variable interest entities under GAAP, Tanglewood at Voss and Alexan Black Mountain. In the first quarter of 2010, we deconsolidated the assets and liabilities of Tanglewood at Voss and Alexan Black Mountain, which include the notes payable of our mezzanine borrowers totaling $68.5 million. Each of our notes payable is collateralized by one or more of our properties. At June 30, 2010, our notes payable interest rates ranged from

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2.1% to 6.3%, with a weighted average interest rate of approximately 3.2%. Of our $352.1 million in notes payable at June 30, 2010, $312.8 million represented debt subject to variable interest rates. At June 30, 2010, our notes payable have maturity dates that range from July 2010 to January 2016. We have unconditionally guaranteed payment of the notes payable related to Frisco Square, Chase Park Plaza Hotel, Chase — Private Residences, Northborough Tower, Bent Tree Green, and Crossroads Office Park.

Santa Clara

The Santa Clara Tech Center property consists of three buildings: the 700, 750, and 800 buildings. The mortgage and mezzanine loans (collectively, the “Original Loans”) associated with the Santa Clara Tech Center matured on June 9, 2010. As of the maturity date, due to ongoing negotiations with an unaffiliated third party (the “Santa Clara JV Partner”) to create the joint ventures discussed below, we had not yet reached an agreement with the lender to extend the terms of the Original Loans and accordingly, we were granted a forbearance by the lender through August 5, 2010.

On August 5, 2010, concurrent with entering into two new joint ventures with the Santa Clara JV Partner, we reached an agreement with the lender to modify and extend the Original Loans in the following manner:

· The agreements associated with the Original Loans were severed and replaced by new loan agreements with the same lender by bifurcating the Original Loans into two new loans (the “Replacement Loans”) such that specific debt is associated with the 700 & 750 buildings separate from debt associated with the 800 building;

· The new joint ventures paid down the Original Loans’ balance by an aggregate $7 million, such that the balances of the Replacement Loans at inception was an aggregate of $45.5 million;

· The maturity date of the Replacement Loans is June 9, 2013; and

· The Replacement Loans require payment of interest only until maturity at a rate equal to:

· Replacement mortgage loans — either (i) the greater of 1% or the 30-day LIBOR, plus 4.75% (the “LIBOR Option”), or (ii) the prime rate plus the difference between the LIBOR Option and the prime rate; and

· Replacement mezzanine loans — either (i) the greater of 1% or the 30-day LIBOR, plus 8.5% (the “Mezzanine LIBOR Option”), or (ii) the prime rate plus the difference between the Mezzanine LIBOR Option and the prime rate.

As of June 30, 2010, the aggregate balance due under the Original Loans was $52.5 million. Following the August 5, 2010 modification and extension, the balance due under the Replacement Loans was an aggregate $45.5 million. There is no penalty for prepayment of the Replacement Loans, subject to certain conditions.

Further, on August 5, 2010, we entered into the following arrangements:

· We sold to the Santa Clara JV Partner a 50% interest in the Santa Clara Tech Center property for cash of $8.8 million.

· Concurrent with the sale, we entered into two new joint venture agreements with the Santa Clara JV Partner such that one joint venture holds the 700 and 750 buildings separate from the joint venture that holds the 800 building. We contributed our remaining 50% interest in the Santa Clara Tech Center along with $8.8 million of cash in exchange for 50% interests each of the two new joint ventures. The Santa Clara JV Partner also contributed $8.8 million of cash and their 50% interest in the Santa Clara Tech Center in exchange for their respective 50% interests. In addition, the Santa Clara JV Partner acquired separate preferred equity interests in the joint ventures for an aggregate of $7.5 million in cash. The joint venture agreements specify that all future capital needs of the joint ventures are to be funded pari passu to each partner’s respective interest in the joint ventures.

Our interests in the joint ventures are noncontrolling, unconsolidated interests which we expect to account for using the equity method of accounting. Accordingly, effective, August 5, 2010, we expect to deconsolidate the Santa Clara Tech Center property on our consolidated financial statements.

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Becket House

Our loan agreements generally stipulate that we comply with certain reporting and financial covenants. These covenants include among other things, notifying the lender of any change in management and maintaining minimum debt service coverage ratios. As a result of the difficult economic conditions negatively impacting both occupancy and rental rates at the Becket House, lease renewals and new leases have been executed at substantially lower rates per square foot, we were unable to meet certain financial covenants under the Becket House loan agreement as of June 30, 2010. In addition, in 2009 and 2008, we recognized impairment charges related to our leasehold interest in Becket House of $9.9 million and $6 million, respectively. Failure to meet the loan covenants under the loan agreement constitutes a technical default and, absent a waiver or modification of the loan agreement, the lender may accelerate maturity with any unpaid interest and principal immediately due and payable. At June 30, 2010, the outstanding principal balance of the Becket House loan was $17.6 million. 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. The Becket House loan is non-recourse to us.

Ferncroft

At Ferncroft Corporate Center (“Ferncroft”), our wholly owned eight-story office building located in Middleton, Massachusetts, our two largest tenants renewed their leases for additional terms but for a combined 60,000 square feet less than they previously occupied. As a result of this significant decrease in occupancy we are currently operating under a cash management arrangement in accordance with Ferncroft’s $18 million CMBS mortgage loan agreement. Accordingly, tenant rental payments are deposited in a restricted lockbox account. Therefore, we do not have direct access to these rental payments, and the disbursement of cash from the restricted lockbox account to us is at the discretion of the loan’s servicer. Furthermore, we have been unable to disburse cash from the restricted lockbox account to us in order to pay Ferncroft’s operating expenses. Not paying the operating expenses as they become due constitutes an event of default under the loan agreement. The Ferncroft loan is non-recourse to us. We are in negotiations with the servicer and there are several potential outcomes including a loan modification for us to retain ownership in return for additional capital commitments, a sale of the property to a third-party, or a deed-in-lieu of foreclosure. However, as of the date of this report we expect that the most likely outcome will be a deed-in-lieu of foreclosure. We remain the title holder on Ferncroft as of June 30, 2010, and as of the date of this report.

Credit Facility

In February 2008, we entered into a senior secured revolving credit facility providing for up to $75 million of secured borrowings. The initial credit facility allowed us to borrow up to $75 million in revolving loans, of which up to $20 million was available for issuing letters of credit. We have unconditionally guaranteed payment of the senior secured revolving credit facility. The availability of credit under the revolving credit facility is limited by the terms of the credit agreement. As of June 30, 2010, the maximum availability and the outstanding balance under the revolving credit facility was $69.1 million.

The following table summarizes our contractual obligations for principal payments as of June 30, 2010:

Principal Payments Due:
July 1, 2010 - December 31, 2010	$	140,739
2011	166,442
2012	8,070
2013	16,664
2014	361
Thereafter	18,883
Unamortized premium	910

	$	352,069

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12. Leasing Activity

Future minimum base rental payments due to us under non-cancelable leases in effect as of June 30, 2010 for our consolidated properties are as follows:

	Future Minimum Lease Payments
July 1, 2010 - December 31, 2010	$	16,454
2011	33,066
2012	27,313
2013	23,682
2014	16,252
Thereafter	37,836

Total	$	154,603

As of June 30, 2010, none of our tenants accounted for 10% or more of our aggregate annual rental revenues from our consolidated properties. Included in rental revenue for both the three and six months ended June 30, 2010 was less than $0.1 million of contingent rent. Approximately $0.1 million of contingent rent was included in rental revenue for both the three and six months ended June 30, 2009.

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

In December 2008, we entered into a foreign currency put/call option to hedge our net investment in Becket House. In April 2010, following a strategic review of our currency exposures, we early terminated this foreign currency put/call option. The foreign currency put/call option was originally scheduled to mature in November 2011. The early termination of this foreign currency put/call option resulted in net cash proceeds to us of $0.2 million.

Derivative instruments classified as assets were reported at their combined fair values of less than $0.1 million and $0.2 million in prepaid expenses and other assets at June 30, 2010 and December 31, 2009, respectively. Derivative instruments classified as liabilities were reported at their combined fair values of $1.4 million and $3.1 million in accrued and other liabilities at June 30, 2010 and December 31, 2009, respectively. During the six months ended June 30, 2010, we recorded an unrealized gain of $0.7 million to AOCI in our statement of equity to adjust the carrying amount of the interest rate swaps and caps qualifying as hedges at June 30, 2010. Unrealized losses on interest rate derivatives for the six months ended June 30, 2010 reflect a reclassification of unrealized losses from accumulated other comprehensive loss to interest expense of less than $0.1 million.

