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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[Mark One]

 

x

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

 

For the quarterly period ended September 30, 2010

 

OR

 

o

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

 

For the transition period from               to               

 

Commission File Number: 000-53195

 

Behringer Harvard Multifamily REIT I, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland

 

20-5383745

(State or other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

15601 Dallas Parkway, Suite 600, Addison, Texas 75001

(Address of Principal Executive Offices) (ZIP Code)

 

(866) 655-3600

(Registrant’s Telephone Number, Including Area Code)

 

None

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

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

 

As of October 31, 2010, the Registrant had 97,447,335 shares of common stock outstanding.

 

 

 



Table of Contents

 

BEHRINGER HARVARD MULTIFAMILY REIT I, INC.

Form 10-Q

Quarter Ended September 30, 2010

 

 

 

Page

 

 

 

PART 1
FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

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

3

 

 

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009

4

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2010 and the year ended December 31, 2009

5

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

61

 

 

 

Item 4.

Controls and Procedures

62

 

 

 

PART II
OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

63

 

 

 

Item 1A.

Risk Factors

63

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

63

 

 

 

Item 3.

Defaults Upon Senior Securities

65

 

 

 

Item 4.

(Removed and Reserved)

65

 

 

 

Item 5.

Other Information

65

 

 

 

Item 6.

Exhibits

66

 

 

 

Signature

67

 

2



Table of Contents

 

Behringer Harvard Multifamily REIT I, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Assets

 

 

 

 

 

Real estate:

 

 

 

 

 

Land

 

$

88,940

 

$

39,100

 

Buildings and improvements

 

364,663

 

121,363

 

 

 

453,603

 

160,463

 

Less accumulated depreciation

 

(9,323

)

(1,484

)

Total real estate, net

 

444,280

 

158,979

 

 

 

 

 

 

 

Investments in unconsolidated real estate joint ventures

 

326,595

 

279,859

 

Cash and cash equivalents

 

64,086

 

77,540

 

Deferred financing costs, net

 

3,758

 

834

 

Receivables from affiliates

 

292

 

258

 

Intangibles, net

 

20,248

 

1,205

 

Other assets, net

 

9,796

 

7,047

 

Total assets

 

$

869,055

 

$

525,722

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Mortgage loans payable

 

$

93,508

 

$

51,300

 

Credit facility payable

 

20,000

 

 

Payables to affiliates

 

320

 

2,278

 

Distributions payable

 

4,636

 

3,248

 

Accrued offering costs payable to affiliates

 

2,654

 

1,411

 

Deferred lease revenues and other related liabilities, net

 

16,153

 

15,197

 

Tenant security deposits and prepaid rent

 

781

 

405

 

Accounts payable and other liabilities

 

12,136

 

866

 

Total liabilities

 

150,188

 

74,705

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, $.0001 par value per share; 125,000,000 shares authorized, none outstanding

 

 

 

Non-participating, non-voting convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 shares issued and outstanding

 

 

 

Common stock, $.0001 par value per share; 875,000,000 shares authorized, 94,811,198 and 57,098,265 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively

 

10

 

5

 

Additional paid-in capital

 

823,256

 

486,880

 

Cumulative distributions and net loss

 

(104,399

)

(35,868

)

Total stockholders’ equity

 

718,867

 

451,017

 

Total liabilities and stockholders’ equity

 

$

869,055

 

$

525,722

 

 

See Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

Behringer Harvard Multifamily REIT I, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Rental revenues

 

$

9,389

 

$

538

 

$

21,152

 

$

538

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Property operating expenses

 

2,828

 

139

 

6,045

 

139

 

Real estate taxes

 

1,500

 

67

 

2,819

 

67

 

Asset management and other fees

 

1,020

 

492

 

3,736

 

1,037

 

General and administrative expenses

 

1,144

 

889

 

3,304

 

2,263

 

Acquisition expenses

 

3,203

 

2,791

 

8,734

 

2,791

 

Interest expense

 

1,748

 

 

3,819

 

 

Depreciation and amortization

 

6,534

 

351

 

13,881

 

374

 

Total expenses

 

17,977

 

4,729

 

42,338

 

6,671

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

285

 

409

 

1,026

 

684

 

Equity in earnings (loss) of investments in unconsolidated real estate joint ventures

 

(2,074

)

(79

)

(8,038

)

2,135

 

Net loss

 

$

(10,377

)

$

(3,861

)

$

(28,198

)

$

(3,314

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

91,300

 

36,678

 

78,512

 

26,867

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share

 

$

(0.11

)

$

(0.11

)

$

(0.36

)

$

(0.12

)

 

See Notes to Consolidated Financial Statements.

 

4



Table of Contents

 

Behringer Harvard Multifamily REIT I, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands)

(Unaudited)

 

 

 

Convertible Stock

 

Common Stock

 

Additional

 

Cumulative

 

Total

 

 

 

Number

 

Par

 

Number

 

Par

 

Paid-in

 

Distributions

 

Stockholders’

 

 

 

of Shares

 

Value

 

of Shares

 

Value

 

Capital

 

and Net Loss

 

Equity

 

Balance at January 1, 2009

 

1

 

$

 

15,348

 

$

1

 

$

117,268

 

$

(4,875

)

$

112,394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

(8,305

)

(8,305

)

Sales of common stock, net

 

 

 

41,129

 

4

 

363,332

 

 

363,336

 

Redemptions of common stock

 

 

 

(304

)

 

(2,512

)

 

(2,512

)

Distributions declared on common stock

 

 

 

 

 

 

(22,688

)

(22,688

)

Stock issued pursuant to Distribution Reinvestment Plan, net

 

 

 

925

 

 

8,792

 

 

8,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2009

 

1

 

 

57,098

 

5

 

486,880

 

(35,868

)

451,017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

(28,198

)

(28,198

)

Sales of common stock, net

 

 

 

36,773

 

5

 

326,405

 

 

326,410

 

Redemptions of common stock

 

 

 

(1,216

)

 

(10,515

)

 

(10,515

)

Distributions declared on common stock

 

 

 

 

 

 

(40,333

)

(40,333

)

Stock issued pursuant to Distribution Reinvestment Plan, net

 

 

 

2,156

 

 

20,486

 

 

20,486

 

Balance at September 30, 2010

 

1

 

$

 

94,811

 

$

10

 

$

823,256

 

$

(104,399

)

$

718,867

 

 

See Notes to Consolidated Financial Statements.

 

5



Table of Contents

 

Behringer Harvard Multifamily REIT I, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

For the Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(28,198

)

$

(3,314

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Equity in (earnings) loss of investments in unconsolidated real estate joint ventures

 

8,038

 

(2,135

)

Distributions received from investments in unconsolidated real estate joint ventures

 

5,426

 

4,474

 

Depreciation

 

7,838

 

220

 

Amortization of intangibles

 

4,669

 

77

 

Amortization of deferred financing costs

 

1,374

 

78

 

Amortization of deferred lease revenues and other related liabilities

 

(1,032

)

28

 

Changes in operating assets and liabilities:

 

 

 

 

 

Deferred lease revenues and other related liabilities

 

1,988

 

 

Accounts payable and other liabilities

 

1,725

 

1,053

 

Other assets

 

(275

)

(338

)

Accounts receivable

 

(189

)

 

Payables to affiliates

 

 

204

 

Accrued interest on note receivable

 

(166

)

(146

)

Cash provided by operating activities

 

1,198

 

201

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Acquisition of and additions to real estate

 

(288,516

)

(123,095

)

Investments in unconsolidated real estate joint ventures

 

(140,033

)

(57,322

)

Issuances of note receivable

 

 

(2,183

)

Escrow deposits

 

(1,712

)

 

Return of investments in unconsolidated real estate joint ventures

 

78,886

 

3,449

 

Other

 

47

 

(166

)

Cash used in investing activities

 

(351,328

)

(179,317

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from sales of common stock

 

366,490

 

263,421

 

Proceeds from financings, net:

 

 

 

 

 

Mortgage proceeds

 

15,820

 

 

Mortgage principal payments

 

(387

)

 

Mortgage financing costs

 

(370

)

 

Proceeds from credit facility, net:

 

 

 

 

 

Credit facility proceeds

 

87,000

 

 

Credit facility payments

 

(67,000

)

 

Credit facility financing costs

 

(2,640

)

 

Offering costs paid

 

(38,955

)

(35,795

)

Distributions on common stock paid in cash

 

(18,470

)

(7,583

)

Redemptions of common stock

 

(4,812

)

(1,184

)

Cash provided by financing activities

 

336,676

 

218,859

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(13,454

)

39,743

 

Cash and cash equivalents at beginning of period

 

77,540

 

23,771

 

Cash and cash equivalents at end of period

 

$

64,086

 

$

63,514

 

 

See Notes to Consolidated Financial Statements.

