Lightstone Value Plus REIT V, Inc. - FORM 10-Q

Lightstone Value Plus REIT V, Inc. - FORM 10-Q - November 13, 2014

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Lightstone Value Plus REIT V, Inc. Reports

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EXCEL - IDEA: XBRL DOCUMENT - Lightstone Value Plus REIT V, Inc.	Financial_Report.xls
EX-32.1 - EXHIBIT-CERT - Lightstone Value Plus REIT V, Inc.	ex321-q32014.htm
EX-32.2 - EXHIBIT-CERT - Lightstone Value Plus REIT V, Inc.	ex322-q32014.htm
EX-31.1 - EXHIBIT-CERT - Lightstone Value Plus REIT V, Inc.	ex311-q32014.htm
EX-31.2 - EXHIBIT_CERT - Lightstone Value Plus REIT V, Inc.	ex312-q32014.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2014

Commission File Number: 000-53650

Behringer Harvard Opportunity REIT II, Inc.

(Exact Name of Registrant as Specified in Its Charter)



Maryland		20-8198863
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

15601 Dallas Parkway, Suite 600, Addison, Texas 75001

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (866) 655-3600

None

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

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý No o

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



Large accelerated filer o		Accelerated filer o

Non-accelerated filer 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 ý

As of October 31, 2014, Behringer Harvard Opportunity REIT II, Inc. had 25,801,669 shares of common stock outstanding.

Table of Contents

BEHRINGER HARVARD OPPORTUNITY REIT II, INC.

FORM 10-Q

Quarter Ended September 30, 2014



		Page

PART I
FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	3

	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2014 and 2013	4

	Condensed Consolidated Statements of Equity for the Nine Months Ended September 30, 2014 and 2013	5

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	42

PART II
OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	44

Item 4.	Mine Safety Disclosures	44

Item 5.	Other Information	44

Item 6.	Exhibits	44

Signature		45

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

Behringer Harvard Opportunity REIT II, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except shares)

(unaudited)



	September 30, 2014			December 31, 2013
Assets
Real estate
Land and improvements, net	$	55,690		$	65,407
Buildings and improvements, net	189,360			219,523
Real estate under development	2,294			99
Total real estate	247,344			285,029
Cash and cash equivalents	105,180			94,877
Restricted cash	5,123			5,343
Accounts receivable, net	1,807			3,017
Prepaid expenses and other assets	1,801			1,196
Investment in unconsolidated joint venture	12,355			11,985
Furniture, fixtures and equipment, net	7,200			7,923
Deferred financing fees, net	2,240			3,185
Lease intangibles, net	1,040			1,820
Income taxes receivable	167			—
Total assets	$	384,257		$	414,375
Liabilities and Equity
Notes payable	$	193,243		$	212,037
Accounts payable	1,238			513
Payables to related parties	525			840
Acquired below-market leases, net	242			324
Distributions payable to noncontrolling interest	18			20
Income taxes payable	—			183
Accrued and other liabilities	7,552			7,669
Total liabilities	202,818			221,586

Commitments and contingencies	—			—

Equity
Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none outstanding	—			—
Convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 outstanding	—			—
Common stock, $.0001 par value per share; 350,000,000 shares authorized, 25,908,217 and 26,015,980 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively	3			3
Additional paid-in capital	232,040			232,903
Accumulated distributions and net loss	(58,664		)	(49,520		)
Accumulated other comprehensive income	24			498
Total Behringer Harvard Opportunity REIT II, Inc. equity	173,403			183,884
Noncontrolling interest	8,036			8,905
Total equity	181,439			192,789
Total liabilities and equity	$	384,257		$	414,375

See Notes to Unaudited Condensed Consolidated Financial Statements.

Behringer Harvard Opportunity REIT II, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per share amounts)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues
Rental revenue	$	7,545		$	7,615		$	23,315		$	20,564
Hotel revenue	3,812			3,982			12,313			10,994
Total revenues	11,357			11,597			35,628			31,558
Expenses
Property operating expenses	2,944			2,857			8,293			6,975
Hotel operating expenses	3,028			3,008			9,037			8,496
Interest expense, net	1,785			2,053			5,903			5,776
Real estate taxes	1,144			1,278			3,909			3,418
Property management fees	380			399			1,209			1,090
Asset management fees	601			990			1,669			2,535
General and administrative	1,125			1,225			3,082			2,858
Acquisition expense	4			996			30			4,053
Depreciation and amortization	3,167			3,447			10,229			10,202
Total expenses	14,178			16,253			43,361			45,403
Interest income, net	62			25			162			83
Loss on early extinguishment of debt	—			—			(454		)	—
Other income (loss)	(21		)	28			(24		)	37
Loss from continuing operations before gain on sale of real estate and income tax benefit	(2,780		)	(4,603		)	(8,049		)	(13,725		)
Gain on sale of real estate	9			—			11,454			—
Income tax benefit	127			—			127			—
Income (loss) from continuing operations	(2,644		)	(4,603		)	3,532			(13,725		)
Income from discontinued operations	—			16,952			—			31,134
Net income (loss)	(2,644		)	12,349			3,532			17,409
Noncontrolling interest in continuing operations	154			182			278			560
Noncontrolling interest in discontinued operations	—			(1,691		)	—			(5,447		)
Net (income) loss attributable to the noncontrolling interest	154			(1,509		)	278			(4,887		)
Net income (loss) attributable to the Company	$	(2,490	)	$	10,840		$	3,810		$	12,522
Amounts attributable to the Company
Continuing operations	$	(2,490	)	$	(4,421	)	$	3,810		$	(13,165	)
Discontinued operations	—			15,261			—			25,687
Net income (loss) attributable to the Company	$	(2,490	)	$	10,840		$	3,810		$	12,522
Weighted average shares outstanding:
Basic and diluted	25,935			26,032			25,980			26,041
Net income (loss) per share
Continuing operations	$	(0.10	)	$	(0.17	)	$	0.15		$	(0.51	)
Discontinued operations	—			0.59			—			0.99
Basic and diluted income (loss) per share	$	(0.10	)	$	0.42		$	0.15		$	0.48
Distributions declared per common share	$	0.50		$	—		$	0.50		$	—
Comprehensive income (loss):
Net income (loss)	$	(2,644	)	$	12,349		$	3,532		$	17,409
Other comprehensive income (loss):
Reclassification of unrealized loss on interest rate derivatives to net income	18			18			55			106
Foreign currency translation gain (loss)	(492		)	262			(519		)	135
Total other comprehensive income (loss)	(474		)	280			(464		)	241
Comprehensive income (loss)	(3,118		)	12,629			3,068			17,650
Comprehensive income (loss) attributable to noncontrolling interest	151			(1,513		)	268			(4,897		)
Comprehensive income (loss) attributable to the Company	$	(2,967	)	$	11,116		$	3,336		$	12,753