The following table summarizes the notional values of our derivative financial instruments as of June 30, 2010. The notional values provide an indication of the extent of our involvement in these instruments at June 30, 2010, but do not represent exposure to credit, interest rate, or market risks:

Type / Description	Notional Value		Interest Rate / Strike Rate			Maturity	Fair Value Asset / (Liability)
Cash Flow Hedges
Interest rate cap - Becket House	£	12,700	5.75		%	November 21, 2010	$	—
Interest rate swap - Crossroads	$	25,000	3.10		%	November 1, 2010	$	(285	)

Net Investment Hedge
Foreign currency put - Central Europe Joint Venture	€	17,000	€	1.10		July 28, 2010	$	2
Other
Interest rate swap - Chase Park Plaza Hotel	$	80,594	3.82		%	November 15, 2010	$	(1,163	)

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The table below presents the fair value of our derivative financial instruments as well as their classification on the consolidated balance sheets as of June 30, 2010 and December 31, 2009.

		Asset Derivatives				Liability Derivatives
	Balance Sheet Location	Fair Value at June 30, 2010		Fair Value at December 31, 2009		Fair Value at June 30, 2010			Fair Value at December 31, 2009
Derivatives designated as hedging instruments:

Interest rate derivative contracts	Accrued and other liabilities	$	—	$	—	$	(285	)	$	(611	)
Foreign exchange contracts	Prepaid expenses and other assets	2		204		—			—

Total derivatives designated as hedging instruments		$	2	$	204	$	(285	)	$	(611	)

Derivatives not designated as hedging instruments:

Interest rate derivative contract	Accrued and other liabilities	$	—	$	—	$	(1,163	)	$	(2,470	)

Total derivatives		$	2	$	204	$	(1,448	)	$	(3,081	)

The tables below present the effect of our derivative financial instruments on the consolidated statements of operations as of June 30, 2010 and 2009.

Derivatives in Cash Flow Hedging Relationships

	Amount of Gain or (Loss) Recognized in AOCI on Derivative (Effective Portion)				Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)(1)				Amount of Gain or (Loss) Recognized in AOCI on Derivative (Effective Portion)				Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)(1)
	Three months ended June 30,				Three months ended June 30,				Six months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009		2010		2009		2010		2009
Interest rate derivative contracts	$	389	$	671	$	—	$	17	$	719	$	597	$	45	$	216

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

Derivatives in Net Investment Hedging Relationships

	Amount of Gain or (Loss) Recognized in AOCI on Derivative (Effective Portion)					Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)(1)				Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
	Three months ended June 30,					Three months ended June 30,				Three months ended June 30,
	2010			2009		2010		2009		2010		2009
Foreign exchange contracts	$	(2,091	)	$	1,996	$	—	$	—	$	—	$	—

	Amount of Gain or (Loss) Recognized in AOCI on Derivative (Effective Portion)					Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)(1)				Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
	Six months ended June 30,					Six months ended June 30,				Six months ended June 30,
	2010			2009		2010		2009		2010		2009
Foreign exchange contracts	$	(3,477	)	$	210	$	—	$	—	$	—	$	—

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

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Derivatives Not Designated as Hedging Instruments

	Location of Gain or (Loss)	Amount of Gain or (Loss) Recognized in Income on Derivative				Amount of Gain or (Loss) Recognized in Income on Derivative
	Recognized in Income on	Three months ended June 30,				Six months ended June 30,
	Derivative	2010		2009		2010			2009
Interest rate derivative contract	Interest expense	$	—	$	575	$	(4	)	$	754

Credit risk and collateral

Our credit exposure related to interest rate and foreign currency derivative instruments is represented by the fair value of contracts with a net liability fair value at the reporting date. These outstanding instruments may expose us to credit loss in the event of nonperformance by the counterparties to the agreements. However, we have not experienced any credit loss as a result of counterparty nonperformance in the past. To manage credit risk, we select and will periodically review counterparties based on credit ratings and limit our exposure to any single counterparty. Under our agreements with the counterparty related to our interest rate caps of Santa Clara Tech Center and Chase — The Private Residences, cash deposits may be required to be posted by the counterparty whenever their credit rating falls below certain levels. Based on our agreement with the counterparty related to our interest rate swap of Crossroads Office Park, we may be required to post cash collateral of up to $0.6 million if the lender’s obligation to lend under our senior secured credit facility is terminated or the lender ceases to be a party to the senior secured credit facility; the value of the derivative is a liability on our consolidated balance sheet. At June 30, 2010, no collateral has been posted with our counterparties nor have our counterparties posted collateral with us related to our derivative instruments. See Notes 3 and 5 for further information on our derivative instruments.

14. Distributions

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

Prior to April 2, 2009, our Board declared daily distributions in advance of the period to which the distributions applied and the daily distributions were paid monthly in arrears. On April 2, 2009, our Board of Directors voted to declare distributions on a quarterly basis in arrears to generate significant cost savings to our stockholders. On July 19, 2010, our Board authorized a quarterly distribution in the amount of $0.025 per share of common stock, which is equivalent to an annual distribution of 1% assuming a $10 price per share, payable to the common stockholders of record at the close of business on June 30, 2010. The distribution will be paid on or before August 16, 2010.

15. Related Party Transactions

Behringer Opportunity Advisors I and certain of its affiliates receive fees and compensation in connection with the acquisition, management, and sale of our assets.

We pay Behringer Opportunity Advisors I or its affiliates a debt financing fee equal to 1% of the amount of any debt made available to us. We incurred no debt financing fees for the six months ended June 30, 2010. We incurred debt financing fees of $0.1 million for the six months ended June 30, 2009.

We pay HPT Management Services LP, Behringer Harvard Real Estate Services, LLC, or Behringer Harvard Opportunity Management Services, LLC (collectively, “BH Property Management”), affiliates of our advisor and our property managers, fees for management, leasing, and construction supervision of our properties, which may be subcontracted to unaffiliated third parties. Such fees are equal to 4.5% of gross revenues plus leasing commissions based upon the customary leasing commission applicable to the same geographic location of the respective property. In the event that we contract directly with a non-affiliated third-party property manager in respect of a property, we will pay BH Property Management an oversight fee equal to 0.5% of gross revenues of the property managed. In no event will we pay both a property management fee and an oversight fee to BH Property Management with respect to any particular property. We incurred and expensed property management fees or oversight fees totaling $0.8 million and $1 million in the six months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010, we incurred less than $0.1 million of construction management fees payable to BH Property Management. We did not incur any construction management fees to BH Property Management for the six months ended June 30, 2009.

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We pay Behringer Opportunity Advisors I an annual asset management fee of 0.75% of the aggregate asset value of acquired real estate. The fee is payable monthly in an amount equal to one-twelfth of 0.75% of the aggregate asset value as of the last day of the preceding month. For the six months ended June 30, 2010, we expensed $3.1 million of asset management fees. On July 19, 2010, Behringer Opportunity Advisors I deferred until September 30, 2010, our obligation to pay certain asset management fees totaling $0.5 million recognized for the three months ended June 30, 2010. For the six months ended June 30, 2009, we expensed $2.7 million of asset management fees and capitalized less than $0.1 million of asset management fees to real estate.

We will reimburse Behringer Opportunity Advisors I or its affiliates for all expenses paid or incurred by them in connection with the services they provide to us, including direct expenses and the costs of salaries and benefits of persons employed by those entities and performing services for us, subject to the limitation that we will not reimburse for any amount by which our advisor’s operating expenses (including the asset management fee) at the end of the four fiscal quarters immediately preceding the date reimbursement is sought exceeds the greater of: (1) 2% of our average invested assets or (2) 25% of our net income for that four quarter period other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and any gain from the sale of our assets for that period. Notwithstanding the preceding sentence, we may reimburse the advisor for expenses in excess of this limitation if a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the six months ended June 30, 2010 and 2009, we incurred and expensed costs for administrative services totaling $1 million and $0.9 million, respectively.

At June 30, 2010, we had a payable to our advisor and its affiliates of $0.9 million. This balance consists primarily of asset management fees and administrative service expenses payable to Behringer Opportunity Advisors I, management fees payable to BH Property Management, and other miscellaneous payables. This payable is partially offset by a receivable from our advisor and its affiliates of less than $0.1 million, which is included in receivables from related parties at June 30, 2010.