 

6



Table of Contents

 

Behringer Harvard Multifamily REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1.             Organization and Business

 

Organization

 

Behringer Harvard Multifamily REIT I, Inc. (which, together with its subsidiaries as the context requires, may be referred to as the “Company,” “we,” “us,” or “our”) was organized in Maryland on August 4, 2006 and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes. As a REIT, we generally are not subject to corporate-level income taxes.  To maintain our REIT status, we are required, among other requirements, to distribute annually at least 90% of our “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to our stockholders.  If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates.  As of September 30, 2010, we believe we are in compliance with all applicable REIT requirements.

 

We invest in and operate high quality multifamily communities. These multifamily communities include conventional multifamily assets, such as mid-rise, high-rise, and garden style properties, and may also include student housing and age-restricted properties, typically requiring residents to be age 55 or older.  Our targeted communities include existing “core” properties that are already stabilized and producing rental income as well as more opportunistic properties in various phases of development, redevelopment, lease up or repositioning.  Further, we may invest in other types of commercial real estate, real estate-related securities, mortgage, bridge, mezzanine or other loans and Section 1031 tenant-in-common interests, or in entities that make investments similar to the foregoing.  We completed our first investment in April 2007 and, as of September 30, 2010, we have made wholly owned or joint venture investments in 30 multifamily communities of which 21 are stabilized operating properties and nine are in various stages of lease up.  We have made and intend to continue making investments both in wholly owned investments and through co-investment arrangements with other participants (“Co-Investment Ventures”).

 

We have no employees and are supported by related party service agreements. We are externally managed by Behringer Harvard Multifamily Advisors I, LLC (“Behringer Harvard Multifamily Advisors I” or the “Advisor”), a Texas limited liability company. The Advisor is responsible for managing our affairs on a day-to-day basis and for identifying and making real estate investments on our behalf.  Substantially all our business is conducted through our indirectly wholly owned operating partnership, Behringer Harvard Multifamily OP I LP, a Delaware limited partnership (“Behringer Harvard Multifamily OP I”). Our wholly owned subsidiary, BHMF, Inc., a Delaware corporation (“BHMF Inc.”) owns less than 0.1% of Behringer Harvard Multifamily OP I as its sole general partner. The remaining ownership interest in Behringer Harvard Multifamily OP I is held as a limited partner’s interest by our wholly owned subsidiary BHMF Business Trust, a Maryland business trust.

 

Offerings of our Common Stock

 

On November 22, 2006, we commenced a private offering pursuant to Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) to sell a maximum of approximately $400 million of common stock to accredited investors (the “Private Offering”).  We terminated the Private Offering on December 28, 2007.  We sold a total of approximately 14.2 million shares of common stock and raised a total of approximately $127.3 million in gross offering proceeds in the Private Offering. Net proceeds after selling commissions, dealer manager fees, and other offering costs were approximately $114.3 million.

 

On September 5, 2008, we commenced our initial public offering (the “Initial Public Offering”) of up to 200 million shares of common stock offered at a price of $10.00 per share pursuant to a Registration Statement on Form S-11 filed under the Securities Act.   The Initial Public Offering also covered the registration of up to an additional 50 million shares of common stock at a price of $9.50 per share pursuant to our distribution reinvestment plan (“DRIP”).  We reserve the right to reallocate shares of our common stock between the primary offering and our DRIP.  As of September 30, 2010, we have sold a total of approximately 82.1 million shares of common stock and raised a total of approximately $817.4 million in gross offering proceeds in the Initial Public Offering. Net proceeds, after selling commissions, dealer manager fees, and other offering costs were approximately $721.8 million.  On June 29, 2010, our board of directors approved an extension of the Initial Public Offering until no later than September 2, 2011.

 

7



Table of Contents

 

Our common stock is not currently listed on a national securities exchange. However, management anticipates within four to six years after the termination of our Initial Public Offering to begin the process of either listing the common stock on a national securities exchange or liquidating our assets, depending on then-prevailing market conditions.

 

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 31, 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 from this report.

 

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet and consolidated statement of stockholders’ equity as of September 30, 2010 and consolidated statements of operations and cash flows for the periods ended September 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 present fairly our consolidated financial position as of September 30, 2010 and our consolidated results of operations and cash flows for the periods ended September 30, 2010 and 2009. Such adjustments are of a normal recurring nature.

 

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

 

3.             Summary of Significant Accounting Policies

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates include such items as: the purchase price allocations for real estate acquisitions; impairment of long-lived assets, notes receivable and equity-method real estate investments; fair value evaluations; revenue recognition of note receivable interest income and equity in earnings of investments in unconsolidated real estate joint ventures; depreciation and amortization; and allowance for doubtful accounts.  Actual results could differ from those estimates.

 

Principles of Consolidation and Basis of Presentation

 

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

 

There are judgments and estimates involved in determining if an entity in which we will make an investment or have made an investment will be a VIE and if so, if we will be the primary beneficiary. The entity will be 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. There are some guidelines as to what the minimum equity at risk should be, but the percentage can vary depending upon factors such as the type of financing, status of operations and entity structure and it will be up to our Advisor to determine that minimum percentage as it relates to our business and the facts surrounding each of our acquisitions. In addition, even if the entity’s equity at risk is a large percentage, our Advisor will be required to evaluate the equity at risk compared to the entity’s expected future losses to determine if there could still in fact be sufficient equity in 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 using a discount rate to determine the net present value of those future losses and allocating those losses between the equity owners, subordinated lenders or other variable interests. The determination will also be based on an evaluation of the voting and other rights of owners and other parties to determine if the

 

8



Table of Contents

 

equity interests possess minimum governance powers.  The evaluation will also consider the relation of these parties’ rights to their economic participation in benefits or obligation to absorb losses.  As partnership and other governance agreements have various terms which may change over time or based on future results, these evaluations require complex analysis and weighting of different factors. A change in the judgments, assumptions, allocations and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment on the equity method that should in fact be consolidated, the effects of which could be material to our results of operations and financial condition.

 

For VIEs and other investments, we must evaluate whether we have control of an entity. Such evaluation involves judgments in determining if provisions in governing agreements provide control of activities that will impact the entity.  Such review includes an evaluation as to whether the governing provisions are protective or participating rights for us, our Co-Investment Ventures or other equity owners. This evaluation includes an assessment of multiple terms as to their economic effect to the operations of the entity, how relevant the terms are to the recurring operations of the entity and the weighing of each item to determine in the aggregate which owner, if any, has control. These assessments would affect whether an entity should be consolidated or reported on the equity method, the effects of which could be material to our results of operations and financial condition.

 

Real Estate and Other Related Intangibles

 

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

 

The fair value of any tangible assets acquired, expected to consist of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, buildings and improvements.  Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods.  Buildings are depreciated over their estimated useful lives ranging from 25 to 35 years using the straight-line method.  Improvements are depreciated over their estimated useful lives ranging from 3 to 15 years using the straight-line method.  When we acquire rights to use land or improvements through contractual rights rather than fee simple interests, we determine the value of the use of these assets based on the relative fair value of the assets after considering the contractual rights and the fair value of similar assets. Assets acquired under these contractual rights are classified as intangibles and amortized on a straight-line basis over the shorter of the contractual term or the estimated useful life of the asset. Contractual rights related to land or air rights that are substantively separated from depreciating assets are amortized over the life of the contractual term or, if no term is provided, are classified as indefinite-lived intangibles.  Indefinite-lived intangible assets are evaluated at each reporting period to determine whether the indefinite useful life is appropriate.

 

We determine the value of in-place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant.  The aggregate value of in-place leases and tenant relationships was determined by applying a fair value model.  The estimates of fair value of in-place leases includes an estimate of carrying costs during the expected lease-up periods for the respective units considering current market conditions.  In estimating fair value of in-place leases, we consider items such as real estate taxes, insurance, leasing commissions, legal expenses, tenant improvements and other operating expenses to execute similar deals as well as projected rental revenue and carrying costs during the expected lease-up period.  The estimate of the fair value of tenant relationships also includes our estimate of the likelihood of renewal.

 

We 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) estimates of current market lease rates for the corresponding in-place leases, measured over a period equal to (1) the remaining non-cancelable lease term for above-market leases, or (2) the remaining non-cancelable lease term plus any fixed rate renewal options for below-market leases. We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the above determined lease term.

 

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We amortize the value of in-place leases acquired to expense over the remaining term of the leases. The value of tenant relationship intangibles will be amortized to expense over the initial term and any anticipated renewal periods, but in no event will the amortization period for intangible assets exceed the remaining depreciable life of the building.  Intangible lease assets are classified as intangibles and intangible lease liabilities are recorded within deferred lease revenues and other related liabilities.

 

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

 

Initial valuations are subject to change until our information is finalized, which is no later than 12 months from the acquisition date.  We have had no significant valuation changes for acquisitions prior to September 30, 2010.

 

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

 

For properties wholly owned by us or our Co-Investment Ventures, including all related intangibles, 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 including its eventual disposition, to the carrying amount of the asset.  In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value.  In addition, we evaluate indefinite-lived intangible assets for possible impairment at least annually by comparing the fair values with the carrying values.  Fair value is generally estimated by valuation of similar assets.

