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EX-10.1 - Behringer Harvard Short-Term Liquidating Trustv222160_ex10-1.htm
EX-31.1 - Behringer Harvard Short-Term Liquidating Trustv222160_ex31-1.htm
EX-31.2 - Behringer Harvard Short-Term Liquidating Trustv222160_ex31-2.htm
EX-32.1 - Behringer Harvard Short-Term Liquidating Trustv222160_ex32-1.htm


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 March 31, 2011
 
     
 
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: 000-51291

Behringer Harvard Short-Term Opportunity
Fund I LP
(Exact Name of Registrant as Specified in Its Charter)

Texas
71-0897614
(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer
Identification No.)

15601 Dallas Parkway, Suite 600, Addison, Texas 75001
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:  (866) 655-1620

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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.45 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   No o

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

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

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


 
 

 

BEHRINGER HARVARD SHORT-TERM OPPORTUNITY FUND I LP
FORM 10-Q
Quarter Ended March 31, 2011

   
Page
PART I
FINANCIAL INFORMATION
     
Item 1.
Financial Statements (Unaudited).
 
     
 
Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010
3
     
 
Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010
4
     
 
Condensed Consolidated Statements of Equity for the three months ended March 31, 2011 and 2010
5
     
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010
6
     
 
Notes to Condensed Consolidated Financial Statements
7
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
17
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
26
     
Item 4.
Controls and Procedures.
26
     
PART II
OTHER INFORMATION
     
Item 1.
Legal Proceedings.
26
     
Item 1A.
Risk Factors.
26
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
27
     
Item 3.
Defaults Upon Senior Securities.
27
     
Item 4.
Removed and Reserved.
27
     
Item 5.
Other Information.
27
     
Item 6.
Exhibits.
27
     
Signature
 
28
 
 
2

 

PART I
FINANCIAL INFORMATION
Item 1. 
Financial Statements.

Behringer Harvard Short-Term Opportunity Fund I LP
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except unit amounts)

   
March 31,
   
Decmber 31,
 
   
2011
   
2010
 
Assets
           
Real estate
           
Land
  $ 29,270     $ 29,709  
Buildings and improvements, net
    94,930       98,415  
Total real estate
    124,200       128,124  
                 
Real estate inventory, net
    61,439       60,925  
Cash and cash equivalents
    2,879       2,040  
Restricted cash
    3,500       3,039  
Accounts receivable, net
    3,803       3,827  
Prepaid expenses and other assets
    876       892  
Furniture, fixtures, and equipment, net
    888       1,203  
Deferred financing fees, net
    552       683  
Lease intangibles, net
    3,041       2,575  
Total assets
  $ 201,178     $ 203,308  
                 
Liabilities and Equity
               
Liabilities
               
Notes payable
  $ 154,781     $ 153,430  
Note payable to related party
    12,018       11,693  
Accounts payable
    2,405       2,801  
Payables to related parties
    2,628       2,302  
Accrued liabilities
    6,694       7,234  
Total liabilities
    178,526       177,460  
                 
Commitments and contingencies
               
                 
Equity
               
Partners' capital
               
Limited partners - 11,000,000 units authorized,
               
10,803,839 units issued and outstanding at
               
March 31, 2011 and December 31, 2010
    (9,742 )     (4,768 )
General partners
    36,791       34,729  
Partners' capital
    27,049       29,961  
Noncontrolling interest
    (4,397 )     (4,113 )
Total equity
    22,652       25,848  
Total liabilities and equity
  $ 201,178     $ 203,308  
 
See Notes to Condensed Consolidated Financial Statements.

 
3

 

Behringer Harvard Short-Term Opportunity Fund I LP
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per unit amounts)

   
Three months
   
Three months
 
   
ended
   
ended
 
   
March 31, 2011
   
March 31, 2010
 
Revenues
           
Rental revenue
  $ 2,616     $ 2,422  
Hotel revenue
    4,077       3,120  
Total revenues
    6,693       5,542  
                 
Expenses
               
Property operating expenses
    4,299       3,917  
Asset impairment loss
    2,700       -  
Inventory valuation adjustment
    -       1,667  
Interest expense, net
    1,919       1,437  
Real estate taxes, net
    682       770  
Property and asset management fees
    457       440  
General and administrative
    207       223  
Depreciation and amortization
    1,700       1,661  
Total expenses
    11,964       10,115  
                 
Interest income
    61       30  
Loss on derivative instrument, net
    -       (34 )
Loss from operations before income taxes
    (5,210 )     (4,577 )
                 
Provision for income taxes
    (48 )     (39 )
                 
Net loss
    (5,258 )     (4,616 )
                 
Net loss attributable to noncontrolling interest
    284       534  
                 
Net loss attributable to the Partnership
  $ (4,974 )   $ (4,082 )
                 
Basic and diluted weighted average limited partnership units outstanding
    10,804       10,804  
                 
Basic and diluted net loss per limited partnership unit attributable to the Partnership
  $ (0.46 )   $ (0.38 )

See Notes to Condensed Consolidated Financial Statements.

 
4

 

Behringer Harvard Short-Term Opportunity Fund I LP
Condensed Consolidated Statements of Equity
(Unaudited)
(in thousands)

   
General Partners
   
Limited Partners
             
         
Accumulated
   
Number of
         
Accumulated
   
Noncontrolling
       
   
Contributions
   
Losses
   
Units
   
Contributions
   
Losses
   
Interest
   
     Total     
 
                                           
Balance as of January 1, 2011
  $ 34,729     $ -       10,804     $ 74,522     $ (79,290 )   $ (4,113 )   $ 25,848  
                                                         
Net loss
                                    (4,974 )     (284 )     (5,258 )
                                                         
Notes receivable
                                            (195 )     (195 )
                                                         
Contributions
    2,062                                       195       2,257  
                                                         
Balance as of March 31, 2011
  $ 36,791     $ -       10,804     $ 74,522     $ (84,264 )   $ (4,397 )   $ 22,652  

   
General Partners
   
Limited Partners
             
         
Accumulated
   
Number of
   
   
   
Accumulated
   
Noncontrolling
       
   
Contributions
   
Losses
   
Units
   
 Contributions
   
Losses
   
Interest
   
     Total     
 
                                           
Balance as of January 1, 2010
  $ 24,667     $ -       10,804     $ 74,522     $ (62,676 )   $ (2,117 )   $ 34,396  
                                                         
Net loss
                                    (4,082 )     (534 )     (4,616 )
                                                         
Notes receivable
                                            (635 )     (635 )
                                                         
Contributions
    3,934                                       635       4,569  
                                                         
Balance as of March 31, 2010
  $ 28,601     $ -       10,804     $ 74,522     $ (66,758 )   $ (2,651 )   $ 33,714  

See Notes to Condensed Consolidated Financial Statements.

 
5

 

Behringer Harvard Short-Term Opportunity Fund I LP
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

   
Three months
   
Three months
 
   
ended
   
ended
 
   
March 31, 2011
   
March 31, 2010
 
Cash flows from operating activities
           
Net loss
  $ (5,258 )   $ (4,616 )
Adjustments to reconcile net loss to net cash
               
used in operating activities:
               
Depreciation and amortization
    1,812       1,774  
Loss on derivative instruments, net
    -       34  
Asset impairment loss
    2,700       -  
Inventory valuation adjustment
    -       1,667  
Changes in operating assets and liabilities:
               
Real estate inventory
    (1,275 )     (3,680 )
Accounts receivable
    24       (67 )
Prepaid expenses and other assets
    16       (112 )
Lease intangibles
    (682 )     19  
Accounts payable
    12       (455 )
Accrued liabilities
    (196 )     (1,756 )
Payables or receivables with related parties
    326       290  
Cash used in operating activities
    (2,521 )     (6,902 )
                 
Cash flows from investing activities
               
Capital expenditures for real estate
    80       (62 )
Change in restricted cash
    (461 )     (768 )
Cash used in investing activities
    (381 )     (830 )
                 
Cash flows from financing activities
               
Proceeds from notes payable
    1,403       3,454  
Proceeds from note payable to related party
    325       -  
Payments on notes payable
    (30 )     (54 )
Payments on capital lease obligations
    (17 )     (16 )
Financing costs
    (2 )     -  
Contributions from general partners
    2,062       3,934  
Cash provided by financing activities
    3,741       7,318  
                 
Net change in cash and cash equivalents
    839       (414 )
Cash and cash equivalents at beginning of period
    2,040       1,964  
Cash and cash equivalents at end of period
  $ 2,879     $ 1,550  
                 
Supplemental disclosure:
               
Interest paid, net of amounts capitalized
  $ 1,107     $ 823  
                 
Non-cash investing activities:
               
Notes receivable from noncontrolling interest holder
  $ 195     $ 635  
Capital expenditures for real estate in accrued liabilities
  $ 43     $ 54  
Reclassification of real estate inventory to buildings
  $ -     $ 2,611  
                 
Non-cash financing activities:
               
Contributions from noncontrolling interest holder
  $ 195     $ 635  
Financing costs in accrued liabilities
  $ -     $ 12  

See Notes to Condensed Consolidated Financial Statements.

 
6

 
  
Behringer Harvard Short-Term Opportunity Fund I LP
Notes to Condensed Consolidated Financial Statements
(Unaudited)
   
1.
Business and Organization
 
Business
 
Behringer Harvard Short-Term Opportunity Fund I LP (which may be referred to as the “Partnership,” “we,” “us,” or “our”) is a limited partnership formed in Texas on July 30, 2002.  Our general partners are Behringer Harvard Advisors II LP (“Behringer Advisors II”) and Robert M. Behringer (collectively, the “General Partners”).  We were funded through capital contributions from our General Partners and initial limited partner on September 20, 2002 (date of inception) and offered our limited partnership units pursuant to a public offering which commenced on February 19, 2003 and was terminated on February 19, 2005 (the “Offering”).  The Offering was a best efforts continuous offering, and we admitted new investors until the termination of the Offering.  Our limited partnership units are not currently listed on a national exchange, and we do not expect any public market for the units to develop.  We have used the proceeds from the Offering, after deducting offering expenses, to acquire interests in twelve properties, including seven office building properties, one shopping/service center, a hotel redevelopment with an adjoining condominium development, two development properties and undeveloped land.  We do not actively engage in the business of operating the hotel.  As of March 31, 2011, ten of the twelve properties we acquired remain in our portfolio.  Our Agreement of Limited Partnership, as amended (the “Partnership Agreement”), provides that we will continue in existence until the earlier of December 31, 2017 or termination of the Partnership pursuant to the dissolution and termination provisions of the Partnership Agreement.
 