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

16. Stock-Based Compensation

The Behringer Harvard Opportunity REIT I, Inc. Amended and Restated 2004 Incentive Award Plan (“Incentive Award Plan”) was approved by our board of directors on July 19, 2005 and by our stockholders on July 25, 2005, and provides for equity awards to our directors and consultants and to employees, directors, and consultants of our affiliates. In November 2008, the board of directors approved an amendment to the grantees’ stock option agreements for all awards granted prior to December 31, 2007, setting forth a revised vesting and expiration schedule. Accordingly, all options granted prior to December 31, 2007 that were previously outstanding and fully vested are subject to the revised vesting and expiration schedule as follows: 25% become exercisable in each of the calendar years 2010 and 2011 with the remaining 50% exercisable in the calendar year 2012. Any vested awards not exercised in the calendar year specified are forfeited and no longer exercisable. We did not recognize any incremental compensation cost resulting from these modifications.

On June 22, 2009, we issued options to purchase 5,000 shares of our common stock at $8.17 per share to each of our three independent directors pursuant to the Incentive Award Plan. On July 24, 2008, we issued options to purchase 5,000 shares of our common stock at $9.50 per share to each of our three independent directors pursuant to the Incentive Award Plan. The options issued in both 2010 and 2009 become exercisable one year after the date of grant. As of June 30, 2010, options to purchase 69,583 shares of stock were outstanding, at a weighted average exercise price per share of $8.99. Of these outstanding shares, 39,896 are fully vested, at a weighted average exercise price per share of $8.90. The remaining contractual life of the outstanding options is 3.4 years. Compensation expense associated with our Incentive Award Plan was not material for the six months ended June 30, 2010 or 2009.

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Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

17. Supplemental Cash Flow Information

Supplemental cash flow information is summarized below.

	Six months ended June 30,
	2010		2009
Supplemental disclosure:
Interest paid, net of amounts capitalized	$	6,008	$	6,940

Non-cash investing activities:
Property and equipment additions and purchases of real estate in accrued liabilities	$	1,239	$	229
Capital expenditures for real estate under development in accounts payable and accrued liabilities	$	2,335	$	2,310
Amortization of deferred financing fees in properties under development	$	42	$	149

Non-cash financing activities:
Common stock issued in distribution reinvestment plan	$	3,815	$	3,008

*****

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

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

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include discussion and analysis of the financial condition of Behringer Harvard Opportunity REIT I, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including our ability to rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, the value of our assets, our anticipated capital expenditures, the amount and timing of anticipated future cash distributions to our stockholders, the estimated per share value of our common stock and other matters. Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2010 and the factors described below:

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

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

· a decrease in the level of participation under our distribution reinvestment plan;

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

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

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

· future increases in interest rates;

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

· impairment charges;

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

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

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

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

Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect 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 report on Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties or covenants

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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.

Executive Overview

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

As of June 30, 2010, we had invested in 22 assets: 11 consolidated wholly owned properties; five properties consolidated through investments in joint ventures, including two hotel and development properties and a mixed-use property; an investment in an island development accounted for under the equity method; an investment in a portfolio of 22 properties located in four Central European countries accounted for under the equity method; two investments in student housing projects in Texas and Virginia, also accounted for under the equity method; and two mezzanine loans on multifamily properties, which were consolidated prior to January 1, 2010. Our investment properties are located in Arizona, California, Colorado, Massachusetts, Minnesota, Missouri, Nevada, Texas, Virginia, the Commonwealth of The Bahamas, London, England, the Czech Republic, Poland, Hungary, and Slovakia.

Market Outlook

Beginning in 2008, the U.S. and global economies experienced a significant downturn. This downturn 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. Due to the struggling U.S. and global economies, overall demand across most real estate sectors including office, hospitality, and retail remains low due to losses in the financial and professional services industries and a U.S. unemployment rate of 10% throughout much of the second half of 2009. We believe that corresponding rental rates will also remain weak at least through the third quarter of 2010. The national vacancy percentage for office space increased from 14.5% in the fourth quarter of 2008 to 19.6% in the first quarter of 2010. Vacancies are expected to peak at around 20% in 2010. Further, we believe that tenant defaults and bankruptcies are likely to increase in the short-term. To date, we have not experienced any significant tenant defaults resulting in the loss of material rental income.

The hospitality industry continues to be negatively affected by the poor global economy. Smith Travel Research indicates that the national overall occupancy rate for hospitality properties in the United States declined from 53.1% in the fourth quarter of 2008 to 51.9% in the first quarter of 2010. The national overall Average Daily Rate (“ADR”) has also declined, from $103.43 in the fourth quarter of 2008 to $96.27 in the first quarter of 2010. This weakening of the hospitality industry is expected to continue throughout 2010 and is not expected to recover until 2011.

In the multifamily real estate sector, a limited new supply of multifamily assets is expected in the near future. Since high quality multifamily developments can take 18 months to 36 months to entitle, obtain necessary permits, and construct, we believe there will be an imbalance in supply and demand fundamentals for at least the next couple of years. As the economy improves, we expect renter demand and effective rents to increase in multifamily communities.

We have several projects in various stages of development including Rio Salado located in Phoenix, Arizona; Frisco Square located in Frisco, Texas; The Lodge & Spa at Cordillera located in Edwards, Colorado; and Royal Island, located in The Bahamas. Due in large part to the struggling U.S. and global economies, we have decided to defer further substantive development activities on these projects for the near term.

While it is unclear as to when the overall economy will recover, we do not expect conditions to improve significantly in the near future. Management expects that the current volatility in the capital markets will continue, at least in the short-term. This volatility has significantly impacted the availability of credit for borrowers. The Wall Street Journal reported in February 2010 that lending by U.S. banks fell by 7.4% in 2009 compared to the prior year, the largest decline in bank lending since 1942. These market conditions make it more difficult to refinance assets when their mortgages mature as well as impact our ability to access bank capital for leasing, tenant improvements, and other capital needs of our properties. Consequently, we may seek alternative sources of financing to achieve our investment objectives including using the proceeds from the sale of our properties and/or temporarily reducing or eliminating our quarterly dividend.

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Liquidity and Capital Resources

Our principal demands for funds for the next twelve months and beyond will be for the payment of costs associated with the lease-up of available space at our operating properties (including commissions, tenant improvements, and capital improvements), for certain ongoing costs at our development properties, for the payment of operating expenses and distributions, and for the payment of interest and principal on our outstanding indebtedness. Generally, cash needs for items other than costs associated with the lease-up of available space at our operating properties (including commissions, tenant improvements, and capital improvements) and ongoing costs at our development properties are expected to be met from operations and borrowings. In August 2010, Behringer Opportunity Advisors I deferred until March 31, 2011 our obligation to pay all asset management fees accruing during the months of May 2010 through October 2010 and all debt financing fees and expense reimbursements accruing during the months of July 2010 through October 2010. Also in August 2010, BH Property Management deferred until March 31, 2011 our obligation to pay property management oversight fees accruing during the months of July 2010 through October 2010.

We expect to fund our short-term liquidity requirements by using the short-term borrowings and cash flow from the operations of our current investments. Operating cash flows are expected to be flat due to rental revenue stabilizing on our operating properties combined with lower hotel revenues at The Lodge and Spa at Cordillera offset by anticipated condominium sales at The Private Residences at The Chase Park Plaza. For both our short-term and long-term liquidity requirements, other potential future sources of capital may include proceeds from secured or unsecured debt financing, asset dispositions, reduction or elimination of the amount of distributions paid, decreases in the amount of nonessential capital expenditures, deferral of fees paid to Behringer Harvard Opportunity Advisors I, further limitation on the payment of dividend redemptions, and undistributed funds from operations. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures.

Debt Financings

We may, from time to time, make mortgage, bridge, or mezzanine loans and other loans for investments or property development. We may obtain financing at the time an investment is made or at such later time as determined to be necessary, depending on multiple factors. Except as noted below, we believe that we were in compliance with the debt covenants under our loan agreements as of June 30, 2010.

Our notes payable decreased to $352.1 million at June 30, 2010 from $429.8 million at December 31, 2009 primarily as a result of the deconsolidation of Tanglewood at Voss and Alexan Black Mountain, effective January 1, 2010 (see Note 8 to our consolidated financial statements). Each of our loans is secured by one or more of our properties. At June 30, 2010, our notes payable interest rates ranged from 2.1% to 6.3%, with a weighted average interest rate of 3.2%. Generally, our notes payable mature at approximately two to ten years from origination and require payments of interest only for approximately two to five years, with all principal and interest due at maturity. Notes payable associated with our Northborough and Frisco Square investments require monthly payments of both principal and interest. At June 30, 2010, our notes payable had maturity dates that range from July 2010 to January 2016.

The commercial real estate debt markets have been experiencing and continue to experience volatility as a result of certain factors, including the tightening of underwriting standards by lenders and credit rating agencies. 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. Current economic conditions, as well as few unmortgaged assets, negatively impact our ability to finance capital needs through borrowings. Current market conditions also make it more difficult to refinance assets when their mortgages mature. In general, in the current market lenders have increased the amount of equity required to support either new or existing borrowings. Consequently, there is greater uncertainty regarding our ability to access the credit markets in order to attract financing on reasonable terms.