 

For real estate we own through an investment in an unconsolidated real estate joint venture or other similar real estate investment structure, at each reporting date we compare the estimated fair value of our real estate investment to the carrying value.  An impairment charge is recorded to the extent the fair value of our real estate investment is less than the carrying amount and the decline in value is determined to be other than a temporary decline.  We did not record any impairment losses for the three or nine months ended September 30, 2010 or 2009.

 

Cash and Cash Equivalents

 

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

 

Notes Receivable

 

We and our Co-Investment Ventures report notes receivable at their outstanding principal balances net of any unearned income and unamortized deferred fees and costs. Loan origination fees and certain direct origination costs are generally deferred and recognized as adjustments to interest income over the lives of the related loans.  Included within other assets are notes receivable of $4.1 million and $4.0 million as of September 30, 2010 and December 31, 2009, respectively.

 

In accounting for notes receivable by us or our Co-Investment Ventures, we evaluate whether the investments are loans, investments in joint ventures or acquisitions of real estate. In addition, we evaluate whether the loans contain any rights to participate in expected residual profits, provide sufficient collateral or qualifying guarantees or include other characteristics of a loan. As a result of our review, neither our wholly owned loan nor the loans made through our Co-Investment Ventures contain a right to participate in expected residual profits. In addition, the project borrowers remain obligated to pay principal and interest due on the loan with sufficient collateral, reserves or qualifying guarantees.

 

Notes receivables are assessed for impairment in accordance with applicable GAAP.  Based on specific circumstances, we determine whether it is probable that there has been an adverse change in the estimated cash flows of the contractual payments for the notes receivable. We then assess the impairment based on the probability of collecting all contractual amounts. If the impairment is probable, we recognize an impairment loss equal to the difference between our or the Co-Investment Venture’s investment in the note receivable and the present value of the estimated cash flows discounted at the note receivable’s effective interest rate. Where we have the intent and the ability to foreclose on our security interest in the property, we will use the collateral’s fair value as a basis for the impairment.

 

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There are judgments involved in determining the probability for an impairment to collect contractual amounts. As these types of notes receivable are generally investment specific based on the particular loan terms and the underlying project characteristics, there is usually no secondary market to evaluate impairments. Accordingly, we must rely on our subjective judgments and individual weightings of the specific factors. If notes receivable are considered impaired, then judgments and estimates are required to determine the projected cash flows for the notes receivable, considering the borrower’s or, if applicable, the guarantor’s financial condition and the consideration and valuation of the secured property and any other collateral. Changes in these facts or in our judgments and assessments of these facts could result in impairment losses which could be material to our consolidated financial statements.

 

Investments in Unconsolidated Real Estate Joint Ventures

 

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

 

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

 

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

 

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

 

Deferred Financing Costs

 

Deferred financing costs are recorded at cost and are amortized to interest expense using a straight-line method that approximates the effective interest method over the life of the related debt.

 

Revenue Recognition

 

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

 

Acquisition Costs

 

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

 

Organization and Offering Costs

 

Our Advisor is obligated to pay all of our Initial Public Offering and Private Offering organization and offering costs and we are required to make reimbursements in accordance with the Advisory Management Agreement, as amended.  Organization expenses are expensed as incurred.  Offering costs are recognized based on estimated amounts probable of reimbursement and are offset against additional paid-in capital.

 

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Redemptions of Common Stock

 

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

 

Income Taxes

 

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

 

We have evaluated the current and deferred income tax related to state taxes, where we do not have a REIT exemption, and we have no significant tax liability or benefit as of September 30, 2010 or December 31, 2009.

 

We recognize the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. As of September 30, 2010, we have no significant uncertain tax positions.

 

Concentration of Credit Risk

 

We invest our cash and cash equivalents among several banking institutions and money market accounts in an attempt to minimize exposure to any one of these entities.  As of September 30, 2010 and December 31, 2009, we had cash and cash equivalents deposited in certain financial institutions in excess of federally-insured levels.  We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents.

 

Income (Loss) per Share

 

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

 

The Behringer Harvard Multifamily REIT I, Inc. Amended and Restated 2006 Incentive Award Plan (“Incentive Award Plan”) authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards.  A total of 10 million shares has been authorized and reserved for issuance under the Incentive Award Plan.  As of September 30, 2010, no options have been issued.  For the nine months ended September 30, 2010 and 2009, 6,000 shares of the restricted stock have been included in the basic and dilutive earnings per share calculation.

 

As of September 30, 2010 and December 31, 2009, we had 1,000 shares of convertible stock issued and outstanding, no shares of preferred stock issued and outstanding, and had no options to purchase shares of common stock outstanding.  The convertible stock is not included in the dilutive earnings per share because the shares of convertible stock do not participate in earnings and would currently not be convertible into any common shares, if converted.

 

Reportable Segments

 

Our current business consists of investing in and operating multifamily communities. Substantially all of our consolidated net income is from investments in real estate properties that we wholly own or own through Co-Investment Ventures, the latter of which we account for under the equity method of accounting. Our management evaluates operating performance on an individual investment

 

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level. However, as each of our investments has similar economic characteristics in our consolidated financial statements, the Company is managed on an enterprise-wide basis with one reportable segment.

 

Fair Value

 

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

 

As of September 30, 2010, we believe the carrying values of cash and cash equivalents, receivables and payables from affiliates and credit facility payable approximate their fair values based on their highly-liquid nature and/or short-term maturities, including prepayment options. As of September 30, 2010, we estimate the fair value of our mortgage loans payable at $99.0 million, compared to its carrying value of $93.5 million.  As of September 30, 2009, we had no mortgage loans payable.  As of September 30, 2010 and December 31, 2009, we had no significant assets or liabilities measured at fair value on a recurring or nonrecurring basis.  We estimate fair values for financial instruments based on interest rates with similar terms and remaining maturities that management believes we could obtain.

 

Reclassification

 

Certain financial information from the previous fiscal year has been revised to conform to the current year presentation. This revision to the historical presentation does not reflect a material change to the information presented in the Consolidated Balance Sheets.  As of December 31, 2009, in order to combine the immaterial amount, we combined note and other receivables of approximately $4.0 million into the “Other assets, net” caption.

 

4.             New Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued an amendment to the authoritative guidance on the consolidation of variable interest entities.  This 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.  This guidance 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 in evaluating whether an entity is a variable interest entity.  This guidance was applicable to us beginning January 1, 2010.  The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

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5.             Real Estate Investments

 

We make real estate investments through entities wholly owned by us or through unconsolidated real estate joint ventures.  As of September 30, 2010, we had eight wholly owned real estate investments and 22 investments in unconsolidated real estate joint ventures. As of December 31, 2009, we had three wholly owned real estate investments and 17 investments in unconsolidated real estate joint ventures.  All of our investments in unconsolidated real estate joint ventures are BHMP CO-JVs (as defined below). We are not limited to joint ventures through BHMP CO-JVs, as we may choose other joint venture partners or investment structures.

 

The following tables present our wholly owned real estate investments and our investments in unconsolidated real estate joint ventures as of September 30, 2010 and December 31, 2009.  The investments are categorized as of September 30, 2010 based on the type of investment, on the stages in the development and operation of the investment and for investments in unconsolidated real estate joint ventures based on its type of underlying investment.  The definitions of each stage are as follows:

 

·      Stabilized / Comparable are communities that are stabilized (the earlier of 90% occupancy or one year after completion) for both the current and all prior reporting periods.

 

·      Stabilized / Non-comparable are communities that have been stabilized or acquired after January 1, 2009.

 

·      Lease ups are communities that have commenced leasing but have not yet reached stabilization.

 

·      Developments are communities currently under construction for which leasing activity has not commenced.  As of September 30, 2010, there were no communities classified as developments.

 

Year of acquisition dates represent the year of our purchase of the multifamily community.  Initial investment dates represent the year of our initial investment in the multifamily community.  Completion dates, including estimated future completion dates, are based on the date the multifamily community is substantially complete or renovated and capable of generating all significant revenue sources.  Accordingly, the dates provided in the table below may be different from the completion dates defined in the various contractual agreements or the final issuance of any official regulatory recognition of completion related to each multifamily community.  Occupancy data is presented upon stabilization of the property and is as of September 30, 2010.