Although there have been recent signs of stabilization, the U.S. and global economies continue to experience the effects of the significant downturn that began in 2008.  This downturn continues to disrupt the broader financial and credit markets, weaken consumer confidence and impact unemployment rates.  While it is unclear when the overall economy will recover from these weakened market conditions, we do not expect conditions to improve significantly in the near future.  Consequently, our primary objectives will be to continue to preserve capital, as well as sustain and enhance property values, while continuing to focus on the disposition of our properties.  Our ability to dispose of our properties will be subject to various factors, including the ability of potential purchasers to access capital debt financing.  If we are unable to sell a property when we determine to do so, it could have a significant adverse effect on our cash flows and results of operations.  Given the disruptions in the capital markets and the current lack of available credit to buyers, our ability to dispose of our properties may be delayed, or we may receive lower than anticipated returns.  In addition, a more prolonged economic downturn could negatively affect our ability to attract and retain tenants.  
  
Our principal demands for funds in the next twelve months and beyond will be for the payment of costs associated with lease-up of available space at our operating properties, for certain ongoing costs at our development properties, Partnership operating expenses and for the payment of interest, principal and further principal paydowns on our outstanding indebtedness as required by our lenders.  During the three months ended March 31, 2011, Behringer Advisors II or its affiliates waived reimbursement of administrative expenses of $0.1 million and asset management fees of $15,000.  In addition, Behringer Advisors II or its affiliates waived $2.1 million for reimbursement of operating expenses for the three months ended March 31, 2011, which is classified as a capital contribution from our General Partners on our condensed consolidated statement of equity.  In addition, during the year ended December 31, 2010, Behringer Harvard Holdings LLC (“Behringer Holdings” or our ”Sponsor”), forgave $2.8 million of principal borrowings and all accrued interest thereon under a loan agreement, which has also been accounted for as a capital contribution by our General Partners.  As a result of current economic and market conditions, our ability to continue as a going concern is dependent on the willingness and ability of our General Partners or their affiliates to provide us with sources of liquidity.  Our portfolio of office and shopping/service center properties was approximately 27% percent leased at March 31, 2011.  We signed a long-term full building lease that will begin October 1, 2011 at 1221 Coit Road, which represents approximately 11% of the rentable square feet.  We are continuing marketing efforts to re-lease all of our vacant spaces quickly and at terms that are favorable to us.  In addition, on April 20, 2011 we entered into a contract for the sale of 250/290 John Carpenter Freeway which represents approximately 47% of the rentable square feet in our office and shopping/service center properties.  See Note 10, “Subsequent Events” for further information regarding the contract for sale of 250/290 John Carpenter Freeway.
 
We expect to fund our liquidity requirements from borrowings and proceeds from the disposition of properties.  In addition, we may also seek to raise capital by contributing one or more of our existing assets to a joint venture with a third party.  Investments in joint ventures, under certain circumstances, involve risks not present when a third party is not involved.  Our ability to successfully identify, negotiate, and complete joint venture transactions on acceptable terms or at all is highly uncertain in the current economic environment.
 
We continue to prepare and assess properties for potential sale.  In order to execute our current business plan and provide additional liquidity, we have identified a number of our investments for possible disposition in 2011.  As a result of our current liquidity needs, we may have to sell a property under terms that are less advantageous than we could achieve with a longer holding period.  However, there can be no assurance these future dispositions will occur, or, if they occur, that they will help us to achieve our liquidity objectives.

 
7

 
 
Behringer Harvard Short-Term Opportunity Fund I LP
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of March 31, 2011, $98.4 million of our $166.8 million in notes payable matures in the next twelve months.  Of that amount, $9.4 million is related to the Plaza Skillman property which was placed into receivership on October 11, 2010.  The loan is nonrecourse to us.  As of March 31, 2011, of our $166.8 million in notes payable, $154.4 million is secured by properties and $144.0 million is recourse to us.  We or our subsidiaries are currently in default on $72.5 million of the $98.4 million that is due in the next twelve months.  We are currently in negotiations with the lenders to waive the events of default and restructure the terms under each loan.  We are working with all lenders, with respect to our remaining debt due within the next twelve months, to either extend the maturity dates of the loans or refinance the loans under different terms.  We currently expect to use additional borrowings and proceeds from the disposition of properties to continue making our scheduled debt service payments until the maturity dates of the loans are extended, the loans are refinanced, or the outstanding balance of the loans is completely paid off.  However, there is no guarantee that we will be able to refinance our borrowings with more or less favorable terms or extend the maturity dates of such loans.  In the event that any of the lenders demanded immediate payment of an entire loan balance, we would have to consider all available alternatives, including transferring legal possession of the relevant property to the lender.
 
2.
Interim Unaudited Financial Information
 
The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in this report on Form 10-Q pursuant to the rules and regulations of the SEC.
 
The results for the interim periods shown in this report are not necessarily indicative of future financial results.  Our accompanying condensed consolidated balance sheet as of March 31, 2011 and our condensed consolidated statements of operations, equity and cash flows for the periods ended March 31, 2011 and 2010 have not been audited by our independent registered public accounting firm.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly our financial position as of March 31, 2011 and December 31, 2010 and our consolidated results of operations and cash flows for the periods ended March 31, 2011 and 2010.  Such adjustments are of a normal recurring nature.
 
Use of Estimates in the Preparation of Financial Statements
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates include such items as impairment of long-lived assets, depreciation and amortization and allowance for doubtful accounts.  Actual results could differ from those estimates.
 
To conform to the current year presentation, which presents advertising expense as a component of property operating expenses on our condensed consolidated statement of operations, we reclassified advertising costs of $52,000 to operating expenses for the three months ended March 31, 2010.  We believe this change in presentation simplifies the statement of operations by combining an immaterial line item.
 
We have evaluated subsequent events for recognition or disclosure in our condensed consolidated financial statements.
 
3.
Summary of Significant Accounting Policies
 
Described below are certain of our significant accounting policies. The disclosures regarding several of the policies have been condensed or omitted in accordance with interim reporting regulations specified by Form 10-Q.  Please see our Annual Report on Form 10-K for a complete listing of all of our significant accounting policies.  In the Notes to Condensed Consolidated Financial Statements, all dollar and share amounts in tabulation are in thousands of dollars and shares, respectively, unless otherwise noted. 
 
 

 
8

 
 
Behringer Harvard Short-Term Opportunity Fund I LP
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
Real Estate
 
As of March 31, 2011 and December 31, 2010, accumulated depreciation and amortization related to direct investments in real estate assets and related lease intangibles were as follows:
 
   
Buildings and
   
Lease
 
As of March 31, 2011
 
Improvements
   
Intangibles
 
Cost
  $ 117,655     $ 5,460  
Less: depreciation and amortization
    (22,725 )     (2,419 )
Net
  $ 94,930     $ 3,041  

   
Buildings and
   
Lease
 
As of December 31, 2010
 
Improvements
   
Intangibles
 
Cost
  $ 119,903     $ 5,071  
Less: depreciation and amortization
    (21,488 )     (2,496 )
Net
  $ 98,415     $ 2,575  
 
We amortize the value of in-place leases, in-place tenant improvements and in-place leasing commissions to expense over the term of the respective leases.  The tenant relationship values are amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the acquired lease intangibles related to that tenant would be charged to expense.  Anticipated amortization associated with acquired lease intangibles for the period from April 1 through December 31, 2011 and for each of the following four years ended December 31 is as follows:
 
April 1 - December 31, 2011
  $      41  
2012
    33  
2013
    33  
2014
    33  
2015
    33  
 
Impairment of Long-Lived Assets
 
Management monitors events and changes in circumstances indicating that the carrying amounts of our real estate assets may not be recoverable.  Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to, major vacancies and the resulting loss of revenues, natural disasters, bona fide purchase offers and a change in the economic climate.  When such events or changes in circumstances occur, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the estimated period we expect to hold the asset, including its eventual disposition, to the carrying amount of the asset.  In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying value of the asset to estimated fair value.  We determine the estimated fair value based on discounted cash flow streams using various factors, including estimated future selling prices, costs spent to date, remaining budgeted costs and selling costs.
 
In order to execute our business plan and provide additional equity, we identified a number of our investments for possible disposition in 2011, thus decreasing our projected hold period.  On April 20, 2011, we entered into a contract for the sale of 250/290 John Carpenter Freeway. The contract sales price of $27.0 million was less than our carrying value of the asset.  As a result, we recognized an asset impairment loss of approximately $2.7 million for the three months ended March 31, 2011 to adjust the carrying value of the asset to estimated fair value.  As of March 31, 2011, we do not believe that the property meets the criteria for classification as held for sale.  There was no asset impairment loss for the three months ended March 31, 2010.  Real estate values may continue to have fluctuations due to, among other things, the current economic environment and, as a result, there can be no assurance we will not have impairments in the future.  Any such charges could have an adverse effect on our consolidated financial position and operations.
 
Inventory Valuation Adjustment
 
For real estate inventory, at each reporting date, management compares the estimated fair value less costs to sell to the carrying value.  An adjustment is recorded to the extent that the fair value less costs to sell is less than the carrying value.  We determine the estimated fair value based on comparable sales in the normal course of business under existing and anticipated market conditions.  This evaluation takes into consideration factors such as current selling prices, estimated future selling prices, costs spent to date, estimated additional future costs, appraisals and management’s plans for the property.  Estimates used in the determination of the estimated fair value of real estate inventory are based on factors known to management at the time such estimates are made.

 
9

 
 
Behringer Harvard Short-Term Opportunity Fund I LP
Notes to Condensed Consolidated Financial Statements
(Unaudited)
   
The U.S. housing market and related condominium sector continued to experience the downturn that began in 2006.  The housing market has experienced reduced demand, deterioration in the credit markets, rising foreclosure activity due to relatively high unemployment and generally weak conditions in the overall economy.  These factors contributed to weakened demand for new homes, slower than expected sales and reduced selling prices.  As a result of our evaluations, for the three months ended March 31, 2010, we recognized inventory valuation adjustments of $1.7 million related to the constructed luxury homes and developed land lots at Bretton Woods.  We recognized no inventory valuation adjustments for the three months ended March 31, 2011.  In the event that market conditions decline in the future or the current difficult market conditions extend beyond our expectations, additional adjustments may be necessary in the future.  Any such charges could have an adverse effect on our consolidated financial position.
 
Revenue Recognition
 
We recognize rental income generated from leases on real estate assets on the straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any.  The total net decrease to rental revenues due to straight-line rent adjustments for each of the three months ended March 31, 2011 and 2010 was approximately $0.1 million and $18,000, respectively.  As discussed above, our rental revenue also includes amortization of above and below market leases.  Any payments made to tenants that are considered lease incentives or inducements are being amortized to revenue over the life of the respective leases.  Revenues relating to lease termination fees are recognized at the time a tenant’s right to occupy the space is terminated and when we have satisfied all obligations under the agreement.
 