Except for selected sub-markets in the multifamily sector, capitalization rates (or cap rates) for real estate properties have generally increased. Cap rates and property prices move inversely so that an increase in cap rates should, absent an increase in property net operating income, result in a decrease in property value. Although this development is positive for new property acquisitions, the overall impact will likely be negative for us because we believe it will further strain our ability to finance our business using existing assets and to refinance debt on our existing assets because our properties may be viewed as less valuable.

As the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our developments and property contributions. This may result in our investment operations generating lower overall economic returns and a reduced level of cash flow, which could potentially impact our ability to make distributions to our stockholders at current levels. In addition, the recent dislocations in the debt markets have reduced the amount of capital that is available to finance real estate, which, in turn: (i) leads to a decline in real estate values generally; (ii) slows real estate transaction activity; (iii) reduces the loan to value upon which lenders are willing to extend debt; and, (iv) results in difficulty in refinancing debt as it becomes due, all of which may reasonably be expected to have a material adverse impact on the value of real estate investments and the revenues, income or cash flow from the acquisition and operations of real properties and mortgage loans. In addition, the current state of the debt markets has negatively impacted the ability to raise equity capital.

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If debt financing is not available on acceptable terms and conditions, we may not be able to refinance maturing debt or obtain financing for investments. Domestic and international financial markets have been experiencing and continue to experience unusual volatility and uncertainty. If this volatility and uncertainty persists, our ability to borrow monies, on acceptable terms and conditions, to finance the purchase of, or other activities related to, real estate assets will be significantly impacted. If we are unable to borrow monies on acceptable terms and conditions, we may find it difficult, costly or impossible to refinance indebtedness upon maturity. If interest rates are higher when the properties are refinanced, our cash flow from operating activities will be reduced. In addition, in the current market, lenders have increased the amount of equity required to support either new or existing borrowings.

Santa Clara

· The new joint ventures paid down the Original Loans’ balance by an aggregate $7 million, such that the balances of the Replacement Loans at inception was an aggregate of $45.5 million;

· The maturity date of the Replacement Loans is June 9, 2013; and

· The Replacement Loans require payment of interest only until maturity at a rate equal to:

Further, on August 5, 2010, we entered into the following arrangements:

· We sold to the Santa Clara JV Partner a 50% interest in the Santa Clara Tech Center property for cash of $8.8 million.

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Becket House

Our loan agreements generally stipulate that we comply with certain reporting and financial covenants. These covenants include, among other things, notifying the lender of any change in management and maintaining minimum debt service coverage ratios. As a result of the difficult economic conditions negatively impacting both occupancy and rental rates at the Becket House, which caused lease renewals and new leases to be executed at substantially lower rates per square foot, we were unable to meet certain financial covenants under the Becket House loan agreement as of June 30, 2010. In addition, in 2009 and 2008, we recognized impairment charges related to our leasehold interest in Becket House of $9.9 million and $6 million, respectively. Failure to meet the loan covenants under the loan agreement constitutes a technical default and, absent a waiver or modification of the loan agreement, the lender may accelerate maturity with any unpaid interest and principal immediately due and payable. At June 30, 2010, the outstanding principal balance of the Becket House loan was $17.6 million. 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. The Becket House loan is non-recourse to us.

Ferncroft

One of our principal long-term liquidity requirements includes the repayment of maturing debt, including borrowings under our senior secured credit facility discussed below. The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of June 30, 2010. The table does not represent any extension options.

	Payments Due by Period
	July 1, 2010 - December 31, 2010		2011-2012		2013-2014		After 2014		Total
Principal payments - fixed rate debt	$	144	$	2,300	$	17,025	$	18,883	$	38,352
Interest payments - fixed rate debt	1,164		4,543		2,979		1,166		9,852
Principal payments - variable rate debt	140,595		172,212		—		—		312,807
Interest payments - variable rate debt (based on rates in effect as of June 30, 2010)	3,929		2,912		—		—		6,841

Total	$	145,832	$	181,967	$	20,004	$	20,049	$	367,852

Included in the $140.6 million of principal payments — variable rate debt due in 2010, is $52.5 million related to Santa Clara Tech Center. On August 5, 2010, we reached an agreement with the lender to modify and extend the Santa Clara note payable to June 9, 2013. Notes payable related to Chase Park Plaza Hotel of $77.5 million, and Chase — The Private Residences of $9.7 million are scheduled to mature in 2010. The loan agreements for Chase Park Plaza Hotel and Chase — The Private Residences provide us with two one-year options to extend the maturity dates of the notes payable, subject to certain conditions. In the second half of 2010, we expect to further pay down the outstanding balance on the note payable related to Chase — The Private Residences through proceeds from the sale of the condominium unit currently under contract or reserved as of June 30, 2010. We are in discussions with the respective lenders to extend the maturity date or refinance these loans. If we are unable to reach a satisfactory arrangement with the lenders or are unable to extend the maturity dates under the loan agreements, we could go into default under the respective loan

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agreements. Consequently, we may seek other lenders to refinance the notes payable or seek alternative sources of funding, including the use of proceeds from the sale of our properties.

Credit Facility

On February 13, 2008, we entered into a senior secured revolving credit facility (the “Credit Agreement”) providing for up to $75 million of secured borrowings with Bank of America, as lender and administrative agent, and other lending institutions that become a party to the Credit Agreement. The credit facility is secured by a first lien on all real property assets in a collateral pool consisting of five wholly owned properties. Loans under the credit facility bear interest at an annual rate that is equal to a combination of (i) the LIBOR plus an applicable margin that, depending upon the debt service coverage ratio, may vary from 1.5% to 1.7%, or (ii) the prime rate plus an applicable margin that, depending upon the debt service coverage ratio, may vary from 0% to 0.2%. The credit facility matures on February 13, 2011. We have two options to extend the maturity date for a period of twelve months each upon meeting certain condition under the Credit Agreement.

We have unconditionally guaranteed payment of the senior secured revolving credit facility. The availability of credit under the senior secured credit facility is limited by the terms of the Credit Agreement. As of June 30, 2010, the maximum availability and outstanding balance under the senior secured credit facility was $69.1 million. The proceeds of the senior secured credit facility have been used to fund ongoing costs at our development and operating properties and for general corporate purposes. Our ability to fund our liquidity requirements are expected to come from the cash and cash equivalents on the consolidated balance sheet totaling $5.6 million as of June 30, 2010 and additional amounts that may become available under our senior secured credit facility. As necessary, we may seek alternative sources of financing including using the proceeds from the sale of our properties and temporarily reducing or eliminating our quarterly distribution to achieve our investment objectives.

As of June 30, 2010, restricted cash on the consolidated balance sheet of $7.3 million includes amounts held in lockbox accounts related to Ferncroft Corporate Center of $1.1 million and amounts set aside as interest reserves totaling $3.1 million. The remaining balance of $3.1 million includes amounts set aside related to certain operating properties for tenant improvement and commission reserves, tax reserves, maintenance and capital expenditures reserves, and other amounts as may be required by our lenders.

Joint Venture Indebtedness

We have noncontrolling, unconsolidated ownership investments in three properties and one investment in a joint venture consisting of 22 properties. Our effective ownership percentages range from 30% to 50%. We exercise significant influence over, but do not control, these entities and therefore they are presently accounted for using the equity method of accounting. As of June 30, 2010, the aggregate debt held by unrelated parties, including both ours and our partners’ share, incurred by these ventures was approximately $147.1 million.

The table below summarizes the outstanding debt of these properties as of June 30, 2010.

	Venture		Interest Rate
	Ownership		(as of		Carrying		Maturity
Properties	%		June 30, 2010)		Amount		Date

GrandMarc at the Corner	50	%	5.06	%	$	27,089	January 1, 2020
GrandMarc at Westberry Place	50	%	4.99	%	37,772		January 1, 2020
Central Europe Joint Venture	47	%	2.31	%(1)	82,255		March 1, 2012(2)
Total					$	147,116

(1) Represents the weighted average interest rate of the various notes payable secured by the 22 properties in the Central Europe Joint Venture.

(2) Represents the weighted average maturity date of the various notes payable secured by the 22 properties in the Central Europe Joint Venture.