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Real Estate, net
(in millions)

 

Investments in Real Estate

 

Location

 

Year of
Acquisition

 

Year of
Completion

 

Units

 

Occupancy
Rate

 

September 30,
2010

 

December 31,
2009

 

Stabilized / Non-comparable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Gallery at NoHo Commons (1)

 

Los Angeles, CA

 

2009

 

2006

 

438

 

93

%

$

103.7

 

$

106.0

 

Mariposa Loft Apartments

 

Atlanta, GA

 

2009

 

2004

 

253

 

97

%

27.3

 

27.9

 

Grand Reserve Orange

 

Orange, CT

 

2009

 

2005

 

168

 

92

%

24.5

 

25.1

 

Acacia on Santa Rosa Creek

 

Santa Rosa, CA

 

2010

 

2003

 

277

 

96

%

37.0

 

 

The Lofts at Park Crest (1)  (2)

 

McLean, VA

 

2010

 

2008

 

131

 

98

%

48.5

 

 

Burnham Pointe (2)

 

Chicago, IL

 

2010

 

2008

 

298

 

85

%

85.6

 

 

Uptown Post Oak

 

Houston, TX

 

2010

 

2008

 

392

 

92

%

63.1

 

 

Lease ups:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acappella

 

San Bruno, CA

 

2010

 

2010

 

163

 

N/A

 

54.6

 

 

 

 

 

 

 

 

 

 

2,120

 

 

 

$

444.3

 

$

159.0

 

 

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Initial

 

Year of
Completion
or Estimated

 

 

 

 

 

Our Investment in Unconsolidated
Real Estate Joint Ventures
(in millions)

 

Investments in Unconsolidated Real Estate
Joint Ventures (3)

 

Location

 

Investment
Date

 

Completion
Date

 

Units

 

Occupancy
Rate

 

September 30,
2010

 

December 31,
2009

 

Equity Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stabilized / Comparable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Reserve at Johns Creek Walk (4)

 

Johns Creek, GA

 

2007

 

2006

 

210

 

97

%

$

3.6

 

$

4.0

 

Stabilized / Non-comparable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Eclipse (5)

 

Houston, TX

 

2007

 

2009

 

330

 

91

%

7.2

 

19.7

 

Halstead (5)

 

Houston, TX

 

2009

 

2004

 

301

 

90

%

14.8

 

3.4

 

The Venue (5)

 

Clark County, NV

 

2008

 

2009

 

168

 

95

%

14.9

 

4.5

 

Waterford Place (5)

 

Dublin, CA

 

2009

 

2003

 

390

 

95

%

10.0

 

11.0

 

Burrough’s Mill Apartment Homes (5)

 

Cherry Hill, NJ

 

2009

 

2003

 

308

 

96

%

7.3

 

8.1

 

Forty55 Lofts (5)

 

Marina del Rey, CA

 

2009

 

2010

 

140

 

94

%

27.2

 

26.2

 

Calypso Apartments and Lofts (5)

 

Irvine, CA

 

2009

 

2008

 

177

 

93

%

13.8

 

27.4

 

4550 Cherry Creek (5)

 

Denver, CO

 

2010

 

2004

 

288

 

92

%

12.2

 

 

7166 at Belmar (5)

 

Lakewood, CO

 

2010

 

2008

 

308

 

95

%

12.8

 

 

Briar Forest Lofts (5)

 

Houston, TX

 

2010

 

2008

 

352

 

90

%

9.5

 

 

Fitzhugh Urban Flats (5)

 

Dallas, TX

 

2010

 

2009

 

452

 

94

%

11.6

 

 

Tupelo Alley (2) (5)

 

Portland, OR

 

2010

 

2009

 

188

 

96

%

10.9

 

 

Lease ups:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bailey’s Crossing (4) (6)

 

Alexandria, VA

 

2007

 

2010

 

414

 

N/A

 

29.4

 

29.8

 

55 Hundred (2) (4) (6)

 

Arlington, VA

 

2007

 

2010

 

234

 

N/A

 

22.1

 

23.6

 

Cyan/PDX (2) (5)

 

Portland, OR

 

2009

 

2009

 

352

 

N/A

 

45.0

 

46.2

 

San Sebastian (5)

 

Laguna Woods, CA

 

2009

 

2010

 

134

 

N/A

 

19.9

 

19.9

 

Equity and Loan Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stabilized / Non-comparable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Satori (2) (4) (6)

 

Fort Lauderdale, FL

 

2007

 

2010

 

279

 

 

 

11.3

 

12.3

 

Lease ups:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Veritas (4) (6)

 

Henderson, NV

 

2007

 

1st Quarter 2011

 

430

 

N/A

 

14.4

 

14.9

 

Skye 2905 (2) (4) (6)

 

Denver, CO

 

2008

 

2010

 

400

 

N/A

 

12.3

 

12.9

 

Loan Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease ups:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Reserve

 

Dallas, TX

 

2007

 

2010

 

149

 

N/A

 

5.4

 

5.1

 

The Cameron (2) (6)

 

Silver Spring, MD

 

2007

 

2010

 

325

 

N/A

 

11.0

 

10.9

 

 

 

 

 

 

 

 

 

6,329

 

 

 

$

326.6

 

$

279.9

 

 

 

 

 

 

 

Total Units

 

8,449

 

 

 

 

 

 

 

 


(1)

Purchase prices for The Gallery at NoHo Commons and The Lofts at Park Crest were $96.0 million and $68.2 million, respectively, before closing costs and prorations. Other amounts from the acquisitions were recognized as intangible assets or deferred lease revenues and other related liabilities.

 

 

(2)

Includes retail space, where the total approximate square footage of retail space of gross leasable area (“GLA”) for all these investments totals approximately 127,500 square feet or approximately 6% of total rentable area. Of the stabilized communities, The Lofts at Park Crest, Tupelo Alley, Burnham Pointe and Satori contain retail space with approximately 104,600 square feet of GLA, of which 73% was occupied as of September 30, 2010.

 

 

(3)

Our ownership interest in all our investments in unconsolidated real estate joint ventures is 55% except for The Reserve at Johns Creek Walk (64%), Cyan/PDX (70%) and 7166 at Belmar (70%).

 

 

(4)

Equity investment of a BHMP CO-JV in a Property Entity with unaffiliated third parties.

 

 

(5)

Equity investment wholly owned by a BHMP CO-JV.

 

 

(6)

Equity interests in the property owned by BHMP CO-JV and/or other owners may be subject to call rights, put rights and/or buy-sell rights and/or right of BHMP CO-JV to convert mezzanine loan investment to equity in the property.

 

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Investments in Real Estate

 

For the nine months ended September 30, 2010, we acquired in separate transactions five wholly owned multifamily communities, Acacia on Santa Rosa Creek, The Lofts at Park Crest, Burnham Pointe, Uptown Post Oak and Acappella totaling 1,261 units, for an aggregate purchase price of approximately $315.3 million, including the assumption of a mortgage loan payable of $26.7 million.

 

The following tables present certain additional information regarding our material acquisitions in The Lofts at Park Crest, acquired in March 2010, and Burnham Pointe, acquired in June 2010. The amounts recognized for major assets acquired and liabilities assumed as of the acquisition date are as follows (in millions):

 

 

 

The Lofts at
Park Crest

 

Burnham Pointe

 

Land

 

$

 

$

10.4

 

Buildings and improvements

 

49.6

 

76.0

 

Intangible assets:

 

 

 

 

 

In-place leases

 

2.7

 

1.6

 

Contractual rights

 

16.3

 

 

Total intangible assets

 

19.0

 

1.6

 

 

 

 

 

 

 

Contingent consideration liability

 

(0.4

)

 

Total

 

$

68.2

 

$

88.0

 

 

·      Contractual rights include land and parking garage rights.

 

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

 

The amounts recognized for revenues and net losses from the acquisition dates to September 30, 2010 related to the operations of The Lofts at Park Crest and Burnham Pointe are as follows (in millions).

 

 

 

The Lofts at Park Crest

 

Burnham Pointe

 

Revenues

 

$

3.5

 

$

1.7

 

Acquisition expenses

 

$

0.4

 

$

1.0

 

Depreciation and amortization

 

$

2.0

 

$

1.6

 

Net loss

 

$

 

$

(1.8

)

 

The following unaudited consolidated pro forma information is presented as if we acquired The Lofts at Park Crest and Burnham Pointe on January 1, 2009.  This information is not necessarily indicative of what the actual results of operations would have been had we completed these transactions on January 1, 2009, nor does it purport to represent our future operations (amounts in millions, expect per share):

 

 

 

Pro Forma

 

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenues

 

$

9.4

 

$

2.6

 

$

25.5

 

$

5.1

 

Acquisition expenses

 

$

3.2

 

$

2.8

 

$

4.2

 

$

7.3

 

Depreciation and amortization

 

$

6.5

 

$

1.7

 

$

16.0

 

$

6.8

 

Net loss

 

$

(10.4

)

$

(5.2

)

$

(23.7

)

$

(15.3

)

Net loss per share

 

$

(0.10

)

$

(0.10

)

$

(0.25

)

$

(0.37

)

 

Depreciation expense associated with all of our wholly owned buildings and improvements for the three months ended September 30, 2010 and 2009 was approximately $3.7 million and $0.2 million, respectively.  Depreciation expense associated with

 

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all of our wholly owned buildings and improvements for the nine months ended September 30, 2010 and 2009 was approximately $7.8 million and $0.2 million, respectively.