We also recognize revenue from the operations of a hotel.  Hotel revenues consisting of guest room, food and beverage, and other revenue are derived from the operations of the boutique hotel portion of Hotel Palomar and Residences and are recognized as the services are rendered.
 
Noncontrolling Interest
 
We hold a direct or indirect majority controlling interest in certain real estate partnerships and thus, consolidate the accounts with and into our accounts.  Noncontrolling interests in partnerships represents the third-party partners’ proportionate share of the equity in consolidated real estate partnerships.  Income and losses are allocated to noncontrolling interest holders based on their weighted average percentage ownership during the year.
 
During the three months ended March 31, 2011, we issued notes receivable totaling $0.2 million to our 30% noncontrolling interest partner in Mockingbird Commons LLC (“Mockingbird Commons Partnership”).  Proceeds from the notes receivable were recognized as capital contributions and contra-equity to the minority interest partner on our condensed consolidated statement of equity for the three months ended March 31, 2011.
 
4. 
New Accounting Pronouncements
 
In April 2011, the Financial Accounting Standards Board (“FASB”) issued further clarification on when a loan modification or restructuring is considered a troubled debt restructuring. In determining whether a loan modification represents a troubled debt restructuring, an entity should consider whether the debtor is experiencing financial difficulty and the lender has granted a concession to the borrower. This guidance is to be applied retrospectively, with early application permitted.   This guidance is effective for the first interim or annual period beginning on or after June 15, 2011. We do not expect the adoption of this guidance to have a material impact on our financial statements or disclosures.
 
5. 
Fair Value Measurements
 
Fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy was established by the Financial Accounting Standards Board that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

 
10

 
 
Behringer Harvard Short-Term Opportunity Fund I LP
Notes to Condensed Consolidated Financial Statements
(Unaudited)
   
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.  Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.  In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
 
Nonrecurring Fair Value Measurements
 
Asset Impairment Losses
 
Management monitors events and changes in circumstances indicating that the carrying amounts of our real estate assets may not be recoverable.  We evaluated 250/290 John Carpenter Freeway during the fourth quarter of 2010 and the first quarter of 2011 as a result of declining market rental rates and continuing vacancies at the property.  We recognized an asset impairment loss of $2.3 million for the year ended December 31, 2010.  In order to execute our business plan and provide additional equity, we identified a number of our investments for possible disposition in 2011, thus decreasing our projected hold period.  On April 20, 2011, we entered into a contract for the sale of 250/290 John Carpenter Freeway. The contract sales price of $27.0 million was less than our carrying value of the asset.  As a result, we recognized an asset impairment loss of approximately $2.7 million for the three months ended March 31, 2011 to adjust the carrying value of the asset to estimated fair value.  We also recognized a $2.8 million impairment charge for the year ended December 31, 2010 related to our Plaza Skillman property as a result of learning that certain tenants would not be renewing or extending their leases.
 
Inventory Valuation Adjustment
 
The housing market and related condominium sales continued to experience difficult conditions and as a result we evaluated our real estate inventory for potential impairment.  As a result of our evaluations, we recognized inventory valuation adjustments of $1.9 million related to the constructed luxury homes and developed land lots at Bretton Woods during the year ended December 31, 2010.  The inputs used to calculate the fair value of these assets included current selling prices, estimated future selling prices, costs spent to date, estimated additional future costs and appraisals.
 
The following fair value hierarchy table presents information about our assets measured at fair value on a nonrecurring basis during the three months ended March 31, 2011 and December 31, 2010.
 
                     
Total
       
March 31, 2011
 
Level 1
   
Level 2
   
Level 3
   
Fair Value
   
Loss
 
Real estate
  $ -     $ 26,195     $ -     $ 26,195     $ (2,700 )

                     
Total
       
December 31, 2010
 
Level 1
   
Level 2
   
Level 3
   
Fair Value
   
Loss
 
Real estate
  $ -     $ -     $ 35,015     $ 35,015     $ (5,118 )
Real estate inventory, net
    -       -       6,990       6,990       (1,886 )
Total
  $ -     $ -     $ 42,005     $ 42,005     $ (7,004 )
 
Fair Value Disclosures
 
Fair value of financial instruments
 
As of March 31, 2011 and December 31, 2010, management estimated the carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses were at amounts that reasonably approximated their fair value based on their short-term maturities.
 
The notes payable and capital lease obligations totaling approximately $166.8 million and $165.2 million as of March 31, 2011 and December 31, 2010, respectively, have a fair value of approximately $165.8 million and $164.7 million, respectively, based upon interest rates for mortgages and capital leases with similar terms and remaining maturities that we believe the Partnership could obtain.

 
11

 
 
Behringer Harvard Short-Term Opportunity Fund I LP
Notes to Condensed Consolidated Financial Statements
(Unaudited)
   
The fair value estimates presented herein are based on information available to our management as of March 31, 2011 and December 31, 2010.  We determined the above disclosure of estimated fair values using available market information and appropriate valuation methodologies.  However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.  Although our management is not aware of any factors that would significantly affect the estimated fair value amount, such amount has not been comprehensively revalued for purposes of these consolidated financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein.
 
6. 
Real Estate
 
As of March 31, 2011 and December 31, 2010, we owned interests in five office building properties, one shopping/service center, a hotel redevelopment with an adjoining condominium development, two development properties and undeveloped land.  In the aggregate, the office and shopping/service center properties represent approximately 1.15 million rentable square feet.  The following table presents certain additional information about our properties as of March 31, 2011:
 
       
Date
 
Approx. Rentable
     
Approximate
 
Ownership 
 
Property Name
 
Location
 
Acquired
 
Square Footage
 
Description
 
% Leased
 
Interest
 
5050 Quorum
 
Dallas, Texas
 
07/02/04
 
 133,799 
 
seven-story office building
 
52%
 
100%
 
Plaza Skillman (1)
 
Dallas, Texas
 
07/23/04
 
 98,764 
 
shopping/service center
 
47%
 
100%
 
1221 Coit Road
 
Dallas, Texas
 
10/04/04
 
 125,030 
 
two-story office building
 
0% (2)
 
90%
 
Hotel Palomar and Residences
 
Dallas, Texas
 
11/08/04
 
 475,000 
 
redevelopment property
 
n/a
 
70%
 
250/290 John Carpenter Freeway
 
Irving, Texas
 
04/04/05
 
 539,000 
 
three-building office complex
 
18%
 
100%
 
Landmark I
 
Dallas, Texas
 
07/06/05
 
 122,273 
 
two-story office building
 
83%
 
100%
 
Landmark II
 
Dallas, Texas
 
07/06/05
 
 135,154 
 
two-story office building
 
0%
 
100%
 
Cassidy Ridge
 
Telluride, Colorado
 
05/15/06
 
land
 
development property
 
n/a
 
100%
 
Melissa Land
 
Melissa, Texas
 
10/05/05
 
land
 
land
 
n/a
 
100%
 
Bretton Woods
 
Dallas, Texas
 
03/03/05
 
 land 
 
developed property
 
n/a
 
100%
 
                           
1) Property placed into receivership on October 11, 2010
2) Full building lease to begin October 2011
 
 
7. 
Capitalized Costs
 
On May 15, 2006, we acquired a 100% interest in Cassidy Ridge, a 1.56 acre site in Telluride, Colorado on which we are constructing 23 luxury condominium units.  Certain costs associated with Cassidy Ridge development have been capitalized.  Construction of the condominiums was essentially complete at March 31, 2011 and as a result, we will no longer capitalize indirect costs associated with the project.  For the three months ended March 31, 2011 and 2010 we capitalized a total of $0.5 million and $4.0 million, respectively, in costs associated with the development of Cassidy Ridge to real estate inventory.  The amount for the period ended March 31, 2011 is net of $0.6 million in credits received.  During the three months ended March 31, 2011 and 2010, we capitalized $0.7 million and $0.4 million, respectively, in interest costs for Cassidy Ridge.

 
12

 
 
Behringer Harvard Short-Term Opportunity Fund I LP
Notes to Condensed Consolidated Financial Statements
(Unaudited)
   
8. 
Notes Payable
 
The following table sets forth the principal balance of our notes payable as of March 31, 2011 and December 31, 2010:
    
Balance
 
Started
Interest
 
Maturity
Description
 
March 31, 2011
   
December 31, 2010
 
Rate (10)
 
Date
5050 Quorum Loan - Sterling Bank
  $ 10,000     $ 10,000  
7.0%
 
1/23/2011 (7)
1221 Coit Road Loan - Meridian Bank Texas
    4,000       4,000  
7.0% (1)
 
12/4/2011
Plaza Skillman Loan - IPTV
    9,366       9,366  
7.34%
 
4/11/2011 (8)
Plaza Skillman Loan - unamortized premium
    138       160      
4/11/2011 (8)
Hotel Palomar and Residences - Credit Union Liquidity Services
    24,850       24,850  
Prime + 1.0% (2)
 
10/1/2011 (7)
Hotel Palomar and Residences - Bank of America
    41,218       41,218  
30-day LIBOR + 3.5% (3)
 
12/21/2012
Mockingbird Commons Partnership Loans
    1,294       1,294  
6.0% to 12.0%
 
10/9/2009
Bretton Woods Loans - Preston State Bank
    4,844       4,844  
6.0% (4)
 
11/24/2012
Landmark I Loan - State Farm Bank
    9,975       9,975  
4.0%
 
4/1/2011 (9)
Landmark II Loan - State Farm Bank
    11,025       11,025  
4.0%
 
4/1/2011 (9)
Melissa Land Loan - Preston State Bank
    1,560       1,590  
5.5% (5)
 
7/29/2012
Cassidy Ridge Loan - Credit Union Liquidity Services
    26,861       25,458  
6.5% (6)
 
10/1/2011
Revolver Agreement - Bank of America
    9,650       9,650  
30-day LIBOR + 3.5% (3)
 
12/21/2012
Notes payable
    154,781       153,430        
                       
BHH Loan - related party
    11,118       11,118  
5.0%
 
11/13/2012
BHH Cassidy Ridge Loan - related party
    900       575  
5.0%
 
11/1/2011
Notes payable related party
    12,018       11,693        
    $ 166,799     $ 165,123        
 

(1)
Rate is the higher of prime plus 1.0% or 7.0%.
 
(2)
Prime rate at March 31, 2011 was 3.25%.
 
(3)
30-day LIBOR was 0.3% at March 31, 2011.
 
(4)
Rate is the higher of prime plus 2.0% or 6.0%.
 
(5)
Rate is the higher of prime plus 0.5% or 6.0%.
 