Results of Operations

As of June 30, 2010, we had invested in 22 assets: 11 consolidated wholly owned properties; five properties consolidated through investments in joint ventures, including two hotel and development properties and a mixed-used property; an investment in an island development accounted for under the equity method; an investment in a portfolio of 22 properties located in four Central European countries accounted for under the equity method; two investments in student housing projects in Texas and Virginia, also accounted for under the equity method; and two mezzanine loans on multifamily properties, which we consolidated prior to January 1, 2010. Our investment properties are located in Arizona, California,

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Colorado, Massachusetts, Minnesota, Missouri, Nevada, Texas, Virginia, the Commonwealth of The Bahamas, London, England, the Czech Republic, Poland, Hungary, and Slovakia.

As a result of new accounting guidance regarding the accounting and disclosure requirements for the consolidation of variable interest entities, on January 1, 2010, we deconsolidated the assets and liabilities of Tanglewood at Voss and Alexan Black Mountain along with the associated revenue and expenses.

Three months ended June 30, 2010 as compared to three months ended June 30, 2009

	Three months ended June 30,				Increase (Decrease)
	2010		2009		Amount			Percent
Revenue:
Rental revenue	$	12,213	$	15,755	$	(3,542	)	-22	%
Hotel revenue	815		674		141			21	%
Condominium sales	2,207		8,109		(5,902		)	-73	%
Interest income from notes receivable	476		—		476			n/a
Total revenues	$	15,711	$	24,538	$	(8,827	)	-36	%

Expenses:
Property operating expenses	$	5,066	$	6,870	$	(1,804	)	-26	%
Cost of condominium sales	2,417		8,178		(5,761		)	-70	%
Interest expense	3,555		4,057		(502		)	-12	%
Real estate taxes	1,934		2,125		(191		)	-9	%
Impairment charge	—		2,732		(2,732		)	n/a
Property management fees	528		599		(71		)	-12	%
Asset management fees	1,641		1,441		200			14	%
General and administrative	1,337		1,668		(331		)	-20	%
Depreciation and amortization	5,834		7,251		(1,417		)	-20	%
Total expenses	$	22,312	$	34,921	$	(12,609	)	-36	%

Revenues. Our total revenues decreased by $8.8 million to $15.7 million for the three months ended June 30, 2010 as compared to $24.5 million for the three months ended June 30, 2009. The change in revenues is primarily due to:

· a decrease in rental revenue of $3.5 million to $12.2 million for the three months ended June 30, 2010. The decrease in rental revenue is primarily due to $1.2 million related to the deconsolidation of Tanglewood at Voss and Alexan Black Mountain, a decrease in revenue related to Chase Park Plaza of $1.1 million, a decrease in rental revenue from Ferncroft of $0.8 million, and a decrease in revenue from Becket House of $0.4 million. We expect rental revenue to be flat in 2010 due to slowing lease-up of available space at our operating properties and moderating rental rates on rollover of existing leases in the current weak economy;

· hotel revenues for the three months ended June 30, 2010 totaled $0.8 million as compared to $0.7 million for the three months ended June 30, 2009, and consisted of revenues generated by the operations of The Lodge & Spa at Cordillera. The increase in hotel revenues is primarily due to an increase in occupancy from 22% for 2009 to 50.5% for 2010;

· condominium sales of $2.2 million for the three months ended June 30, 2010 as compared to $8.1 million for the three months ended June 30, 2009. We closed on the sale of one condominium unit at The Private Residences at The Chase Park Plaza during the three months ended June 30, 2010. We closed on the sale of 11 condominium units at The Private Residences at The Chase Park Plaza during the three months ended June 30, 2009; and

· interest income from notes receivable of $0.5 million for the three months ended June 30, 2010 as compared to no interest income from notes receivable for the three months ended June 30, 2009. This increase is due to $0.5 million earned on the Tanglewood at Voss mezzanine loan.

Property Operating Expenses. Property operating expenses for the three months ended June 30, 2010 were $5.1 million as compared to $6.9 million for the three months ended June 30, 2009, and were comprised of operating expenses from our consolidated properties. The decrease in property operating expenses was primarily due to $0.7 million related to reduced service charges on Becket House consistent with reduced occupancy and $0.5 million related to the deconsolidation of the Tanglewood at Voss and Alexan Black Mountain properties (see Note 8 to our consolidated financial statements).

Cost of Condominium Sales. Cost of condominium sales, relating to the sale of condominium units at The Private Residences at The Chase Park Plaza, for the three months ended June 30, 2010 were $2.4 million as compared to $8.2 million

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for the three months ended June 30, 2009. The decrease is due to the sale of one condominium unit for the three months ended June 30, 2010 as compared to the sales of 11 condominium units for the three months ended June 30, 2009.

Interest Expense. Interest expense for the three months ended June 30, 2010 was $3.6 million as compared to $4.1 million for the three months ended June 30, 2009 and was primarily due to the decrease in notes payable balances related to the deconsolidation of Tanglewood at Voss and Alexan Black Mountain (see Note 8 to our consolidated financial statements). Our total notes payable at June 30, 2010 was $352.1 million as compared to $433.2 million at June 30, 2009. Other items contributing to the decrease in interest expense were a decrease on the Becket House note payable of $0.3 million related to a decrease in the average interest rate, offset by an increase of $0.1 million related to a higher weighted average balance on our revolving credit facility.

Real Estate Taxes. Real estate taxes, net of amounts capitalized, for the three months ended June 30, 2010 were $1.9 million as compared to $2.1 million for the three months ended June 30, 2009 and were comprised of real estate taxes from each of our consolidated properties. The decrease in real estate taxes is primarily due to the deconsolidation of the Tanglewood at Voss and Alexan Black Mountain properties. We expect increases in real estate taxes in the future as available space at our operating properties is leased-up.

Impairment charge. We did not recognize any impairment charges for the three months ended June 30, 2010. We recognized a $2.7 million non-cash impairment charge for the three months ended June 30, 2009, related to our leasehold interest, Becket House.

Property Management Fees. Property management fees for the three months ended June 30, 2010 were $0.5 million as compared to $0.6 million for the three months ended June 30, 2009 and were comprised of fees incurred by our consolidated properties. We expect increases in property management fees in the future as available space at our operating properties is leased-up.

Asset Management Fees. Asset management fees for the three months ended June 30, 2010 totaled $1.6 million as compared to $1.4 million for the three months ended June 30, 2009 and were comprised of fees incurred by our consolidated properties. We expect asset management fees to stabilize in the future.

General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2010 totaled $1.3 million, as compared to $1.7 million for the three months ended June 30, 2009 and were comprised of corporate general and administrative expenses, including directors’ and officers’ insurance premiums, auditing fees, legal fees and other administrative expenses.

Depreciation and Amortization Expense. Depreciation and amortization expense for the three months ended June 30, 2010 was $5.8 million as compared to $7.3 million for the three months ended June 30, 2009 and was comprised of depreciation and amortization of our consolidated properties. The decrease in depreciation and amortization expense was primarily due to the deconsolidation of the Tanglewood at Voss and Alexan Black Mountain properties (see Note 8 to our consolidated financial statements).

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Six months ended June 30, 2010 as compared to six months ended June 30, 2009

	Six months ended June 30,				Increase (Decrease)
	2010		2009		Amount			Percent
Revenue:
Rental revenue	$	24,544	$	31,581	$	(7,037	)	-22	%
Hotel revenue	2,049		1,498		551			37	%
Condominium sales	25,564		11,929		13,635			114	%
Interest income from notes receivable	6,434		—		6,434			n/a
Total revenues	$	58,591	$	45,008	$	13,583		30	%

Expenses:
Property operating expenses	$	10,994	$	13,557	$	(2,563	)	-19	%
Cost of condominium sales	25,937		12,020		13,917			116	%
Interest expense	7,233		8,191		(958		)	-12	%
Real estate taxes	3,759		4,435		(676		)	-15	%
Impairment charge	4,230		2,732		1,498			55	%
Provision for loan losses	7,136		—		7,136			n/a
Property management fees	1,087		1,199		(112		)	-9	%
Asset management fees	3,103		2,779		324			12	%
General and administrative	2,598		2,984		(386		)	-13	%
Depreciation and amortization	11,582		15,014		(3,432		)	-23	%
Total expenses	$	77,659	$	62,911	$	14,748		23	%

Revenues. Our total revenues increased by $13.6 million to $58.6 million for the six months ended June 30, 2010 as compared to $45 million for the six months ended June 30, 2009. The change in revenues is primarily due to:

· a decrease in rental revenue of $7 million to $24.5 million for the six months ended June 30, 2010. The decrease in rental revenue is primarily due to $2.3 million related to the deconsolidation of Tanglewood at Voss and Alexan Black Mountain, a decrease in revenue related to Chase Park Plaza of $2.1 million, a decrease in rental revenue from Ferncroft of $1.5 million, and a decrease in revenue from Becket House of $1.2 million. We expect rental revenue to be flat in 2010 due to slowing lease-up of available space at our operating properties and moderating rental rates on rollover of existing leases in the current weak economy;

· hotel revenues for the six months ended June 30, 2010 totaled $2 million as compared to $1.5 million for the six months ended June 30, 2009, and consisted of revenues generated by the operations of The Lodge & Spa at Cordillera. The increase in hotel revenues is primarily due to an increase in occupancy from 22% for 2009 to 50.5% for 2010;

· condominium sales of $25.6 million for the six months ended June 30, 2010 as compared to $11.9 million for the six months ended June 30, 2009. We closed on the sale of 12 condominium units at an average price of $2.1 million each at The Private Residences at The Chase Park Plaza during the six months ended June 30, 2010. We closed on the sale of 16 condominium units at an average price of $0.7 million each at The Private Residences at The Chase Park Plaza during the six months ended June 30, 2009; and

· interest income from notes receivable of $6.4 million for the six months ended June 30, 2010 as compared to no interest income from notes receivable for the six months ended June 30, 2009. This increase is primarily due to the $5.5 million of interest received from the Royal Island borrowers and $0.9 million earned on the Tanglewood at Voss mezzanine loan.