 

Cost of intangibles related to our wholly owned investments in real estate consisted of the value of in-place leases and other contractual intangibles.  Included in other contractual intangibles as of September 30, 2010 is $6.8 million related to the use rights of a parking garage and site improvements and $9.5 million of indefinite-lived contractual rights related to land air rights.  There were no indefinite-lived intangibles as of December 31, 2009. Anticipated amortization associated with lease and other contractual intangibles for each of the following five years is as follows (in millions):

 

October – December 2010

 

$

2.0

 

2011

 

$

0.6

 

2012

 

$

0.4

 

2013

 

$

0.4

 

2014

 

$

0.4

 

 

As of September 30, 2010 and December 31, 2009, accumulated depreciation and amortization related to our consolidated real estate properties and related intangibles were as follows (in millions):

 

 

 

 

 

Intangibles

 

As of September 30, 2010

 

Buildings and
Improvements

 

In-Place Lease
Intangibles

 

Other
Contractual

 

Cost

 

$

364.7

 

$

9.8

 

$

16.3

 

Less: depreciation and amortization

 

(9.3

)

(5.8

)

(0.1

)

Net

 

$

355.4

 

$

4.0

 

$

16.2

 

 

 

 

 

 

Intangibles

 

As of December 31, 2009

 

Buildings and
Improvements

 

In-Place Lease
Intangibles

 

Other
Contractual

 

Cost

 

$

121.4

 

$

2.4

 

$

 

Less: depreciation and amortization

 

(1.5

)

(1.2

)

 

Net

 

$

119.9

 

$

1.2

 

$

 

 

Investments in Unconsolidated Real Estate Joint Ventures

 

We have entered into 22 separate joint ventures with Behringer Harvard Master Partnership I LP (the “BHMP Co-Investment Partner”) through entities in which we are the manager. The 1% general partner of the BHMP Co-Investment Partner is Behringer Harvard Institutional GP LP, which is an affiliate of our Advisor and is indirectly owned by our sponsor, Behringer Harvard Holdings, LLC. The 99% limited partner of the BHMP Co-Investment Partner is Stichting Depositary PGGM Private Real Estate Fund, a Dutch foundation acting in its capacity as depositary of and for the account and risk of PGGM Private Real Estate Fund, an investment vehicle for Dutch pension funds (“PGGM”).  Substantially all of the capital provided to the BHMP Co-Investment Partner is from PGGM. We have no ownership or other direct financial interests in either of these entities.

 

PGGM has committed to invest up to $300 million in co-investments with affiliates or investment programs of our sponsor.  As of September 30, 2010, approximately $45.5 million of the $300 million commitment remains unfunded; however, in the event that certain investments are refinanced or new property debt is placed within two years from the date of the acquisition, the amount of the unfunded commitment may be increased.

 

Generally, the BHMP Co-Investment Partner will co-invest with a 45% equity interest, and we will co-invest with a 55% equity interest, although the BHMP Co-Investment Partner may elect smaller allocations.  Capital contributions and cash distributions are allocated pro rata in accordance with ownership interests.

 

Each of our separate joint ventures with the BHMP Co-Investment Partner is made through a separate entity that owns 100% of the voting equity interests and approximately 99% of the economic interests in one subsidiary REIT, through which substantially all of the joint venture’s business is conducted.  Each separate joint venture entity, together with its respective subsidiary REIT, is

 

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referred to herein as a “BHMP CO-JV.”  Each BHMP CO-JV is a separate legal entity formed for the sole purpose of holding its respective investment and obtaining legally separated debt and equity financing.  In certain circumstances the governing documents of the BHMP CO-JV may require the subsidiary REIT to be disposed of via a sale of its capital stock rather than as an asset sale by that subsidiary REIT.

 

Each BHMP CO-JV is managed by us or a subsidiary of ours, but the operation of the BHMP CO-JV’s investment must generally be conducted in accordance with operating plans approved by the BHMP Co-Investment Partner.  In addition, without the consent of all members of the BHMP CO-JV, the manager may not generally approve or disapprove on behalf of the BHMP CO-JV certain major decisions affecting the BHMP CO-JV, such as (i) selling or otherwise disposing of the BHMP CO-JV’s investment or any other property having a value in excess of $100,000, (ii) selling any additional interests in the BHMP CO-JV, (iii) approving initial and annual operating plans and capital expenditures or (iv) incurring or materially modifying any indebtedness of the BHMP CO-JV in excess of $100,000 or causing the BHMP CO-JV to become liable for any debt, obligation or undertaking of any other individual or entity in excess of $100,000 other than in accordance with the operating plans.  The BHMP Co-Investment Partner may remove the manager for cause and appoint a successor.

 

We have determined that our BHMP CO-JVs are not variable interest entities and that each partner has equal substantive control and participating rights with no single party controlling each BHMP CO-JV. Accordingly, we account for our interest in each BHMP CO-JV using the equity method of accounting.

 

Certain BHMP CO-JVs have made equity investments with third-party partners in, and/or have made loans to, entities that own one multifamily operating or development community.  The collective group of these operating property entities or development entities are collectively referred to herein as “Property Entities.”  Each Property Entity is a separate legal entity for the sole purpose of holding its respective operating property or development project and obtaining legally separated debt and equity financing.

 

As of September 30, 2010, six of our BHMP CO-JVs include equity investments in Property Entities.  Each of these BHMP CO-JV equity investments in a Property Entity is evaluated for consolidation at the BHMP CO-JV level using our principles of consolidation. Of these six Property Entities, three investments are reported on a consolidated basis by the BHMP CO-JV and the remaining three investments are recorded as unconsolidated real estate joint ventures and reported with the equity method of accounting by the respective BHMP CO-JVs.

 

During the nine months ended September 30, 2010, we invested in five newly formed BHMP CO-JVs, each holding a wholly owned multifamily community. The total acquisition price for these multifamily communities was $219.7 million.  Our total share of the capital contribution for these BHMP CO-JVs was $127.0 million.  Also during the nine months ended September 30, 2010, eight BHMP CO-JVs obtained mortgage financing secured by the respective multifamily community for an aggregate amount of $190.0 million.  Substantially all of the net proceeds related to these financings were distributed to us and the BHMP Co-Investment Partner and our share was $107.9 million.

 

In August 2010, The Venue BHMP CO-JV indirectly acquired the remaining ownership interest in The Venue Property Entity for $0.4 million. Included as a part of the acquisition, The Venue BHMP CO-JV also extinguished The Venue Property Entity’s construction loan with a final principal payment of $17.9 million.  At the time of the payoff, the construction loan had a principal balance of $19.7 million.  The total funding by The Venue BHMP CO-JV was approximately $18.5 million. Our contribution to The Venue BHMP CO-JV was approximately $10.2 million. Effective with the transaction, The Venue Property Entity became wholly owned by The Venue BHMP CO-JV. Upon the acquisition of the controlling interest, The Venue BHMP CO-JV recognized a gain of $1.3 million for the difference between The Venue BHMP CO-JV’s investment carrying value and the fair value. Our share of the gain is included in equity in earnings (loss) of investments in unconsolidated real estate joint ventures and was approximately $0.7 million. At the closing of the acquisition, The Venue BHMP CO-JV effectively eliminated its note receivable to The Venue Property Entity.

 

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The summarized financial data shown below presents the combined accounts of each of the (i) BHMP CO-JVs and (ii) Property Entities where there is a corresponding BHMP CO-JV equity investment.  The amounts listed below include 100% of the Property Entities’ accounts, where the noncontrolling interest amounts represent the portion owned by unaffiliated third parties.  All inter-entity transactions, balances and profits have been eliminated in the combined financial data (amounts in millions):

 

 

 

September 30,

 

December 31,

 

Balance Sheet Data:

 

2010

 

2009

 

Land, buildings and improvements

 

$

1,091.3

 

$

656.0

 

Less: accumulated depreciation and amortization

 

(29.1

)

(6.7

)

Land, buildings and improvements, net

 

1,062.2

 

649.3

 

 

 

 

 

 

 

Construction in progress

 

25.7

 

210.2

 

Notes receivable, net

 

25.8

 

25.4

 

Cash and cash equivalents

 

38.7

 

6.2

 

Intangible assets, net of accumulated amortization of $11.3 million and $4.2 million as of September 30, 2010 as December 31, 2009, respectively

 

1.9

 

2.8

 

Other assets, including restricted cash

 

15.4

 

20.1

 

Total assets

 

$

1,169.7

 

$

914.0

 

 

 

 

 

 

 

BHMP CO-JV level mortgage loans payable

 

$

275.2

 

$

110.1

 

Property Entity level construction and mortgage loans payable

 

314.0

 

284.3

 

Accounts payable, interest payable and other liabilities

 

22.9

 

30.2

 

Total liabilities

 

612.1

 

424.6

 

 

 

 

 

 

 

Redeemable, noncontrolling interests

 

8.4

 

10.4

 

 

 

 

 

 

 

Our members’ equity

 

316.6

 

268.5

 

BHMP Co-Investment Partner’s equity

 

223.1

 

201.2

 

Nonredeemable, noncontrolling interests

 