(6)
Rate is the higher of prime plus 0.5% or 5.5%.
 
(7)
Rate is the higher of prime plus 1.5% or 6.5%.
 
(8)
Property placed into receivership on October 11, 2010
 
(9)
Maturity date extended to July 1, 2011, subsequent to March 31, 2011.
 
(10)
For each of our loans that are in default, we may incur default interest rates.
 
Although the commercial real estate debt market remains restricted, lending volume has increased year-over- year, and secondary market debt is once again available for certain asset classes on a limited basis.  In general, lenders have increased the amount of equity required to support new or existing borrowings.  A market downturn could reduce cash flow, cause us to incur additional losses, and cause us not to be in compliance with lender covenants.  As of March 31, 2011, $98.4 million of our $166.8 million in notes payable is due in the next twelve months. As of March 31, 2011, of our $166.8 million in notes payable, $154.4 million was secured by properties and $144.0 million is recourse to us.  We or our subsidiaries are currently in default on $72.5 million of the $98.4 million that is due in the next twelve months.  We are currently in negotiations with all lenders to waive the events of default and restructure the terms under each loan.  We currently expect to use additional borrowings and proceeds from the disposition of properties to continue making our scheduled debt service payments until the maturity dates of the loans are extended, the loans are refinanced, or the outstanding balance of the loans is completely paid off.  However, there is no guarantee that we will be able to refinance our borrowings with more or less favorable terms or extend the maturity dates of such loans.  In the event that any of the lenders demanded immediate payment of an entire loan balances, we would have to consider all available alternatives, including transferring legal possession of the relevant property to the lender.

 
13

 
 
Behringer Harvard Short-Term Opportunity Fund I LP
Notes to Condensed Consolidated Financial Statements
(Unaudited)
   
Subsequent to March 31, 2011, Behringer Harvard Landmark LP, our wholly-owned subsidiary, extended the loan agreement with State Farm Bank, F.S.B. (“Landmark Lender”), an unaffiliated third party, from April 1, 2011 to July 1, 2011.  The loan agreement contains one additional option to extend the maturity date of the loan for three additional months and provides for early prepayment.  Payments of interest only are due monthly with the unpaid principal balance and all accrued but unpaid interest due on July 1, 2011.  Amounts outstanding under the loan agreement increased from 4.0% to 4.25% as a result of the extension to July 1, 2011.  The outstanding principal balance under the loan agreement was $21.0 million at March 31, 2011 and December 31, 2010.
 
The Mockingbird Commons Partnership entered into a promissory note payable to Credit Union Liquidity Services, LLC, f/k/a Texans Commercial Capital, LLC (“Texans”), an unaffiliated third party, whereby the borrower was permitted to borrow up to $34.0 million (“Mockingbird Loan Agreement”) to construct luxury high-rise condominiums.  Amounts outstanding under the loan bear interest at the Prime Rate plus one percent (1.0%) with a maturity date of October 1, 2011.  The outstanding principal balance under the Mockingbird Loan Agreement was $24.9 million at March 31, 2011 and December 31, 2010.  The borrower failed to make a mandatory $3.0 million principal payment on or before January 15, 2011, as required under the loan agreement.  Nonpayment of the mandatory amount due constituted an event of default under the loan agreement.  All past due amounts may bear interest up to maximum amounts under applicable law.  We received notice from the lender dated May 13, 2011 demanding payment of the $3.0 million mandatory principal payment by May 20, 2011.  If payment is not made by May 20, 2011, the lender may demand immediate payment of the entire loan balance and all past due amounts.  We have been and currently are in negotiations to extend or modify the Mockingbird Loan Agreement.  The National Credit Union Administration placed Texans into conservatorship in April 2011.
 
Behringer Harvard Mountain Village, LLC, our wholly-owned subsidiary, entered into a promissory note payable to Texans, whereby the borrower was permitted to borrow a total principal amount of $27.65 million (“Cassidy Ridge Loan Agreement”) to construct Cassidy Ridge.  We assigned a second lien position on Cassidy Ridge to Texans in the amount of $12.6 million as additional security to the Mockingbird Loan Agreement.  The maturity date of the Cassidy Ridge Loan Agreement is October 1, 2011 and the current interest rate is a fixed rate of 6.5% with interest being calculated on the unpaid principal.  The outstanding principal balance under the Cassidy Ridge Loan Agreement was $26.9 million and $25.5 million at March 31, 2011 and December 31, 2010, respectively.  The default under the Mockingbird Loan Agreement created a cross-default under the Cassidy Ridge Loan Agreement.  As a result, the lender may demand immediate payment of the entire loan balance and all past due amounts may bear interest up to maximum amounts under applicable law.  We have remained and continue to remain current on interest payments due under the Mockingbird Loan Agreement and the Cassidy Ridge Loan Agreement.
 
Behringer Harvard Quorum I LP, our wholly-owned subsidiary, entered into a loan agreement with Sterling Bank (“Quorum Lender”), to borrower $10 million (“Quorum Loan Agreement”), which is secured by 5050 Quorum.  The outstanding principal balance and all accrued but unpaid interest under the Quorum Loan Agreement matured on January 23, 2011.  The borrower did not pay the balance on January 23, 2011, which constituted an event of default under the loan agreement.  As a result, past due amounts may bear interest at up to 18% per annum during the default period.  We received notice from the lender on March 30, 2011 demanding immediate payment of the outstanding principal and all accrued interest.  As the loan is recourse to us, we would have to consider all available alternatives including transferring legal possession of the property to the lender.  We remain in default and are continuing to negotiate with the Quorum Lender to obtain a waiver of the default, modify or extend the Quorum Loan Agreement.  The outstanding principal balance was $10 million at March 31, 2011 and December 31, 2010.
 
On November 13, 2009, we entered into the Fourth Amended and Restated Unsecured Promissory Note payable to Behringer Holdings, pursuant to which we may borrow a maximum of $40.0 million (“BHH Loan”).  On December 31, 2010 Behringer Holdings forgave $2.8 million of principal borrowings and all accrued interest thereon, which was accounted for as a capital contribution by our General Partners.  On March 29, 2011, we entered into the Fifth Amended and Restated Promissory Note to amend the terms of the BHH Loan to a maximum borrowing amount of $25.0 million.  The outstanding principal balance under the BHH Loan at March 31, 2011 and December 31, 2010 was $11.1 million.  Borrowings under the BHH Loan are being used principally to finance general working capital and capital expenditures.  While we would normally explore obtaining additional liquidity of this sort in the debt market, the debt market tightened, and we accessed support from our Sponsor instead. The BHH Loan is unsecured, has an interest rate of 5.0% per annum and requires no monthly payments of interest or principal.  The maturity date of all borrowings and accrued but unpaid interest is March 29, 2014.
 
While it is unclear when the overall economy will recover, we do not expect conditions to improve significantly in the near future.  As a result, we expect that we will continue to require this liquidity support from our Sponsor during 2011.  Our Sponsor, subject to its approval, may make available to us additional funds under the BHH Loan through 2011, potentially up to the borrowing limits thereunder.  There is no guarantee that our Sponsor will provide additional liquidity to us.

 
14

 
 
Behringer Harvard Short-Term Opportunity Fund I LP
Notes to Condensed Consolidated Financial Statements
(Unaudited)
   
In addition, on October 1, 2010, Behringer Harvard Mountain Village, LLC entered into a promissory note agreement with Behringer Holdings to borrow up to $0.9 million (“BHH Cassidy Ridge Loan”).  Proceeds from the loan were used to complete construction of the condominiums at Cassidy Ridge.  The loan bears interest at 5% and matures on October 1, 2011. The outstanding principal balance under the loan was $0.9 million and $0.6 million at March 31, 2011 and December 31, 2010, respectively.
 
As previously noted, we agreed to transfer possession and control of the Plaza Skillman property to a receiver on October 11, 2010.  The loan secured by this property is nonrecourse to us and had an outstanding principal balance of $9.4 million at March 31, 2011.  Additionally, as discussed above, we or our subsidiaries were also in default under the Quorum Loan Agreement, the Mockingbird Loan Agreement and Cassidy Ridge Loan Agreement at March 31, 2011.  We remain in default and are currently in negotiations with the lenders to waive the events of default or amend the loan agreements, among other modifications. There are no assurances that we will be successful in our negotiations to waive the events of default or modify the loan agreements with the lenders.  In the event that any of the lenders demanded immediate payment of an entire loan balance, we would have to consider all available alternatives, as the loans (other than Plaza Skillman) are on a recourse basis to us, including transferring legal possession of the relevant property to the lender.
 
Generally, our notes payable mature approximately three to five years from origination.  The Bank of America loan for Hotel Palomar and Residences and the Revolver Agreement contain cross default and cross-collateralization provisions.  The Texans loans for Hotel Palomar and Residences and Cassidy Ridge also contain cross default and cross collateralization provisions.  The majority of our notes payable require payments of interest only, with all unpaid principal and interest due at maturity.  Further, our loan agreements stipulate that we comply with certain reporting and financial covenants.  These covenants include, among other things, notifying the lender of any change in management and maintaining minimum net worth and liquidity.  We believe that we were in compliance with all other debt covenants under our loan agreements at March 31, 2011.  Each loan, with the exception of the Mockingbird Commons Partnership Loans and the BHH Loan, is secured by the associated real property.  In addition, with the exception of the Mockingbird Commons Partnership Loans, the BHH Loan, the BHH Cassidy Ridge Loan and the Plaza Skillman Loan, all loans are recourse to us.
 
9. 
Related Party Arrangements
 
The General Partners and certain of their affiliates are entitled to receive fees and compensation in connection with the management and sale of our assets, and have received fees in the past in connection with the Offering and acquisitions.  Our General Partners have agreed that all of these fees and compensation will be allocated to Behringer Advisors II since the day-to-day responsibilities of serving as our general partner are performed by Behringer Advisors II through the executive officers of its general partner.
 
For the management and leasing of our properties, we pay HPT Management Services, LLC, Behringer Harvard Short-Term Management Services, LLC or Behringer Harvard Real Estate Services, LLC, or their affiliates (individually or collectively referred to as “Property Manager”), affiliates of our General Partners, property management and leasing fees equal to the lesser of:  (a) the amounts charged by unaffiliated persons rendering comparable services in the same geographic area or (b)(1) for commercial properties that are not leased on a long-term net lease basis, 4.5% of gross revenues, plus separate leasing fees of up to 1.5% of gross revenues based upon the customary leasing fees applicable to the geographic location of the properties, and (2) in the case of commercial properties that are leased on a long-term net lease basis (ten or more years), 1% of gross revenues plus a one-time initial leasing fee of 3% of gross revenues payable over the first five years of the lease term.  We reimburse the costs and expenses incurred by our Property Manager on our behalf, including the wages and salaries and other employee-related expenses of all on-site employees who are engaged in the operation, management, maintenance and leasing or access control of our properties, including taxes, insurance and benefits relating to such employees, and legal, travel and other out-of-pocket expenses that are directly related to the management of specific properties.  During each of the three months ended March 31, 2011 and 2010, we incurred property management fees payable to our Property Manager of $0.1 million.
 