Property Operating Expenses. Property operating expenses for the six months ended June 30, 2010 were $11 million as compared to $13.6 million for the six months ended June 30, 2009, and were comprised of operating expenses from our consolidated properties. The decrease in property operating expenses was primarily due to $0.9 million related to reduced service charges on Becket House consistent with reduced occupancy and $1.1 million related to the deconsolidation of the Tanglewood at Voss and Alexan Black Mountain properties (see Note 8 to our consolidated financial statements).

Cost of Condominium Sales. Cost of condominium sales, relating to the sale of condominium units at The Private Residences at The Chase Park Plaza, for the six months ended June 30, 2010 were $25.9 million as compared to $12 million for the six months ended June 30, 2009. We closed on the sale of 12 condominium units at an average cost of $2.1 million each at The Private Residences at The Chase Park Plaza during the six months ended June 30, 2010. We closed on the sale of

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16 condominium units at an average cost of $0.7 million each at The Private Residences at The Chase Park Plaza during the six months ended June 30, 2009

Interest Expense. Interest expense for the six months ended June 30, 2010 was $7.2 million as compared to $8.2 million for the six months ended June 30, 2009 and was primarily due to the decrease in notes payable balances related to the deconsolidation of Tanglewood at Voss and Alexan Black Mountain (see Note 8 to our consolidated financial statements). Our total notes payable at June 30, 2010 was $352.1 million as compared to $433.2 million at June 30, 2009. Other items contributing to the decrease in interest expense were a decrease of $0.6 million related to a paydown of $8.7 million on the note payable related to Chase Park Plaza, offset by an increase of $0.3 million on The Private Residences at Chase Park Plaza due to a reduction in interest capitalization as construction of the condominiums is completed.

Real Estate Taxes. Real estate taxes, net of amounts capitalized, for the six months ended June 30, 2010 were $3.8 million as compared to $4.4 million for the six months ended June 30, 2009 and were comprised of real estate taxes from each of our consolidated properties. The decrease in real estate taxes is primarily due to the deconsolidation of the Tanglewood at Voss and Alexan Black Mountain properties. We expect increases in real estate taxes in the future as available space at our operating properties is leased-up.

Impairment charge. We recognized a $4.2 million non-cash impairment charge during the first quarter of 2010 related to our office property, Ferncroft Corporate Center. For the six months ended June 30, 2009, we recognized an impairment charge of $2.7 million related to our lease-hold interest, Becket House.

Provision for loan losses. During the first quarter of 2010, we recorded a $7.1 million provision for loan losses to reflect our current estimate of potential loan loss. The provision for loan losses relates to the Alexan Black Mountain mezzanine loan. There were no such provisions or reserves recorded for the first or second quarter of 2009 as we did not consolidate this asset.

Property Management Fees. Property management fees for the six months ended June 30, 2010 were $1.1 million as compared to $1.2 million for the six months ended June 30, 2009 and were comprised of fees incurred by our consolidated properties. We expect increases in property management fees in the future as available space at our operating properties is leased-up.

Asset Management Fees. Asset management fees for the six months ended June 30, 2010 totaled $3.1 million as compared to $2.8 million for the six months ended June 30, 2009 and were comprised of fees incurred by our consolidated properties. We expect asset management fees to stabilize in the future.

General and Administrative Expenses. General and administrative expenses for the six months ended June 30, 2010 were $2.6 million as compared to $3 million for the six months ended June 30, 2009 and were comprised of corporate general and administrative expenses, including directors’ and officers’ insurance premiums, auditing fees, legal fees and other administrative expenses.

Depreciation and Amortization Expense. Depreciation and amortization expense for the six months ended June 30, 2010 was $11.6 million as compared to $15 million for the six months ended June 30, 2009 and was comprised of depreciation and amortization of our consolidated properties. The decrease in depreciation and amortization expense was primarily due a decrease in depreciation and amortization expense of $1.2 million related to a write-off at Ferncroft, and to $1.6 million related to the deconsolidation of the Tanglewood at Voss and Alexan Black Mountain properties (see Note 8 to our consolidated financial statements).

Cash Flow Analysis

Cash flows provided by operating activities for the six months ended June 30, 2010 were $17.1 million and were comprised primarily of a decrease in condominium inventory of $19.1 million, provision for loan losses of $7.1 million, an impairment charge to our Ferncroft property of $4.2 million, and depreciation and amortization expense of $10.2 million, offset by the net loss of $20.4 million, and an increase in accrued and other liabilities of $3.2 million. Cash flows provided by operating activities for the six months ended June 30, 2009 were $5.3 million and were comprised primarily of the net loss of $19.5 million offset by a decrease in condominium inventory of $6 million and depreciation and amortization expense of $12.7 million.

Cash flows used in investing activities for the six months ended June 30, 2010 were $8 million and primarily represent investment in notes receivable of $3.3 million and capital expenditures for real estate under development of $3.7 million. Cash flows used in investing activities for the six months ended June 30, 2009 were $23.8 million and primarily represent capital expenditures for real estate under development, including capital expenditures of consolidated borrowers totaling $9.4 million, investment in notes receivable of $5.1 million, and additions of property and equipment of $5 million.

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Cash flows used in financing activities for the six months ended June 30, 2010 were $10.2 million and were comprised primarily of payments on notes payable of $21.6 million, offset by net borrowings on our senior secured revolving credit facility of $6.5 million, and proceeds from notes payable of $7 million. Cash flows provided by financing activities for the six months ended June 30, 2009 were $13.5 million and were comprised primarily of net borrowings on our senior secured revolving credit facility of $8.6 million and proceeds from notes payable of $16.4 million, offset by payments on notes payable of $11.7 million.

Funds from Operations and Modified Funds from Operations

Funds from operations (“FFO”) is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We use FFO, defined by the National Association of Real Estate Investment Trusts as net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures, subsidiaries, and noncontrolling interests as one measure to evaluate our operating performance. In addition to FFO, we use modified funds from operations (“Modified Funds from Operations” or “MFFO”), which excludes from FFO acquisition-related costs, impairment charges and adjustments to fair value for derivatives not qualifying for hedge accounting, to further evaluate our operating performance.

Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO and MFFO, together with the required GAAP presentations, provide a more complete understanding of our performance.

We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year over year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which is not immediately apparent from net income. We believe that MFFO is helpful to our investors and our management as a measure of operating performance because it excludes costs that management considers more reflective of investing activities and other non-operating items included in FFO. By providing FFO and MFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term, core operating activities. We believe fluctuations in MFFO are indicative of changes in operating activities and provide comparability in evaluating our performance over time and as compared to other real estate companies that may not have acquisition activities or derivatives or be affected by impairments.

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

· Impairment charges. An impairment charge represents a downward adjustment to the carrying amount of a long-lived asset to reflect the current valuation of the asset even when the asset is intended to be held long-term. Such adjustment, when properly recognized under GAAP, may lag the underlying consequences related to rental rates, occupancy and other operating performance trends. The valuation is also based, in part, on the impact of current market fluctuations and estimates of future capital requirements and long-term operating performance that may not be directly attributable to current operating performance. Because MFFO excludes impairment charges, management believes MFFO provides useful supplemental information by focusing on the changes in our operating fundamentals rather than changes that may reflect only anticipated losses.