9.5

 

9.3

 

Total equity

 

549.2

 

479.0

 

Total liabilities and equity

 

$

1,169.7

 

$

914.0

 

 

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Table of Contents

 

 

 

For the three months ended
September 30,

 

For the nine months ended
September 30,

 

Operating Data:

 

2010

 

2009

 

2010

 

2009

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenues

 

$

20.8

 

$

3.5

 

$

47.3

 

$

5.9

 

Interest income

 

2.5

 

3.7

 

7.3

 

10.6

 

 

 

23.3

 

7.2

 

54.6

 

16.5

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Property operating expenses

 

7.8

 

2.0

 

19.9

 

4.0

 

Real estate taxes

 

2.9

 

0.5

 

6.7

 

1.0

 

Interest expense

 

5.9

 

1.7

 

14.3

 

3.0

 

Acquisition expenses

 

 

1.3

 

1.0

 

1.5

 

Depreciation and amortization

 

12.7

 

1.8

 

31.7

 

3.2

 

 

 

29.3

 

7.3

 

73.6

 

12.7

 

 

 

 

 

 

 

 

 

 

 

Gain on acquisition of controlling interest

 

1.3

 

 

1.3

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(4.7

)

(0.1

)

(17.7

)

3.8

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

1.3

 

0.1

 

3.8

 

0.1

 

Net income (loss) attributable to consolidated BHMP CO-JVs

 

$

(3.4

)

$

(0.2

)

$

(13.9

)

$

3.9

 

 

 

 

 

 

 

 

 

 

 

Our share of equity in earnings (loss) of investments in unconsolidated real estate joint ventures

 

$

(2.1

)

$

(0.1

)

$

(8.0

)

$

2.1

 

 

The following presents the reconciliation between our member’s equity interest in the combined BHMP CO-JVs and our total investments in unconsolidated real estate joint ventures (amounts in millions):

 

 

 

September 30,
2010

 

December 31,
2009

 

Balance of our member’s equity in the BHMP CO-JVs

 

$

316.6

 

$

268.5

 

Other capitalized costs, net of amortization

 

10.0

 

11.4

 

Investments in unconsolidated real estate joint ventures

 

$

326.6

 

$

279.9

 

 

Included in the combined financial data are certain notes receivable from Property Entities to BHMP CO-JVs in various stages of lease up.  All note receivable advances have reached their required maximum funding amounts.  Generally for each of the notes receivable included in the combined financial data, the BHMP CO-JVs acquired options to purchase a certain percentage ownership interest in the Property Entity, or to convert the notes receivable into equity interests in the Property Entities. Options are generally exercisable during defined periods after project completion.  Below are the BHMP CO-JVs’ notes receivable from the Property Entities that are included in the combined financial data (amounts in millions):

 

 

 

Carrying Amount

 

Fixed

 

 

 

Option Period

 

Name of Underlying Property

 

September 30,
2010

 

December 31,
2009

 

Interest
Rate

 

Maturity Date

 

Commencement
After Completion

 

Grand Reserve

 

$

7.5

 

$

7.5

 

10.0

%

April 2012

 

N/A (a)

 

The Cameron

 

19.3

 

19.3

 

9.5

%

December 2012

 

90 days

 

Total BHMP CO-JV Notes

 

26.8

 

26.8

 

 

 

 

 

 

 

Less: Deferred Financing Fees

 

(1.0

)

(1.4

)

 

 

 

 

 

 

Net BHMP CO-JV Notes

 

$

25.8

 

$

25.4

 

 

 

 

 

 

 

 


(a) Pursuant to the terms of the option agreement, the BHMP CO-JV exercised its right to terminate the option agreement on May 18, 2010.

 

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In the combined financial data, the notes receivable and notes payable between the BHMP CO-JVs and their Property Entities in which the BHMP CO-JVs have equity interests are eliminated.  For these notes, all advances have reached their required maximum funding amounts. In connection with each of these notes receivable or their equity investment, the BHMP CO-JVs acquired options to purchase a certain percentage ownership interest in the Property Entity, or to convert the notes receivable into equity interests in the Property Entities. Options are generally exercisable during defined periods after project completion. Below are the eliminated BHMP CO-JVs’ notes receivable (amounts in millions):

 

 

 

Carrying Amount

 

Fixed

 

 

 

Option Period

 

Name of Underlying Property

 

September 30,
2010

 

December 31,
2009

 

Interest
Rate

 

Maturity Date

 

Commencement
After Completion

 

Satori

 

$

14.8

 

$

14.8

 

10.0

%

October 2012

 

90 days

 

Skye 2905

 

14.8

 

14.8

 

10.0

%

April 2013

 

90 days

 

Veritas

 

21.0

 

21.0

 

13.0

%

December 2013

 

90 days

 

The Venue (a)

 

 

5.8

 

 

(a)

(a)

 

(a)

 

Total BHMP CO-JV Notes Receivable Eliminated in Combination

 

$

50.6

 

$

56.4

 

 

 

 

 

 

 

 


(a) Effective in August 2010, the $5.8 million note receivable was converted into a controlling equity interest in the Property Entity.  The converted note receivable had a fixed interest rate of 10.0% and a maturity date of June 2013.

 

As of September 30, 2010 and December 31, 2009, BHMP CO-JVs are also subject to senior mortgage loans payable as described in the following table. These loans are senior to the equity investments by the BHMP CO-JVs.  The lenders for these mortgage loans payable have no recourse to us or the applicable BHMP CO-JV other than carve-out guarantees for certain matters such as environmental conditions, misuse of funds and material misrepresentations. These mortgage loan payables are referred to as BHMP CO-JV level mortgage loans payable (amounts in millions):

 

 

 

Carrying Amount

 

 

 

 

 

BHMP CO-JV Level Mortgage Loans Payable

 

September 30,
2010

 

December 31,
2009

 

Interest Rate

 

Maturity Date

 

Waterford Place

 

$

59.2

 

$

60.1

 

4.83% - Fixed

 

May 2013

 

4550 Cherry Creek

 

28.6

 

 

4.23% - Fixed

 

March 2015

 

Calypso Apartments and Lofts

 

24.0

 

 

4.21% - Fixed

 

March 2015

 

7166 at Belmar

 

22.8

 

 

4.11% - Fixed

 

June 2015

 

Burrough’s Mill Apartment Homes

 

26.0

 

26.0

 

5.29% - Fixed

 

October 2016

 

Fitzhugh Urban Flats

 

28.0

 

 

4.35% - Fixed

 

August 2017

 

The Eclipse

 

20.8

 

 

4.46% - Fixed

 

September 2017

 

Briar Forest Lofts

 

21.0

 

 

4.46% - Fixed

 

September 2017

 

Tupelo Alley

 

19.3

 

 

3.58% - Fixed

 

October 2017

 

Forty55 Lofts

 

25.5

 

 

3.90% - Fixed

 

October 2020

 

Halstead (a)

 

 

24.0

 

(a)

 

(a)

 

Total

 

$

275.2

 

$

110.1

 

 

 

 

 

 


(a) In September 2010, the Halstead BHMP CO-JV prepaid the outstanding loan balance of $24.0 million without penalty. Subsequent to September 30, 2010, the Halstead BHMP CO-JV closed on a new $15.7 million mortgage, with a fixed interest rate of 3.79% and a maturity date of September 2017.

 

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As of September 30, 2010 and December 31, 2009, Property Entities are subject to senior construction and mortgage loans payable as described in the following table. These loans are senior to any equity or debt investments by the BHMP CO-JVs.  The lenders for these loans have no recourse to us or the BHMP CO-JVs with recourse only to the applicable Property Entities and with respect to Satori, Skye 2905, and Veritas to affiliates of the project developers that have provided completion and repayment guarantees.  These loans payable are referred to as Property Entity level construction and mortgage loans payable (amounts in millions and monthly LIBOR at September 30, 2010 was 0.26%):

 

 

 

Carrying Amount

 

 

 

 

 

Property Entity Level Construction and
Mortgage Loans Payable

 

September 30,
2010

 

December 31,
2009

 

Interest Rate

 

Maturity Date

 

Satori (a)

 

$

71.9

 

$

69.4

 

Monthly LIBOR + 140 bps

 

October 2010 (b)

 

Skye 2905 (a)

 

63.8

 

42.2

 

Monthly LIBOR + 195 bps

 

May 2011

 

Bailey’s Crossing (a)

 

69.8

 

61.1

 

Monthly LIBOR + 275 bps

 

November 2011

 

The Venue (c)

 

 

19.2

 

(c)

 

(c)

 

Veritas (a)

 

32.8

 

16.7

 

Monthly LIBOR + 275 bps

 

December 2012

 

The Reserve at Johns Creek Walk

 

23.0

 

23.0

 

6.46% - Fixed

 

March 2013

 

55 Hundred (a)

 

52.7

 

52.7

 

Monthly LIBOR + 300 bps

 

November 2013

 

Total

 

$

314.0

 

$

284.3

 

 

 

 

 

 


(a)   Each of these Property Entity level construction loans are used to fund development projects and are drawn as construction costs are incurred.  The aggregate total commitment, if fully funded, is $310.4 million.  Each construction loan has provisions allowing for prepayment at par and extensions, generally two, one-year options if certain operational performance levels have been achieved as of the maturity date.  An extension fee, generally 0.25% of the total loan balance, is required for each extension.