We pay Behringer Advisors II or its affiliates an annual asset management fee of 0.5% of the contract purchase price of our assets.  Any portion of the asset management fee may be deferred and paid in a subsequent year.  During the three months ended March 31, 2011, we incurred asset management fees of $0.3 million, of which approximately $60,000 was capitalized to real estate inventory and approximately $15,000 was waived.  During the three months ended March 31, 2010, we incurred asset management fees of $0.3 million, of which $44,000 was capitalized to real estate and $17,000 was waived.

 
15

 
 
Behringer Harvard Short-Term Opportunity Fund I LP
Notes to Condensed Consolidated Financial Statements
(Unaudited)
   
In connection with the sale of our properties, we will pay to the General Partners or their affiliates a real estate commission in an amount not exceeding the lesser of:  (a) 50% of the reasonable, customary and competitive real estate brokerage commissions customarily paid for the sale of a comparable property in light of the size, type and location of the property, or (b) 3% of the gross sales price of each property, subordinated to distributions to limited partners from the sale proceeds of an amount which, together with prior distributions to the limited partners, will equal (1) 100% of their capital contributions plus (2) a 10% annual cumulative (noncompounded) return of their net capital contributions.  Subordinated real estate commissions that are not payable at the date of sale, because limited partners have not yet received their required minimum distributions, will be deferred and paid at such time as these subordination conditions have been satisfied.  In addition, after the limited partners have received a return of their net capital contributions and a 10% annual cumulative (noncompounded) return on their net capital contributions, then the General Partners are entitled to receive 15% of the remaining residual proceeds available for distribution (a subordinated participation in net sale proceeds and distributions); provided, however, that in no event will the General Partners receive in the aggregate more than 15% of sale proceeds remaining after the limited partners have received a return of their net capital contributions.  Since the conditions above have not been met at this time, we incurred no such real estate commissions for the three months ended March 31, 2011 and 2010.
 
We may reimburse Behringer Advisors II for costs and expenses paid or incurred to provide services to us including direct expenses and the costs of salaries and benefits of certain persons employed by those entities and performing services for us, as permitted by our Partnership Agreement.  For the three months ended March 31, 2011 we incurred $0.1 million for administrative services, all of which was waived.  In addition, Behringer Advisors II or its affiliates waived $2.1 million for reimbursement of operating expenses for the three months ended March 31, 2011, which is classified as a capital contribution on our condensed consolidated statement of equity.  For the three months ended March 31, 2010 we incurred such costs for administrative services totaling $0.1 million, all of which was waived.  In addition, Behringer Advisors II or its affiliates waived $3.9 million for reimbursement of operating expenses for the three months ended March 31, 2010, which was classified as capital contributions on our condensed consolidated statement of equity.
 
On November 13, 2009, we entered into the BHH Loan.  On December 31, 2010 Behringer Holdings forgave $2.8 million of principal borrowings and all accrued interest thereon, which was accounted for as a capital contribution by our General Partners.  On March 29, 2011, we entered into the Fifth Amended and Restated Promissory Note to amend the terms of the BHH Loan to a maximum borrowing amount of $25.0 million.  The outstanding principal balance under the BHH Loan at March 31, 2011 and December 31, 2010 was $11.1 million.  Borrowings under the BHH Loan are being used principally to finance general working capital and capital expenditures.  While we would normally explore obtaining additional liquidity of this sort in the debt market, the debt market tightened, and we accessed support from our Sponsor instead. The BHH Loan is unsecured, has an interest rate of 5.0% per annum and requires no monthly payments of interest or principal.  The maturity date of all borrowings and accrued but unpaid interest is March 29, 2014.
                 
In addition, on October 1, 2010, Behringer Harvard Mountain Village, LLC entered into the BHH Cassidy Ridge Loan.  Proceeds from the loan were used to complete construction of the condominiums at Cassidy Ridge.  The loan bears interest at 5% and matures on October 1, 2011. The outstanding principal balance under the loan was $0.9 million and $0.6 million at March 31, 2011 and December 31, 2010, respectively.
                   
We had payables to related parties of approximately $2.6 million and $2.3 million at March 31, 2011 and December 31, 2010, respectively.  These balances consist primarily of interest accrued on the BHH Loan and management fees payable to our Property Manager.
 
We are dependent on Behringer Advisors II, our Property Manager, or their affiliates, for certain services that are essential to us, including disposition decisions, property management and leasing services and other general and administrative responsibilities.  In the event that these companies are unable to provide the respective services to us, we will be required to obtain such services from other sources.
 
10. 
Subsequent Events
 
On April 20, 2011, Behringer Harvard 250/290 John Carpenter LP, our wholly-owned subsidiary, entered into a contract for the sale of 250/290 John Carpenter Freeway to an unaffiliated buyer.  The contract sales price for 250/290 John Carpenter Freeway is $27.0 million, with rights to additional consideration under certain conditions.  The buyer made an earnest money deposit of $1.0 million as required by the contract, which is refundable until termination of an inspection period.
 
We received notice from Texans dated May 13, 2011 demanding payment of the $3.0 million mandatory principal payment due under the Mockingbird Loan Agreement by May 20, 2011.  If payment is not made by May 20, 2011, the lender may demand immediate payment of the entire loan balance and all past due amounts.  The outstanding balance under the Mockingbird Loan Agreement was $24.9 million at March 31, 2011.
 
*****

 
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Item 2. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis should be read in conjunction with our accompanying financial statements and the notes thereto:
 
Forward-Looking Statements
 
Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include discussion and analysis of the financial condition of us and our subsidiaries, including our ability to rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, the value of our assets, our anticipated capital expenditures, the amount and timing of anticipated future distributions to our unitholders, the estimated per unit value of our limited partnership units and other matters.  Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.
 
These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions.  These statements are not guarantees of future performance, and we caution unitholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2010 as filed with SEC and the risk factors described below:
 
 
·
adverse market and economic challenges experienced by the U.S. economy or real estate industry as a whole and the local economic conditions in the markets in which our properties are located;
 
 
·
the availability of cash flow from operating activities for distributions and capital expenditures;
 
 
·
our level of debt and the terms and limitations imposed on us by our debt agreements;
 
 
·
the availability of credit generally, and any failure to refinance or extend our debt as it comes due or a failure to satisfy the conditions and requirements of that debt;
 
 
·
the need to invest additional equity in connection with debt refinancings as a result of reduced asset values and requirements to reduce overall leverage;
 
 
·
future increases in interest rates;
 
 
·
impairment charges;
 
 
·
our ability to retain our executive officers and other key personnel of our advisor, our property manager and their affiliates;
 
 
·
conflicts of interest arising out of our relationships with our advisor and its affiliates;
 
 
·
changes in the level of financial assistance or support provided by our sponsor or its affiliates; and
 
 
·
unfavorable changes in laws or regulations impacting our business or our assets.
 
Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect or false.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results except as required by applicable law.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.
 
Cautionary Note
 
The representations, warranties and covenants made by us in any agreement filed as an exhibit to this Quarterly Report on Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties or covenants to or with any other parties.  Moreover, these representations, warranties or covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.

 
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Liquidity and Capital Resources
 
Our cash and cash equivalents were $2.9 million at March 31, 2011.  Our principal demands for funds in the next twelve months and beyond will be for the payment of costs associated with lease-up of available space at our operating properties, for certain ongoing costs at our development properties, Partnership operating expenses and for the payment of interest, principal and further principal paydowns on our outstanding indebtedness as required by our lenders.  In light of cash needs required to meet maturing debt obligations and our ongoing operating capital needs, our General Partners determined that it was necessary to discontinue payment of monthly distributions beginning with the 2009 third quarter.  Distributions have not resumed through March 31, 2011, and we do not anticipate that payment of regular distributions will resume.  During the three months March 31, 2011, Behringer Advisors II or its affiliates waived reimbursement of administrative expenses of $0.1 million and asset management fees of $15,000.  In addition, Behringer Advisors II or its affiliates waived $2.1 million for reimbursement of operating expenses for the three months ended March 31, 2011, which is classified as a capital contribution from our General Partners on our condensed consolidated statement of equity.  In addition, during the year ended December 31, 2010, our Sponsor forgave $2.8 million of principal borrowings and all accrued interest thereon under a loan agreement, which has also been accounted for as a capital contribution by our General Partners.  As a result of current economic and market conditions, our ability to continue as a going concern is dependent on the willingness and ability of our General Partners or their affiliates to provide us with sources of liquidity.  Our portfolio of office and shopping/service center properties was approximately 27% percent leased at March 31, 2011.  We signed a long-term full building lease that will begin October 1, 2011 at 1221 Coit Road, which represents approximately 11% of the rentable square feet.  We are continuing marketing efforts to re-lease all of our vacant spaces quickly and at terms that are favorable to us.  In addition, on April 20, 2011 we entered into a contract for the sale of 250/290 John Carpenter Freeway which represents approximately 47% of the rentable square feet in our office and shopping/service center properties.
  
We expect to fund our liquidity requirements from borrowings and proceeds from the disposition of properties.  In addition, we may seek to raise capital by contributing one or more of our existing assets to a joint venture with a third party.  Investments in joint ventures, under certain circumstances, involve risks not present when a third party is not involved.  Our ability to successfully identify, negotiate, and complete joint venture transactions on acceptable terms or at all is highly uncertain in the current economic environment.
 
We continue to prepare and assess properties for potential sale.  In order to execute our current business plan and provide additional liquidity, we have identified a number of our investments for possible disposition in 2011.  As a result of our current liquidity needs, we may have to sell a property under terms that are less than advantageous than we could achieve with a longer holding period.  However, there can be no assurance these future dispositions will occur, or, if they occur, that they will help us to achieve our objectives.
 