· Adjustments to fair value for derivatives not qualifying for hedge accounting. Management uses derivatives in the management of our debt and interest rate exposure. We do not intend to speculate in these interest rate derivatives and accordingly period-to-period changes in derivative valuations are not primary factors in management’s decision-making process. We believe by excluding the gains or losses from these derivatives, MFFO provides useful supplemental information on the realized economic impact of the hedges independent of short-term market fluctuations.

· Acquisition-related costs. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analysis differentiate costs to acquire the investment from the operations derived from the investment. Prior to 2009, acquisition costs for these types of investments were capitalized; however, beginning in 2009 acquisition costs related to business combinations are expensed. We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of our real estate investments and is consistent with management’s analysis of the investing and operating performance of our properties.

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FFO or MFFO should not be considered an alternative to net income (loss) or an indication of our liquidity. Neither is indicative of funds available to fund our cash needs, including our ability to make distributions, and each should be reviewed in connection with other GAAP measurements. Our FFO and MFFO may not be comparable to presentations by other REITs.

Our calculation of FFO and MFFO for the three and six months ended June 30, 2010 and 2009 is presented below (amounts in thousands, except per share amounts):

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009

Net loss	$	(7,204	)	$	(11,850	)	$	(20,362	)	$	(19,503	)
Net loss attributable to noncontrolling interest	237			2,756			601			5,077
Adjustments for:
Real estate depreciation and amortization per income statement	5,834			7,251			11,582			15,014
Pro rata share of unconsolidated JV depreciation and amortization (1)	1,109			1,230			2,271			2,421
Noncontrolling interest depreciation & amortization(2)	(129		)	(1,022		)	(261		)	(2,022		)

Funds from operations (FFO)	$	(153	)	$	(1,635	)	$	(6,169	)	$	987

Other Adjustments:
Impairment charge(3)	—			2,732			4,230			2,732
Noncontrolling interest share of impairment charge	—			(546		)	—			(546		)
Gain on derivatives not designated as hedging instruments	—			(575		)	(4		)	(754		)
Noncontrolling interest share of gain on derivatives not designated as hedging instruments	—			29			1			38

MFFO	$	(153	)	$	5		$	(1,942	)	$	2,457

GAAP weighted average shares:
Basic and diluted	56,203			55,211			56,127			55,122

MFFO per share	$	0.00		$	0.00		$	(0.03	)	$	0.04

(1) This represents the depreciation and amortization expense of our share of depreciation and amortization expense of the properties which we account for under the equity method of accounting.

(2) This reflects the noncontrolling interest adjustment for the third-party partners’ proportionate share of the real estate depreciation and amortization.

(3) Includes the portion of the provision for loan loss as applicable to the principal amount of the loan.

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

· Straight-line rental revenue of $0.5 million and $1.8 million was recognized for the three and six months ended June 30, 2010, respectively. Straight-line rental revenue of $0.6 million and $1.1 million was recognized for the three and six months ended June 30, 2009, respectively.

· Amortization of intangible lease assets and liabilities was recognized as a net increase to rental revenues of $0.7 million and $1.4 million for the three and six months ended June 30, 2010, respectively. Amortization of intangible lease assets and liabilities was recognized as a net increase to rental revenues of $1.2 million and $2.4 million for the three and six months ended June 30, 2009, respectively.

· Amortization of intangible property tax abatement assets was recognized as an increase to real estate tax expense of $0.1 million and $0.2 million for the three and six months ended June 30, 2010, respectively. Amortization of intangible property tax abatement assets was recognized as an increase to real estate tax expense of $0.1 million and $0.2 million for the three and six months ended June 30, 209, respectively.

· Amortization of deferred financing costs of $0.7 million and $1.4 million was recognized as interest expense for mortgages and notes payable for the three and six months ended June 30, 2010, respectively; and $0.2 million and $0.4 million was recognized as a reduction of interest income for the three and six months ended June 30, 2010, respectively. Amortization of deferred financing costs of $0.8 million and $1.6 million was recognized as

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interest expense for mortgages and notes payable for the three and six months ended June 30, 2009, respectively; and $0.2 million and $0.4 million was recognized as a reduction of interest income for the three and six months ended June 30, 2009, respectively.

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

As noted above, we believe FFO and MFFO are helpful to investors and our management as a measure of operating performance. FFO and MFFO are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and MFFO.

Distributions

Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous period, expectations of performance for future periods, including actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial condition, and other factors that our board deems relevant. The board’s decision will be influenced, in substantial part, by its obligation to ensure that we maintain our status as a REIT. In light of the pervasive and fundamental disruptions in the global financial and real estate markets, we cannot provide assurance that we will be able to achieve expected cash flows necessary to continue to pay distributions at any particular level, or at all. Our board may determine to reduce our current distribution rate or cease paying distributions in order to conserve cash.

Cash amounts distributed to stockholders during the six months ended June 30, 2010 was $1.8 million. For the six months ended June 30, 2010, cash flows provided by operating activities was $16.5 million. Accordingly, for the six months ended June 30, 2010, cash flow from operations exceeded cash amounts distributed to stockholders by $14.7 million. Cash amounts distributed to stockholders during the six months ended June 30, 2009 were $1.4 million. For the six months ended June 30, 2009, cash flows provided by operating activities were $5.3 million. Accordingly, for the six months ended June 30, 2009, cash flow from operations exceeded cash amounts distributed to stockholders by $3.9 million.

The following are the distributions paid and declared for the three and six months ended June 30, 2010 and 2009.

							Total		Declared
	Distributions Paid						Distributions		Distribution
2010	Cash		Reinvested		Total		Declared		Per Share
Second Quarter	$	460	$	943	$	1,403	$	1,406	$	0.025
First Quarter	1,316		2,872		4,188		1,405		0.025
	$	1,776	$	3,815	$	5,591	$	2,811	$	0.050

							Total		Declared
	Distributions Paid						Distributions		Distribution
2009	Cash		Reinvested		Total		Declared		Per Share
Second Quarter	$	372	$	1,032	$	1,404	—		—
First Quarter	1,047		3,017		4,064		4,070		0.075
	$	1,419	$	4,049	$	5,468	$	4,070	$	0.075

On April 2, 2009, our Board of Directors voted to declare dividends on a quarterly basis rather than a monthly basis, thus generating significant administrative cost savings to our shareholders, and to determine and pay future distributions in arrears rather than in advance of the period to which they apply. On July 19, 2010, our Board of Directors authorized a quarterly distribution in the amount of $0.025 per share of common stock, which is equivalent to an annual distribution of 1% assuming a $10 price per share. The distribution is payable to the common stockholders of record at the close of business on June 30, 2010. The distribution was paid on August 10, 2010.

Operating performance cannot be accurately predicted due to numerous factors, including the financial performance of our investments in the current real estate environment, the types and mix of investments in our portfolio and the accounting treatment of our investments in accordance with our accounting policies. As a result, future distributions declared and paid may continue to exceed cash flow from operating activities.

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Share Redemption Plan

Our board of directors has authorized a share redemption program for stockholders who have held their shares for more than one year. On March 30, 2009, our board of directors suspended, until further notice, redemptions other than those submitted in respect of a stockholder’s death, disability or confinement to a long-term care facility. On May 11, 2009 and November 9, 2009, our board of directors approved certain amendments to the program related to the per share redemption price. In the second quarter ended June 30, 2010, we redeemed 52,899 shares of common stock.

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. We evaluate these estimates, including investment impairment, on a regular basis. These estimates will be based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

Below is a discussion of the accounting policies that we consider will be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

Principles of Consolidation and Basis of Presentation

Real Estate

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

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

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improvements are depreciated over the estimated useful life of 15 years, and furniture, fixtures, and equipment are depreciated over estimated useful lives ranging from five to seven years using the straight-line method.

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

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

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

Investment Impairments

For real estate we wholly own, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable. When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset. In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value. We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. While we believe our estimates of future cash flows are reasonable, different assumptions regarding such factors as market rents, economies, and occupancies could significantly affect these estimates.

We also evaluate our investments in unconsolidated joint ventures at each reporting date and if we believe there is an other than temporary decline in market value we will record an impairment charge based on these evaluations. We assess potential impairment by comparing our portion of estimated future undiscounted operating cash flows expected to be generated by the joint venture over the life of the joint venture’s assets to the carrying amount of the joint venture. In the event that the carrying amount exceeds our portion of estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the joint venture to its estimated fair value.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Risk

For our net investments in foreign real estate properties, we use British pound and Euro foreign currency forward exchange contracts and foreign currency put/call options to eliminate the impact of foreign currency movements on our financial position. At June 30, 2010, our foreign currency derivative contracts were reported at their fair value of less than $0.1 million within prepaid expenses and other assets in our consolidated balance sheet. A 10% increase in the respective forward foreign currency - US dollar exchange rate would result in a less than $0.1 million decrease in fair value. A 10% decrease in the respective forward foreign currency - US dollar exchange rate would result in a $0.3 million increase in fair value.