 

(b)   Subsequent to September 30, 2010, the construction loan maturity date was extended to October 2011.

 

(c)   In connection with the BHMP CO-JV’s acquisition of the remaining ownership interests from an unaffiliated third party, the construction loan with a principal balance of $19.7 million was paid of in full with a final payment of $17.9 million.

 

As of September 30, 2010, approximately $936.1 million of the net carrying value of land, buildings and improvements and construction in progress collateralized the combined BHMP CO-JV level and Property Entity level construction and mortgage loans payable.

 

In December 2009, Fairfield Residential LLC, a real estate operating company, (“Fairfield Residential”) and certain of its affiliates filed for voluntary bankruptcy.  Certain other affiliates of Fairfield Residential that serve as the general partner for The Cameron and current limited partners of Bailey’s Crossing and 55 Hundred were not part of the bankruptcy filing (the “Fairfield Projects”).  The Bailey’s Crossing, 55 Hundred and The Cameron Property Entities were also not a part of the bankruptcy filing. The Bailey’s Crossing and 55 Hundred Property Entity restructurings and recapitalizations were completed prior to Fairfield Residential’s bankruptcy and were not affected by the bankruptcy filing. With regard to The Cameron Property Entity, The Cameron BHMP CO-JV investment is only as a lender with a $19.3 million note receivable.  Our share of the note receivable is approximately $10.6 million.

 

In connection with the note receivable made by The Cameron BHMP CO-JV to The Cameron Property Entity, Fairfield Residential provided The Cameron BHMP CO-JV with a completion guarantee. In addition, Fairfield Residential provided the senior construction lender a repayment guarantee and a completion guarantee for the senior construction loan. Fairfield Residential’s bankruptcy gave rise to an event of default under The Cameron senior construction loan agreement.  As a result, The Cameron senior construction lender and in turn The Cameron BHMP CO-JV gave default notices to The Cameron Property Entity in 2009.  During 2010, Fairfield Residential and certain of its affiliates emerged from bankruptcy as Fairfield Residential Company LLC.  The Cameron completion guarantee received by The Cameron BHMP CO-JV was part of the bankruptcy estate of Fairfield Residential and was assigned to a class of unsecured creditors.  Through September 30, 2010, The Cameron BHMP CO-JV has not made any claims, although it has preserved its rights to do so.

 

Although operating under an event of default, through September 2010, the senior construction lender has continued to fund construction draws.  In October 2010, the senior lender gave notice that the interest rate would be reset to the default rate, retroactive to December 2009.  In turn, The Cameron BHMP CO-JV gave notice that the interest rate on its note receivable would be reset to the

 

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default rate, retroactive to December 2009.  The default rate of The Cameron BHMP CO-JV’s note receivable is 13%, compared to the regular rate of 9.5%. As of November 15, 2010, The Cameron Property Entity has not paid either the senior lender or The Cameron BHMP CO-JV default interest.

 

The Cameron BHMP CO-JV is currently in discussions with the senior lender and the owners of The Cameron Property Entity to restructure The Cameron Property Entity or cure the senior construction loan default and the BHMP CO-JV note receivable default.  If The Cameron Property Entity does not cure the default, we expect to have an opportunity to (i) cure the default, (ii) purchase the senior construction loan (iii) foreclose on the property, (iv) acquire the 100% or partial ownership interest in The Cameron Property Entity or (v) otherwise negotiate a solution acceptable to the senior construction lender.  However, there is no assurance that we would be able to restructure the senior construction loan including associated guarantees on terms that are acceptable to The Cameron Property Entity owners and the Cameron BHMP CO-JV.  Such restructuring could include a pay down of the senior construction loan by The Cameron Property Entity and/or the BHMP CO-JV, which could result in a capital contribution by us to The Cameron BHMP CO-JV.  In addition, the senior construction lender’s exercise of default remedies or the results of any restructuring negotiations may change our analysis of the accounting for the investment, which could result in The Cameron BHMP CO-JV accounting for the investment as a joint venture, or if The Cameron BHMP CO-JV is viewed as the primary beneficiary, to consolidate the investment. However, we believe we have sufficient collateral, contractual remedies and other creditor rights for The Cameron BHMP CO-JV to recover the carrying value of its note receivable to The Cameron Property Entity.

 

As of September 30, 2010, management’s assessment related to The Cameron BHMP CO-JV is that the loan investment is still properly accounted for as a loan.  The continuation of this accounting treatment is dependent on the resolution of the issues described above, and there can be no assurance as new facts and circumstances arise that different accounting would not be required. A change in accounting could affect our recognition of earnings in future periods.

 

6.             Leasing Activity

 

Future minimum base rental payments due to us under non-cancelable leases in effect as of September 30, 2010 for our wholly owned multifamily communities are as follows (in millions):

 

 

 

Future Minimum
Lease Payments

 

October 1, 2010 – December 31, 2010

 

$

0.5

 

2011

 

2.1

 

2012

 

2.1

 

2013

 

2.1

 

2014

 

2.1

 

Thereafter

 

28.6

 

Total

 

$

37.5

 

 

 

The future minimum lease payments in the above table relate solely to retail leases.

 

7.             Mortgage Loans Payable

 

The following presents the carrying amounts of the mortgage loans payable as of September 30, 2010 and December 31, 2009 (amounts in millions).

 

Mortgage Loans Payable

 

September 30,
2010

 

December 31,
2009

 

Loan Type

 

Interest Rate

 

Maturity Date

 

Acacia on Santa Rosa Creek

 

$

26.4

 

$

 

Principal and interest

 

4.63% - fixed

 

May 2013

 

The Gallery at NoHo Commons

 

51.3

 

51.3

 

Interest-only

 

4.72% - fixed

 

November 2016

 

Mariposa Loft Apartments

 

15.8

 

 

Interest-only

 

5.21% - fixed

 

March 2017

 

Total

 

$

93.5

 

$

51.3

 

 

 

 

 

 

 

 

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As of September 30, 2010, $168.0 million of the net carrying value of real estate collateralized the mortgage loans payable.

 

Contractual principal payments for the remainder of 2010 and each of the four subsequent years thereafter are as follows (in millions):

 

October 1, 2010 – December 31, 2010

 

$

0.1

 

2011

 

0.6

 

2012

 

0.6

 

2013

 

25.1

 

2014

 

 

Thereafter

 

67.1

 

Total

 

$

93.5

 

 

8.             Credit Facility Payable

 

On March 26, 2010, we closed on a $150.0 million credit facility.  The credit facility matures on April 1, 2017, when all unpaid principal and interest is due.  Borrowing tranches under the credit facility bear interest at a “base rate” based on either the one-month or three-month LIBOR rate, selected at our option, plus an applicable margin which adjusts based on the facility’s debt service requirements. As of September 30, 2010, the applicable margin was 2.08% and the base rate was 2.34% based on one-month LIBOR.  The credit facility also provides for fees based on unutilized amounts and minimum usage.  The unused facility fee is equal to 1% per annum of the total commitment less the greater of 75% of the total commitment or the actual amount outstanding. The minimum usage fee is equal to 75% of the total credit facility times the lowest applicable margin less the margin portion of interest paid during the calculation period.  The loan requires monthly interest-only payments and monthly or annual payment of fees.  We may prepay borrowing tranches at the expiration of the LIBOR interest rate period without any penalty.  Prepayments during a LIBOR interest rate period are subject to a prepayment penalty generally equal to the interest due for the remaining term of the LIBOR interest rate period.

 

Draws under the credit facility are secured by a pool of certain multifamily communities directly owned by our wholly owned subsidiaries, where we may add and remove multifamily communities from the collateral pool in compliance with the requirements under the credit facility agreement.   As of September 30, 2010, $241.8 million of the net carrying value of real estate collateralized the credit facility.   The aggregate borrowings under the credit facility are limited to 70% of the value of the collateral pool, which may be different than the carrying value for financial statement reporting.  As of September 30, 2010, available but undrawn amounts under the credit facility are approximately $107 million.

 

The credit facility agreement contains customary provisions with respect to events of default, covenants and borrowing conditions.  In particular, the credit facility agreement requires us to maintain consolidated net worth of at least $150.0 million, liquidity of at least $15.0 million and net operating income of the collateral pool to be no less than 155% of the facility debt service cost. Certain prepayments may be required upon a breech of covenants or borrowing conditions.  We believe we are in compliance with all provisions as of September 30, 2010.

 

9.             Stockholders’ Equity

 

Capitalization

 

As of September 30, 2010 and December 31, 2009, we had 94,811,198 and 57,098,265 shares of common stock outstanding, respectively, including 6,000 shares of restricted stock issued to our independent directors for no cash, and 24,969 shares issued to Behringer Harvard Holdings, LLC for cash of approximately $0.2 million.