Although the commercial real estate debt market remains restricted, lending volume has increased year-over-year, and secondary market debt is once again available for certain asset classes on a limited basis.  In general, lenders have increased the amount of equity required to support new or existing borrowings.  A market downturn could reduce cash flow, cause us to incur additional losses, and cause us not to be in compliance with lender covenants.  As of March 31, 2011, $98.4 million of our $166.8 million in notes payable matures in the next twelve months.  As of March 31, 2011, of our $166.8 million in notes payable, $154.4 million is secured by properties and $144.0 million is recourse to us.  We or our subsidiaries are currently in default on $72.5 million of the $98.4 million that is due in the next twelve months.  We are currently in negotiations with the lenders to waive the events of default and restructure the terms under each loan.  We are working with all lenders, with respect to our remaining debt due within the next twelve months, to either extend the maturity dates of the loans or refinance the loans under different terms.  We currently expect to use additional borrowings and proceeds from the disposition of properties to continue making our scheduled debt service payments until the maturity dates of the loans are extended, the loans are refinanced, or the outstanding balance of the loans is completely paid off.  However, there is no guarantee that we will be able to refinance our borrowings with more or less favorable terms or extend the maturity dates of such loans.  In the event that any of the lenders demanded immediate payment of an entire loan balance, we would have to consider all available alternatives, including transferring legal possession of the relevant property to the lender.
 
Subsequent to March 31, 2011, Behringer Harvard Landmark LP, our wholly-owned subsidiary, extended the loan agreement with the Landmark Lender, an unaffiliated third party, from April 1, 2011 to July 1, 2011.  The loan agreement contains one additional option to extend the maturity date of the loan for three additional months and provides for early prepayment.  Payments of interest only are due monthly with the unpaid principal balance and all accrued but unpaid interest due on July 1, 2011.  Amounts outstanding under the loan agreement increased from 4.0% to 4.25% as a result of the extension to July 1, 2011.  The outstanding principal balance under the loan agreement was $21.0 million at March 31, 2011 and December 31, 2010.

 
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The Mockingbird Commons Partnership entered into the Mockingbird Loan Agreement with Texans to construct luxury high-rise condominiums.  Amounts outstanding under the loan bear interest at the Prime Rate plus one percent (1.0%) with a maturity date of October 1, 2011.  The outstanding principal balance under the Mockingbird Loan Agreement was $24.9 million at March 31, 2011 and December 31, 2010.  The borrower failed to make a mandatory $3.0 million principal payment on or before January 15, 2011, as required under the loan agreement.  Nonpayment of the mandatory amount due constituted an event of default under the loan agreement.  All past due amounts may bear interest up to maximum amounts under applicable law.  We received notice from the lender dated May 13, 2011 demanding payment of the $3.0 million mandatory principal payment by May 20, 2011.  If payment is not made by May 20, 2011, the lender may demand immediate payment of the entire loan balance and all past due amounts.  We have been and currently are in negotiations to extend or modify the Mockingbird Loan Agreement.  The National Credit Union Administration placed Texans into conservatorship in April 2011.
 
Behringer Harvard Mountain Village, LLC, our wholly-owned subsidiary, entered into the Cassidy Ridge Loan with Texans to construct Cassidy Ridge.  We assigned a second lien position on Cassidy Ridge to Texans in the amount of $12.6 million as additional security to the Mockingbird Loan Agreement.  The maturity date of the Cassidy Ridge Loan Agreement is October 1, 2011 and the current interest rate is a fixed rate of 6.5% with interest being calculated on the unpaid principal.  The outstanding principal balance under the Cassidy Ridge Loan Agreement was $26.9 million and $25.5 million at March 31, 2011 and December 31, 2010, respectively.  The default under the Mockingbird Loan Agreement created a cross-default under the Cassidy Ridge Loan Agreement.  As a result, the lender may demand immediate payment of the entire loan balance and all past due amounts may bear interest up to maximum amounts under applicable law. We have remained and continue to remain current on interest payments due under the Mockingbird Loan Agreement and the Cassidy Ridge Loan Agreement.
 
Behringer Harvard Quorum I LP, our wholly-owned subsidiary, entered into the Quorum Loan Agreement with the Quorum Lender to borrower $10 million, which is secured by 5050 Quorum.  The outstanding principal balance and all accrued but unpaid interest under the Quorum Loan Agreement matured on January 23, 2011.  The borrower did not pay the balance on January 23, 2011, which constituted an event of default under the loan agreement.  As a result, past due amounts may bear interest at up to 18% per annum during the default period.  We received notice from the lender on March 30, 2011 demanding immediate payment of the outstanding principal and all accrued interest.  As the loan is recourse to we would have to consider all available alternatives including transferring legal possession of the property to the lender.  We remain in default and are continuing to negotiate with the Quorum Lender to obtain a waiver of the default, modify or extend the Quorum Loan Agreement.  The outstanding principal balance was $10 million at March 31, 2011 and December 31, 2010.
 
On March 29, 2011, we entered into the Fifth Amended and Restated Promissory Note to amend the terms of the BHH Loan to a maximum borrowing amount of $25.0 million.  The outstanding principal balance under the BHH Loan at March 31, 2011 and December 31, 2010 was $11.1 million.  Borrowings under the BHH Loan are being used principally to finance general working capital and capital expenditures.  While we would normally explore obtaining additional liquidity of this sort in the debt market, the debt market tightened, and we accessed support from our Sponsor instead. The BHH Loan is unsecured, has an interest rate of 5.0% per annum and requires no monthly payments of interest or principal.  The maturity date of all borrowings and accrued but unpaid interest is March 29, 2014.
 
While it is unclear when the overall economy will recover, we do not expect conditions to improve significantly in the near future.  As a result, we expect that we will continue to require this liquidity support from our Sponsor during 2011.  Our Sponsor, subject to its approval, may make available to us additional funds under the BHH Loan through 2011, potentially up to the borrowing limits thereunder.  There is no guarantee that our Sponsor will provide additional liquidity to us.
 
In addition, on October 1, 2010, Behringer Harvard Mountain Village, LLC entered into the BHH Cassidy Ridge Loan.  Proceeds from the loan were used to complete construction of the condominiums at Cassidy Ridge.  The loan bears interest at 5% and matures on October 1, 2011.  The outstanding principal balance under the loan was $0.9 million and $0.6 million at March 31, 2011 and December 31, 2010, respectively.
 
As previously noted, we agreed to transfer possession and control of the Plaza Skillman property to a receiver on October 11, 2010.  The loan secured by this property is nonrecourse to us and had an outstanding principal balance of $9.4 million at March 31, 2011.  Additionally, as discussed above, we or our subsidiaries were also in default under the Quorum Loan Agreement, the Mockingbird Loan Agreement and Cassidy Ridge Loan Agreement at March 31, 2011.  We remain in default and are currently in negotiations with the lenders to waive the events of default or amend the loan agreements, among other modifications.  We have remained and continue to remain current on interest payments due under the Mockingbird Loan Agreement and the Cassidy Ridge Loan Agreement.  There are no assurances that we will be successful in our negotiations to waive the events of default or modify the loan agreements with the lenders.  In the event that any of the lenders demanded immediate payment of an entire loan balance, we would have to consider all available alternatives, as the loans (other than Plaza Skillman) are on a recourse basis to us, including transferring legal possession of the relevant property to the lender.
 
Generally, our notes payable mature approximately three to five years from origination.  The Bank of America loan for Hotel Palomar and Residences and the Revolver Agreement contain cross default and cross-collateralization provisions.  The Texans loans for Hotel Palomar and Residences and Cassidy Ridge also contain cross default and cross collateralization provisions.  The majority of our notes payable require payments of interest only, with all unpaid principal and interest due at maturity.  Further, our loan agreements stipulate that we comply with certain reporting and financial covenants.  These covenants include, among other things, notifying the lender of any change in management and maintaining minimum net worth and liquidity.  We believe that we were in compliance with all other debt covenants under our loan agreements at March 31, 2011.  Each loan, with the exception of the Mockingbird Commons Partnership Loans and the BHH Loan, is secured by the associated real property.  In addition, with the exception of the Mockingbird Commons Partnership Loans, the BHH Loan, the BHH Cassidy Ridge Loan and the Plaza Skillman Loan, all loans are recourse to us.

 
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Unit Valuation
 
There is not an established trading market for our limited partnership units, and we do not expect that one will develop.  This illiquidity creates a risk that a limited partner may not be able to sell its units at a time or price acceptable to the limited partner.  Our Partnership Agreement requires that our General Partners annually provide our limited partners with an estimate of the amount a holder of limited partnership units would receive if our properties were sold at their fair market values as of the close of the fiscal year, and the proceeds from the sale of the properties (without reduction for selling expenses), together with other funds of the Partnership, were distributed in a liquidation.  
 
On January 14, 2011 Behringer Advisors II, our co-general partner, adopted a new estimated value per limited partnership unit as of December 31, 2010 of $6.48 per unit.  The estimated value per limited partnership unit at March 31, 2011 remained $6.48.  As part of the valuation process, and as required by the Partnership Agreement, the General Partner has obtained the opinion of an independent third party, Robert A. Stanger & Co., Inc., that the estimated valuation is reasonable and was prepared in accordance with appropriate methods for valuing real estate.  Robert A. Stanger & Co., founded in 1978, is a nationally recognized investment banking firm specializing in real estate, REITs and direct participation programs such as ours.
 
The General Partner estimated the value of our investments by using various, widely accepted methodologies and tools including 10-year cash flows (or shorter depending on our projected hold period), brokers opinion of value, appraisals and comparative sales.
 
The General Partner believes that these valuation methodologies are among those that are industry standard and acceptable valuation methodologies.  The estimated values for our investments in real estate may not represent current market values or fair values as determined in accordance with GAAP.  Real estate is currently carried at its amortized cost basis in our financial statements, subject to any adjustments applicable under GAAP.
 
The estimated value per unit of our limited partnership units does not reflect a liquidity discount for the fact that our units are not currently traded on a national securities exchange, a discount for the non-assumability or prepayment obligations associated with certain of our debt, or a discount for partnership overhead and other costs that may be incurred, including any costs of any sale of our assets.  Different parties using different assumptions and estimates could derive a different estimated value per unit, and these differences could be significant.  The markets for real estate can fluctuate and values are expected to change in the future.
 
As with any valuation methodology, the General Partner’s methodology is based upon a number of estimates and assumptions that may not be accurate or complete.  Different parties with different assumptions and estimates could derive a different estimated value per unit.  Accordingly, with respect to the estimated value per unit, we can give no assurance that:
 
 
·
a unit holder would be able to resell his or her units at this estimated value,
 
 
·
a unit holder would ultimately realize distributions per unit equal to our estimated value per unit upon liquidation of our assets and settlement of our liabilities or a sale of the Partnership,
 
 
·
our units would trade at the estimated value per unit on a national securities exchange, or
 
 
·
the methodology used to estimate our value per unit would be acceptable to FINRA or under ERISA for compliance with their respective reporting requirements.

 
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Further, the estimated value per unit that has been determined will fluctuate over time in response to developments related to individual assets in the portfolio and the management of those assets in response to the real estate and finance market fluctuations.  As contemplated by our Partnership Agreement, the General Partners intend to update the estimated value per unit annually but do not intend to make any attempt to establish any estimated valuations of our units in the interim.  There is no assurance as to the extent to which the current estimated valuation should be relied upon for any purpose after its effective date, regardless that it may be published on any statement issued by the us or otherwise.
 