We maintain less than $0.1 million in Euro-denominated accounts at European financial institutions. Accordingly, we are not materially exposed to any significant foreign currency fluctuations related to these accounts. We do not enter into derivatives for trading or speculative purposes, nor do we maintain any market risk sensitive instruments for trading or speculative purposes.

Interest Rate Risk

We may be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments. Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we will borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps, or floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate portion of our variable rate debt. Of our $352.1 million in notes payable at June 30, 2010, $312.8 million represented debt subject to variable interest rates. If our variable interest rates increased 100 basis points, we estimate that

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total annual interest cost, including interest expensed, interest capitalized, and the effects of the interest rate caps and swaps, would increase by $0.6 million.

At June 30, 2010, interest rate swaps classified as liabilities were reported at their combined fair values of $1.4 million in other liabilities at June 30, 2010. A 100 basis point decrease in interest rates would result in a less than $0.1 million net decrease in the fair value of our interest rate caps and swaps. A 100 basis point increase in interest rates would result in a $1 million net increase in the fair value of our interest rate caps and swaps.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of June 30, 2010, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2010, to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

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

Changes in Internal Control over Financial Reporting

There has been no change in internal control over financial reporting that occurred during the quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

During the period covered by this quarterly report, there were no material developments related to the legal proceedings related to the Skokoses disclosed in our quarterly report for the period ended March 31, 2010.

Item 1A. Risk Factors.

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2009.

Item 2. Unregistered Sales of Equity Securities

Public Offering of Common Stock

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

Share Redemption Program

Our board of directors has adopted a share redemption program that permits stockholders to sell their shares back to us after they have held them for at least one year, subject to the significant conditions and limitations of the program. Our board of directors can amend the provisions of our share redemption program without the approval of our stockholders. The terms on which we redeem shares may differ between redemptions upon a stockholder’s death, “qualifying disability” (as defined in the share redemption program) or confinement to a long-term care facility (collectively referred to herein as “Exceptional Redemptions”) and all other redemptions (referred to herein as “Ordinary Redemptions”). On March 30, 2009, our board of directors voted to accept all redemption requests submitted during the first quarter of 2009 from stockholders who submitted requests for Exceptional Redemptions. However, the board determined to not accept and suspend until further notice redemptions other than Exceptional Redemptions. The purchase price for shares redeemed under the redemption program is set forth below.

In the case of Ordinary Redemptions, the purchase price per share will equal 90% of (i) the most recently disclosed estimated value per share (the “Valuation”) as determined in accordance with our valuation policy (the “Valuation Policy”), less (ii) the aggregate distributions per share of any net sale proceeds from the sale of one or more of our assets, or other special distributions so designated by our board of directors, distributed to stockholders after the Valuation was determined (the “Valuation Adjustment”); provided, however, that the purchase price per share shall not exceed: (1) prior to the first valuation conducted by the board of directors, or a committee thereof (the “Initial Board Valuation”), under the Valuation Policy, 90% of (i) average price per share the original purchaser or purchasers of shares paid to us for all of his or her shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock) (the “Original Share Price”) less (ii) the aggregate distributions per share of any net sale proceeds from the sale of one or more of our assets, or other special distributions so designated by the board of directors, distributed to stockholders prior to the redemption date (the “Special Distributions”); or (2) on or after the Initial Board Valuation, the Original Share Price less any Special Distributions.

In the case of Exceptional Redemptions, the purchase price per share will be equal to: (1) prior to the Initial Board Valuation, the Original Share Price less any Special Distributions; or (2) on or after the Initial Board Valuation, the most recently disclosed Valuation less any Valuation Adjustment, provided, however, that the purchase price per share may not exceed the Original Share Price less any Special Distributions.

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

Any shares approved for redemption will be redeemed on a periodic basis as determined from time to time by our board of directors, and no less frequently than annually. We will not redeem, during any twelve-month period, more than 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption. Generally, the cash available for redemption on any particular date will be limited to the proceeds from the DRP during the period consisting of the preceding four fiscal quarters for which financial statements are available, less any cash already used for redemptions during the same period, plus, if we had positive operating cash flow during such preceding four fiscal quarters, 1% of all operating cash flow during such preceding four fiscal quarters. The redemption limitations apply to all redemptions, whether Ordinary or Exceptional Redemptions.

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On January 8, 2010, our board of directors established a new estimated per share value of $8.03 pursuant to the Valuation Policy, adjusted from the previous per share value of $8.17. Thus, in accordance with the share redemption program as amended and restated, as of January 15, 2010, the per share redemption price for Exceptional Redemptions will be the lesser of (a) $8.03, which is the valuation disclosed above, less the Valuation Adjustment, and (b) the average price per share that investor paid for his shares less any Special Distributions.

For all other ordinary redemptions, the per share redemption price will be the lesser of (1) $7.23, which is 90% of the valuation disclosed above, less any Valuation Adjustment and (2) 90% of the average price per share that the investor paid for his shares less any Special Distributions. However, as previously disclosed, we have suspended redemptions other than Exceptional Redemptions until further notice.

During the second quarter ended June 30, 2010, we redeemed shares as follows:

2010	Total Number of Shares Redeemed	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Be Purchased Under the Plans or Programs
April	—	$	—	—
May	52,899	$	8.03	52,899		(1)
June	—	$	—	—

	52,899	$	8.03	52,899		(1)

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

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved)

Item 5. Other Information.

On August 9, 2010, we entered into a letter agreement with Behringer Harvard Opportunity Advisors I pursuant to which Behringer Harvard Opportunity Advisors I deferred until March 31, 2011 our obligation to pay all asset management fees accruing during the months of May 2010 through October 2010 and all debt financing fees and expense reimbursements accruing during the months of July through October 2010.

In addition, on August 9, 2010, we entered into a letter agreement with HPT Management Services, LLC (“HPT”), Behringer Harvard Real Estate Services, LLC (“BHRES”) and Behringer Harvard Opportunity Management Services, LLC (“BHOMS” and collectively with HPT and BHRES, “BH Property Management”) and our operating partnership, Behringer Harvard Opportunity OP I LP, pursuant to which BH Property Management deferred until March 31, 2011 our obligation to pay property management oversight fees accruing during the months of July 2010 through October 2010.

Item 6. Exhibits.

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

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SIGNATURE

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

	Behringer Harvard Opportunity REIT I, Inc.


Dated: August 12, 2010	By:	/s/ Gary S. Bresky
	Gary S. Bresky
	Chief Financial Officer
	(Principal Financial Officer)

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Index to Exhibits

Exhibit Number		Description

3.1		Second Articles of Amendment and Restatement of the Registrant (previously filed in and incorporated by reference to Form 8-K, filed on July 29, 2008)

3.2		Amended and Restated Bylaws of the Registrant (previously filed in and incorporated by reference to Form 8-K filed on March 11, 2010)

4.1		Third Amended and Restated Distribution Reinvestment Plan (previously filed in and incorporated by reference to Form 10-Q filed on November 13, 2009)

10.1		Letter Agreement, dated July 19, 2010, between Behringer Harvard Opportunity REIT I, Inc. and Behringer Harvard Opportunity Advisors I, LLC (previously filed in and incorporated by reference to Form 8-K filed on July 22, 2010)

10.2*		Letter Agreement, dated August 9, 2010, between Behringer Harvard Opportunity REIT I, Inc. and Behringer Harvard Opportunity Advisors I, LLC

10.3*		Letter Agreement, dated August 9, 2010, between Behringer Harvard Opportunity REIT I, Inc., HPT Management Services, LLC, Behringer Harvard Real Estate Services, LLC, Behringer Harvard Opportunity Management Services, LLC, and Behringer Harvard Opportunity OP I, LP

31.1*		Rule 13a-14(a)/15d-14(a) Certification

31.2*		Rule 13a-14(a)/15d-14(a) Certification

32.1*(1)		Section 1350 Certifications

99.1		Third Amended and Restated Share Redemption Program (previously filed and incorporated by reference to Form 10-Q filed on November 13, 2009)

99.2		Amended and Restated Policy for Estimation of Common Stock Value (previously filed and incorporated by reference to form 8-K filed on June 22, 2009)

*filed herewith

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

Behringer Harvard Opportunity REIT I, Inc. - FORM 10-Q - August 12, 2010

Attached files

Behringer Harvard Opportunity REIT I, Inc. Reports