 

As of September 30, 2010 and December 31, 2009, we had 1,000 shares of convertible stock owned by our Advisor issued for cash of $1,000.  The convertible stock has no voting rights, other than for certain limited exceptions, and prior to conversion, does not participate in any earnings or distributions.  The convertible stock generally is convertible into shares of common stock with a value equal to 15% of the amount by which (i) our enterprise value at the time of conversion, including the total amount of distributions paid to our stockholders, exceeds (ii) the sum of the aggregate capital invested by our stockholders plus a 7% cumulative, non-compounded, annual return on such capital at the time of conversion, on a cash-on-cash basis.  The convertible stock can be converted when the excess value described above is achieved and distributed to stockholders or our common stock is listed on a national securities exchange.  The conversion may also be prorated in the event of a termination or non-renewal of the Advisory

 

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Management Agreement (defined below) other than for cause. Management has determined that the requirements for conversion have not been met as of September 30, 2010.  Management reviewed the terms of the underlying convertible stock and determined the fair value approximated the nominal value paid for the shares at issuance.

 

As of September 30, 2010 and December 31, 2009, we had no shares of preferred stock issued and outstanding. Our board of directors has no present plans to issue preferred stock but may do so with terms established at its discretion and at any time in the future without stockholder approval.

 

Share Redemption Program

 

Our board of directors has authorized a share redemption program for stockholders who have held their shares for more than one year, subject to the significant conditions and limitations of the program.  Under the share redemption program, the per share redemption price will generally equal 90% of the most recently disclosed estimated value per share as determined in accordance with our valuation policy. Redemptions are limited to no more than 5% of the weighted average of shares outstanding during the preceding twelve month period immediately prior to the date of redemption.  In addition, redemptions are generally limited to the proceeds from our DRIP 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 cash flows from operating activities during such preceding four fiscal quarters, 1% of all such cash flows during such preceding four fiscal quarters.

 

For the nine months ended September 30, 2010, our board of directors approved the redemption of 1,215,647 million shares of common stock for approximately $10.5 million.  For the nine months ended September 30, 2009, we redeemed 235,340 shares of common stock for approximately $1.9 million.  As of September 30, 2010, we had approximately $5.7 million of redemptions authorized but unpaid.  As of December 31, 2009, we did not have any unpaid redemptions.

 

Distributions

 

We paid our first distribution effective July 1, 2007.

 

Distributions, including distributions paid by issuing shares under the DRIP, for the nine months ended September 30, 2010 and for the year ended December 31, 2009 were as follows (amounts in millions):

 

 

 

Distributions

 

2010

 

Declared

 

Paid

 

Third Quarter

 

$

15.3

 

$

15.6

 

Second Quarter

 

13.9

 

13.1

 

First Quarter

 

11.1

 

10.2

 

Total

 

$

40.3

 

$

38.9

 

 

 

 

 

 

 

2009

 

 

 

 

 

Fourth Quarter

 

$

8.7

 

$

7.8

 

Third Quarter

 

6.5

 

5.9

 

Second Quarter

 

4.6

 

4.1

 

First Quarter

 

2.9

 

2.5

 

Total

 

$

22.7

 

$

20.3

 

 

Our board of directors have declared distributions at a daily amount of $0.0016438 per share of common stock, an annualized rate of 6%, beginning in the month of September 2010 through the fourth quarter 2010.  We calculate the annualized rate as if the shares were outstanding for a full year based on a $10 per share price.

 

10.          Commitments and Contingencies

 

Each of the BHMP CO-JV equity investments that include unaffiliated third-party partners also includes buy/sell provisions.  Under these provisions and during specific periods, a partner could make an offer to purchase the interest of the other partner and the other partner would have the option to accept the offer or purchase the offering partner’s interest at that price.  As of September 30, 2010, no such offers are outstanding.

 

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The Bailey’s Crossing and The Cameron BHMP CO-JVs may become separately obligated to purchase a limited partnership interest in the related Property Entity at a price set through an appraisal process if the limited partner was to exercise its rights to put its interests to the BHMP CO-JVs. The obligations are for defined periods ranging from one to three years.  As the prices would be based on future events and valuations, we are not able to estimate this amount if exercised; however the limited partners’ combined invested capital as of September 30, 2010 is approximately $22.1 million.  Based on this value, our combined share of these BHMP CO-JV obligations would be approximately $12.2 million.

 

In the ordinary course of business, the multifamily communities in which we have investments may have commitments to provide affordable housing. Under these arrangements, we generally receive from the resident a below market rent, which is determined by a local or national authority. In certain arrangements, a local or national housing authority makes payments covering some or substantially all of the difference between the restricted rent paid by residents and market rents. In connection with our acquisition of The Gallery at NoHo Commons, we assumed an obligation to provide affordable housing through 2048. As partial reimbursement for this obligation, the housing authority will make level annual payments of approximately $2.0 million through 2028 and no reimbursement for the remaining 20-year period. We may also be required to reimburse the housing authority if certain operating results are achieved on a cumulative basis during the term of the agreement. At the acquisition, we recorded a liability of $14.0 million based on the fair value of the terms over the life of the agreement.  In addition, we will record rental revenue from the housing authority on a straight line basis, recognizing a portion of the collections as deferred lease revenues and other related liabilities. As of September 30, 2010 and December 31, 2009, we have approximately $16.2 million and $15.2 million, respectively, of carrying value for deferred lease revenues and other related liabilities.

 

11.          Related Party Arrangements

 

We have no employees and are supported by related party service agreements.  We are dependent on our Advisor, Behringer Securities LP (“Behringer Securities”), Behringer Harvard Multifamily Management Services, LLC (“BHM Management”) and their affiliates for certain services that are essential to us, including the sale of shares of our common stock, asset acquisition and disposition decisions, property management and leasing services and other general administrative responsibilities. In the event that these companies become unable to provide us with the respective services, we would be required to obtain such services from other sources.

 

These services are provided through our advisory management agreement (the “Advisory Management Agreement”), as it has been amended and restated, and may be renewed for an unlimited number of successive one-year terms.  The current term of the Advisory Management Agreement expires on July 1, 2011.  The board of directors has a duty to evaluate the performance of our Advisor annually before the parties can agree to renew the Advisory Management Agreement.

 

Subject to the deferral described below, we are required to reimburse the Advisor for organization and offering expenses related to a public offering of shares (other than pursuant to a distribution reinvestment plan) and any organization and offering expenses previously advanced by the Advisor related to a prior offering of shares to the extent not previously reimbursed by us out of proceeds from the prior offering (“O&O Reimbursement”). However, the Advisor is obligated to reimburse us after the completion of the public offering to the extent that O&O Reimbursement paid by the Company exceeds 1.5% of the gross proceeds of the completed public offering. The Company’s reimbursement of organization and offering expenses related to subsequent public offerings of shares also will not be capped as of the date of reimbursement, unless the terms are amended by the parties upon renewal of the Advisory Management Agreement. In April 2009, in connection with an amendment to the Advisory Management Agreement, a payment of $6.9 million was made to the Advisor for prior O&O Reimbursement incurred but not previously paid. For the three months ended September 30, 2010 and 2009, we incurred O&O Reimbursement of approximately $1.4 million and $2.3 million, respectively.  For the nine months ended September 30, 2010 and 2009, we incurred O&O Reimbursement of approximately $6.4 million and $6.6 million, respectively.  As of September 30, 2010, the amount by which our O&O Reimbursement exceeded 1.5% of the gross proceeds of our Initial Public Offering was approximately $10.4 million.

 

In November 2010, the Advisor agreed to defer payment of the O&O Reimbursement until no later than March 31, 2011. As of September 30, 2010, $2.7 million of O&O Reimbursement was accrued and unpaid.

 

Behringer Securities serves as the dealer manager for the Initial Public Offering and receives selling commissions of up to 7% of gross offering proceeds before reallowance of commissions earned by participating broker-dealers.  In connection with the Initial Public Offering, up to 2.5% of gross proceeds before reallowance to participating broker-dealers are paid to Behringer

 

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Securities as a dealer manager fee. No selling commissions or dealer manager fee is paid on purchases made pursuant to our DRIP.  In the Initial Public Offering, Behringer Securities reallows all of its commissions to participating broker-dealers and reallows a portion of its dealer manager fee of up to 2.0% of the gross offering proceeds to be paid to such participating broker-dealers; provided, however, that Behringer Securities may reallow, in the aggregate, no more than 1.5% of gross offering proceeds for marketing fees and expenses, bona fide training and educational meetings and non-itemized, non-invoiced due diligence efforts, and no more than 0.5% of gross offering proceeds for bona fide, separately invoiced due diligence expenses incurred as fees, costs and other expenses from third parties.

 

The following presents the components of our sale of common stock, net related to our Initial Public Offering (amounts in millions):