The new estimated valuation reflects the current challenging economic climate that continues to severely impact the real estate markets.  Lease rates for office properties have continued to fall as businesses’ demand for space has declined and unemployment remains high.  With the discounted cash flow valuation methodologies that the General Partner uses in its estimated valuation, a decrease in lease rates at these office properties directly affects the assumptions used by the General Partner, and adversely impacts their estimated valuation.  In addition, the Plaza Skillman property’s placement into receivership during 2010 negatively affected our estimated valuation.  However, it is important to note that all of the debt related to Plaza Skillman is nonrecourse to us.
 
Generally, our business plan is to sell our assets once we believe that the economy has improved, and we have the opportunity to realize additional value.  As a result of our current liquidity needs, we may have to sell a property under terms that are less advantageous than we could achieve with a longer holding period.  Our General Partners intend to use all reasonable efforts to realize value for our limited partners when commercial real estate prices have normalized.  Therefore, as we have previously disclosed, we will not be liquidated in our original estimated time frame, but rather in a time frame that our General Partners believe will provide more value to our limited partners.
 
Critical Accounting Policies and Estimates
 
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On a regular basis, we evaluate these estimates, including investment impairment.  These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates.
 
Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.
 
Principles of Consolidation and Basis of Presentation
 
The consolidated financial statements include our accounts and the accounts of our subsidiaries.  All inter-company transactions, balances and profits have been eliminated in consolidation.  Interests in entities acquired are evaluated based on applicable GAAP, which includes the consolidation of variable interest entities (“VIEs”) in which we are deemed to be the primary beneficiary.  If the interest in the entity is determined not to be a VIE, then the entities are evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.
 
There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and if so, if we are the primary beneficiary.  The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity.  Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility and using a discount rate to determine the net present value of those future losses.  A change in the judgments, assumptions and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment on the equity method that should in fact be consolidated, the effects of which could be material to our financial statements.
 
Impairment of Long-Lived Assets
 
Management monitors events and changes in circumstances indicating that the carrying amounts of our real estate assets may not be recoverable.  When such events or changes in circumstances occur, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the estimated period we expect to hold the asset, including its eventual disposition, to the carrying amount of the asset.  In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying value of the asset to estimated fair value.  We determine the estimated fair value based on discounted cash flow streams using various factors, including estimated future selling prices, costs spent to date, remaining budgeted costs and selling costs.
In evaluating our real estate for impairment, management uses appraisals and makes several estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership and the projected sales price of each of the properties.  A change in these estimates and assumptions could result in understating or overstating the book value of our investments, which could be material to our financial statements.

 
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Real Estate Inventory
 
Real estate inventory is stated at the lower of cost or fair market value and consists of developed land, condominiums and constructed homes.  In addition to land acquisition costs, land development costs and construction costs, costs include interest and real estate taxes, which are capitalized during the period beginning with the commencement of development and ending with the completion of construction.
 
Inventory Valuation Adjustment
 
For real estate inventory, at each reporting date, management compares the estimated fair value less costs to sell to the carrying value.  An adjustment is recorded to the extent that the fair value less costs to sell is less than the carrying value.  We determine the estimated fair value based on comparable sales in the normal course of business under existing and anticipated market conditions.  This evaluation takes into consideration estimated future selling prices, costs spent to date, estimated additional future costs and management’s plans for the property.
 
Market Overview
 
Although there have been recent signs of stabilization, adverse economic conditions and changes in the credit markets continue to impact our business, results of operations and financial condition.  Due to the struggling economy, including losses in the financial and professional services industries, overall demand across most real estate sectors remains low.  While it is unclear when the overall economy will recover from these weakened market conditions, we do not expect conditions to improve significantly in the near future.  Consequently, our primary objectives will be to continue to preserve capital, as well as sustain and enhance property values, while continuing to focus on the disposition of our properties.  Our ability to dispose of our properties will be subject to various factors, including the ability of potential purchasers to access capital debt financing.  If we are unable to sell a property when we determine to do so, it could have a significant adverse effect on our cash flows and results of operations.  Given the disruptions in the capital markets and the current lack of available credit to buyers, our ability to dispose of our properties may be delayed, or we may receive lower than anticipated returns.  In addition, adverse economic conditions could negatively affect our ability to attract and retain tenants.
 
Nine of our real estate assets are located in Texas, all of which are located in the Dallas-Fort Worth metropolitan area.  Office vacancy rates in the Dallas-Fort Worth remained unchanged from the fourth quarter of 2010.  The Dallas-Fort Worth area is expected to experience modest leasing volume in the near future.  We believe that corresponding rental rates will increase slightly in 2011 over 2010.  The national vacancy percentage for office space decreased from 19.6% in the first quarter of 2010 to 17.3% in the first quarter of 2011.  To date, we have not experienced any significant tenant defaults resulting in the loss of material rental income.  Additionally, Smith Travel Research indicates that the national overall occupancy rate for hospitality properties in the United States increased 5.7% year-over-year to 54.9% in the first quarter of 2011.  The national overall Average Daily Rate (“ADR”) also rose 3.1% year-over-year to $99.37 in the first quarter of 2011.  This modest positive growth in the hospitality industry is expected to continue throughout 2011.
 
Current economic conditions discussed above make it difficult to predict future operating results.  There can be no assurance that we will not experience further declines in revenues or earnings for a number of reasons, including, but not limited to the possibility of greater than anticipated weakness in the economy and the continued impact of the trends mentioned above.
 
Results of Operations
 
Three months ended March 31, 2011 as compared to the three months ended March 31, 2010
 
We had eight wholly-owned properties and interests in two properties through investments in partnerships and joint ventures as of March 31, 2011 and 2010.  All investments in partnerships and joint ventures were consolidated with and into our accounts for the three months ended March 31, 2011 and 2010.
 
Rental Revenue. Rental revenue for the three months ended March 31, 2011 and 2010 was $2.6 million and $2.4 million, respectively, and was comprised of revenue, including adjustments for straight-line rent and amortization of above- and below-market leases.  Management expects rental revenue to remain relatively flat unless we are able to lease-up available space.
 
Hotel Revenue. Hotel revenue for the three months ended March 31, 2011 and 2010 was $4.1 million and $3.1 million, respectively, and was comprised of revenue generated by the operations of Hotel Palomar.  The increase in hotel revenue is primarily due to the hotel hosting Dallas-Fort Worth area Super Bowl events in February 2011.  Excluding the effects of additional one-time events in the future, we do not anticipate hotel revenue to improve significantly until the overall U.S. economy experiences sustained growth and lodging demand increases.

 
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Property Operating Expenses. Property operating expenses for the three months ended March 31, 2011 and 2010 were $4.3 million and $3.9 million, respectively, and were comprised of expenses related to the daily operations of our properties.  The increase in operating expenses for the three months ended March 31, 2011 is primarily due to additional costs incurred by Hotel Palomar as a result of hosting events for the Super Bowl held in the Dallas-Fort Worth area.  We expect property operating expenses to remain at current levels unless we are able to lease-up available space and lodging demand increases.
 
Asset Impairment Loss. Asset impairment loss for the three months March 31, 2011 was $2.7 million.  In order to execute our business plan and provide additional equity, we identified a number of our investments for possible disposition in 2011, thus decreasing our projected hold period.  On April 20, 2011, we entered into a contract for the sale of 250/290 John Carpenter Freeway. The contract sales price of $27.0 million was less than our carrying value of the asset.  As a result, we recognized an asset impairment loss of approximately $2.7 million for the three months ended March 31, 2011 to adjust the carrying value of the asset to estimated fair value.  There was no asset impairment loss for the three months ended March 31, 2010.  Real estate values may continue to have fluctuations due to, among other things, the current economic environment and, as a result, there can be no assurance we will not have impairments in the future.
 
Inventory Valuation Adjustment. The inventory valuation adjustment for the three months ended March 31, 2010 was $1.7 million and was composed of non-cash adjustments related to the constructed luxury homes and developed land lots at Bretton Woods.  During the first quarter of 2010, the U.S. housing market and related condominium sector continued to experience its nationwide downturn that began in 2006.  The housing market has and continues to experience an oversupply of homes available for sale, reduced availability, deterioration in the credit markets, rising foreclosure activity, reduced selling prices and relatively high unemployment and deteriorating conditions in the overall economy.  In the event that market conditions continue to decline in the future or the current difficult market conditions extend beyond our expectations, additional adjustments may be necessary in the future.
 
Interest Expense. Interest expense, net of amounts capitalized, for the three months ended March 31, 2011 and 2010 was $1.9 million and $1.4 million, respectively, and was primarily comprised of interest expense and amortization of deferred financing fees related to the notes associated with the acquisition and development of our properties.  The increase in interest expense during the three months ended March 31, 2011 is primarily due to the accrual of default interest on loans currently in default and an increase in credit spreads under our loan agreements with certain lenders.  Interest costs for the development of Cassidy Ridge continued to be capitalized through the first quarter of 2011.  For the three months ended March 31, 2011 and 2010 we capitalized interest costs of $0.7 million and $0.4 million, respectively, for Cassidy Ridge.  Construction of the condominium project was essentially complete at March 31, 2011 and as a result, we will no longer capitalize interest costs associated with the project.
 
There continues to be uncertainty regarding our ability to access the credit markets to attract financing on reasonable terms as many lenders continue to demand higher credit spreads.  Our ability to borrow funds to refinance current debt could be adversely affected by our inability to secure financing on favorable terms.
 
Real Estate Taxes. Real estate taxes, net of amounts capitalized, for the three months ended March 31, 2011 and 2010 were $0.7 million and $0.8 million, respectively, and were comprised of real estate taxes from each of our properties.  We expect real estate taxes to remain relatively constant in the near future.
 
Property and Asset Management Fees. Property and asset management fees for the three months ended March 31, 2011 and 2010 were $0.5 million and $0.4 million, respectively, and were comprised of property and asset management fees from our consolidated properties.  Asset management fees of approximately $15,000 and $17,000 were waived by Behringer Advisors II for the three months ended March 31, 2011 and 2010, respectively. We expect property and asset management fees to remain relatively constant in the near future.
 
General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2011 and 2010 were $0.2 million and $0.2 million, respectively.  General and administrative expenses were comprised of auditing fees, transfer agent fees, tax preparation fees, directors’ and officers’ insurance premiums, legal fees, printing costs and other administrative expenses.  Our advisor waived reimbursement of general and administrative expenses of $0.1 million for each of the three months ended March 31, 2011 and 2010.  We expect general and administrative expenses to remain relatively constant in the near future.
 
Depreciation and Amortization Expense. Depreciation and amortization expense for each of the three months ended March 31, 2011 and 2010 was $1.7 million and includes depreciation and amortization of buildings, furniture and equipment and real estate intangibles associated with our consolidated properties.
 
Net Loss Attributable to Noncontrolling Interest. Net loss attributable to noncontrolling interest for the three months ended March 31, 2011 and 2010 was $0.3 million and $0.5 million, respectively, and represents the other partners’ proportionate share of losses from investments in the partnerships that we consolidate.

 
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Cash Flow Analysis
 
Cash used in operating activities for the three months ended March 31, 2011 was $2.5 million and was comprised of the net loss of approximately $5.3 million, adjusted for depreciation and amortization of $1.8 million and non-cash impairment charges of $2.7 million, offset by an increase in real estate inventory of $1.3 million and changes in other operating assets and liabilities of $0.5 million.  Cash used in operating activities for the three months ended March 31, 2010 was $6.9 million and was primarily comprised of the net loss of $4.6 million, adjusted for depreciation and amortization of $1.8 million, inventory valuation adjustments of $1.7 million, an increase in real estate inventory of $3.7 million and changes in other operating assets and liabilities of $2.1 million.
 
Cash used in investing activities for the three months ended March 31, 2011 was $0.4 million and was primarily comprised of an increase in restricted cash related to our properties.  Cash used in investing activities for the three months ended March 31, 2010 was $0.8 million and was primarily comprised of an increase in restricted cash related to our properties.
 
Cash provided by financing activities for the three months ended March 31, 2011 was $3.7 million and consisted primarily of proceeds from notes payable, net of payments, of $1.7 million and contributions from our general partner, Behringer Advisors II, of $2.1 million.  Cash provided by financing activities for the three months ended March 31, 2010 was $7.3 million and consisted primarily of proceeds from notes payable, net of payments, of $3.4 million and contributions from our general partner, Behringer Advisors II, of $3.9 million.
 
Net Operating Income
 
Net operating income (“NOI”) is a non-GAAP financial measure that is defined as total revenue less property operating expenses, real estate taxes, property management fees, advertising costs and the cost of real estate inventory sales.  We believe that NOI provides an accurate measure of the operating performance of our operating assets because NOI excludes certain items that are not associated with management of our properties.  NOI should not be considered as an alternative to net income (loss), or an indication of our liquidity.  NOI is not indicative of funds available to meet our cash needs or our ability to make distributions and should be reviewed in connection with other GAAP measurements.  To facilitate understanding of this financial measure, a reconciliation of NOI to net loss attributable to the Partnership in accordance with GAAP has been provided.  Our calculations of NOI for the three months ended March 31, 2011 and 2010 are presented below (in thousands).

   
Three months
   
Three months
 
   
ended
   
ended
 
   
March 31, 2011
   
March 31, 2010
 
             
Total revenues
  $ 6,693     $ 5,542  
                 
Operating expenses
               
Property operating expenses
    4,299       3,917  
Real estate taxes, net
    682       770  
Property and asset management fees
    457       440  
Less:  Asset management fees
    (201 )     (218 )
Total operating expenses
    5,237       4,909  
                 
Net operating income
  $ 1,456     $ 633  
                 
Reconciliation to Net loss
               
Net operating income
  $ 1,456     $ 633  
                 
Less: Depreciation and amortization
    (1,700 )     (1,661 )
General and administrative expenses
    (207 )     (223 )
Interest expense, net
    (1,919 )     (1,437 )
Asset management fees
    (201 )     (218 )
Asset impairment loss
    (2,700 )     -  
Inventory valuation adjustment
    -       (1,667 )
Provision for income taxes
    (48 )     (39 )
Add: Interest income
    61       30  
Loss on derivative instruments, net
    -       (34 )
                 
Net loss
  $ (5,258 )   $ (4,616 )

 
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Performance Reporting Required by the Partnership Agreement
 
Section 15.2 in our Partnership Agreement requires us to provide our limited partners with our net cash from operations, a non-GAAP financial measure, which is defined as net income, computed in accordance with GAAP, plus depreciation and amortization on real estate assets, adjustments for gains from the sale of assets and gains on the sale of discontinued operations, debt service and capital improvements (“Net Cash From Operations”).  Our calculations of Net Cash From Operations for the three months ended March 31, 2011 and 2010 are presented below (in thousands):

   
Three months ended
   
Three months ended
 
   
March 31, 2011
   
March 31, 2010
 
Net loss
  $ (5,258 )   $ (4,616 )
Net loss attributable to noncontrolling interest
    284       534  
                 
Adjustments
               
Real estate depreciation and amortization (1)
    1,693       1,440  
Impairment charges (1)
    2,700       1,667  
Debt service, net of amounts capitalized (1)
    (1,565 )     (1,103 )
Capital improvements (1)
    (72 )     (55 )
Net cash from operations
  $ (2,218 )   $ (2,133 )
 

(1)
Represents our ownership portion of the properties that we consolidate.
 
Disposition Policies
 
We believe it makes economic sense to sell properties in today’s market in certain instances, such as when the value of the in-place cash flows from existing tenants is stable, predictable and attractive to potential buyers, when the property has limited or no equity with a near-term debt maturity, or when the equity in a property can be redeployed in the portfolio in order to achieve better returns or strategic goals.  Therefore, we will evaluate each real property in which we have invested until such time as sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met.  We will also consider factors such as potential capital appreciation, cash flow and federal income tax considerations, including possible adverse federal income tax consequences to our limited partners, the current state of the general economy and whether waiting to dispose of a property will allow us to realize additional value for our limited partners.  We continue to prepare and assess properties for potential sale, although we do not have a definite timetable.  Our General Partners may exercise their discretion as to whether and when to sell a property, and we will have no obligation to sell properties at any particular time, except upon our termination on December 31, 2017, or earlier if our General Partners determine to liquidate us, or, if investors holding a majority of the units vote to liquidate us in response to a formal proxy to liquidate.  Instead of causing us to liquidate, our General Partners, in their sole discretion, may determine to offer to limited partners the opportunity to convert their units into interests in another public real estate program sponsored by our General Partners or their affiliates, through a plan of merger, plan of exchange or plan of conversion, provided that the transaction is approved by holders of such percentage of units as determined by our General Partners, but not less than a majority and excluding those units held by our General Partners and their affiliates.  If such an opportunity is provided to our limited partners, it may involve the distribution to limited partners of freely traded securities that are listed on a securities exchange.
 
Cash flow from operations will not be invested in the acquisition of new properties. However, our General Partners may determine not to distribute net sales proceeds if such proceeds are:
 
 
·
held as working capital reserves; or
 
 
·
used to make improvements to existing properties.
 
Thus, we are intended to be self-liquidating in nature.
 
We will not pay, directly or indirectly, any commission or fee, except as specifically permitted under Article XII of our Partnership Agreement, to our General Partners or their affiliates in connection with the distribution of proceeds from the sale, exchange or financing of our properties.

 
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Although not required to do so, we will generally seek to sell our real estate properties for cash.  We may, however, accept terms of payment from a buyer that include purchase money obligations secured by mortgages as partial payment, depending upon then-prevailing economic conditions customary in the area in which the property being sold is located, credit of the buyer and available financing alternatives.  Some properties we sell may be sold on an installment basis under which only a portion of the sale price will be received in the year of sale, with subsequent payments spread over a number of years. In such event, our full distribution of the net proceeds of any sale may be delayed until the notes are paid, sold or financed.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
Item 3. 
Quantitative and Qualitative Disclosures About Market Risk.
 
We may be exposed to interest rate changes primarily from variable interest rate debt incurred to acquire and develop properties, issue loans and make other permitted investments.  Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, we borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates.  With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.  We may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps or floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate portion of our variable rate debt.  Of our approximately $166.8 million in notes payable at March 31, 2011, approximately $75.7 million represented debt subject to variable interest rates.  If our variable interest rates increased 100 basis points, we estimate that total annual interest expense would increase by approximately $0.8 million.
 
At March 31, 2011, we did not have any foreign operations and thus were not exposed to foreign currency fluctuations.
 
Item 4. 
Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures
 
As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, the management of Behringer Advisors II, our general partner, including the Chief Executive Officer and Chief Financial Officer of our general partner, evaluated as of March 31, 2011 the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of Behringer Advisors II, our general partner, concluded that our disclosure controls and procedures, as of March 31, 2011, were effective for the purpose of ensuring that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer of Behringer Advisors II, as appropriate to allow timely decisions regarding required disclosures.  
 
We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a partnership have been detected.
 
Changes in Internal Control over Financial Reporting
 
There has been no change in internal control over financial reporting that occurred during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION
 
Item 1.
Legal Proceedings.
 
We are not party to, and none of our properties are subject to, any material pending legal proceedings.
 
Item 1A.
Risk Factors.
 
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2010.

 
26

 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
 None.
 
Item 3.
Defaults Upon Senior Securities.
 
There have been no material changes from the defaults set forth in our Annual Report on Form 10-K for the year ended December 31, 2010.
 
Item 4.
Removed and Reserved.
 
Item 5.
Other Information.
 
None.
 
Item 6.
Exhibits.
 
The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.

 
27

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

 
Behringer Harvard Short-Term Opportunity Fund I LP
   
 
By:    
Behringer Harvard Advisors II LP
   
Co-General Partner
     
Dated:  May 16, 2011
 
By:
/s/ Gary S. Bresky
    Gary S. Bresky
    Chief Financial Officer
    (Principal Financial Officer)
 
 
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Index to Exhibits

Exhibit Number
 
Description
     
3.1
 
Second Amended and Restated Agreement of Limited Partnership of the Registrant dated September 5, 2008 (previously filed in and incorporated by reference to Form 8-K filed on September 5, 2008)
     
3.2
 
Certificate of Limited Partnership of Registrant (previously filed in and incorporated by reference to Registrant’s Registration Statement on Form S-11, Commission File No. 333-100125, filed on September 27, 2002)
     
4.1
 
Subscription Agreement and Subscription Agreement Signature Page (previously filed in and incorporated by reference to Exhibit C to Supplement No. 1 to the prospectus of the Registrant contained within Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-11, Commission File No. 333-100125, filed on June 3, 2003)
     
10.1
 
Purchase Agreement by and between Behringer Harvard 250/290 Carpenter Freeway LP and Forest City Commercial Development, Inc.
     
31.1*
 
Rule 13a-14(a) or Rule 15d-14(a) Certification
     
31.2*
 
Rule 13a-14(a) or Rule 15d-14(a) Certification
     
32.1**
 
Section 1350 Certifications
 

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

 
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