See Notes to Unaudited Condensed Consolidated Financial Statements.

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Behringer Harvard Opportunity REIT II, Inc.

Condensed Consolidated Statements of Equity

(in thousands)

(unaudited)



	Convertible Stock			Common Stock							Accumulated Distributions and Net Income(Loss)			Accumulated Other Comprehensive Income (Loss)
	Number of Shares	Par Value		Number of Shares		Par Value		Additional Paid-in Capital			Accumulated Distributions and Net Income(Loss)			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total Equity
Balance at January 1, 2013	1	$	—	26,060		$	3	$	233,283		$	(58,249	)	$	126		$	11,370		$	186,533
Net income											12,522						4,887			17,409
Redemption of common stock				(41	)			(354		)										(354		)
Contributions from noncontrolling interest																	4,655			4,655
Distributions to noncontrolling interest																	(11,394		)	(11,394		)
Other comprehensive loss:
Reclassification of unrealized losses on interest rate derivatives to net income														96			10			106
Foreign currency translation gain														135						135
Balance at September 30, 2013	1	$	—	26,019		$	3	$	232,929		$	(45,727	)	$	357		$	9,528		$	197,090

Balance at January 1, 2014	1	$	—	26,016		$	3	$	232,903		$	(49,520	)	$	498		$	8,905		$	192,789
Net income											3,810						(278		)	3,532
Redemption of common stock				(108	)			(863		)										(863		)
Distributions declared on common stock											(12,954		)							(12,954		)
Contributions from noncontrolling interest																	82			82
Distributions to noncontrolling interest																	(683		)	(683		)
Other comprehensive income:
Reclassification of unrealized loss on interest rate derivatives to net income														45			10			55
Foreign currency translation loss														(519		)				(519		)
Balance at September 30, 2014	1	$	—	25,908		$	3	$	232,040		$	(58,664	)	$	24		$	8,036		$	181,439

See Notes to Unaudited Condensed Consolidated Financial Statements.

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Behringer Harvard Opportunity REIT II, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities:
Net income	$	3,532		$	17,409
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization	10,146			12,828
Amortization of deferred financing fees	588			725
Gain on sale of real estate	(11,454		)	(31,520		)
Loss on early extinguishment of debt	454			260
Loss on derivatives	188			76
Change in operating assets and liabilities:
Accounts receivable	(14		)	(361		)
Prepaid expenses and other assets	(573		)	214
Accounts payable	745			(364		)
Accrued and other liabilities	(422		)	1,533
Payables to related parties	(315		)	96
Addition of lease intangibles	(283		)	(602		)
Cash provided by operating activities	2,592			294
Cash flows from investing activities:
Acquisition deposits reimbursed	500			250
Purchases of real estate	—			(74,685		)
Investment in unconsolidated joint venture	(370		)	(14,302		)
Return of investment in unconsolidated joint ventures	—			2,444
Proceeds from sale of real estate	46,300			83,470
Additions of property and equipment	(6,878		)	(6,159		)
Change in restricted cash	220			(2,026		)
Cash provided by (used in) investing activities	39,772			(11,008		)
Cash flows from financing activities:
Financing costs	(101		)	(1,228		)
Proceeds from notes payable	—			47,653
Payments on notes payable	(17,212		)	(12,611		)
Purchase of interest rate derivatives	—			(133		)
Payment of loan deposits	(170		)	—
Redemptions of common stock	(863		)	(354		)
Offering costs receivable from related party	—			3,832
Distributions paid on common stock	(12,954		)	—
Contributions from noncontrolling interest holders	82			4,655
Distributions to noncontrolling interest holders	(683		)	(7,041		)
Cash provided by (used in) financing activities	(31,901		)	34,773
Effect of exchange rate changes on cash and cash equivalents	(160		)	34
Net change in cash and cash equivalents	10,303			24,093
Cash and cash equivalents at beginning of period	94,877			77,752
Cash and cash equivalents at end of period	$	105,180		$	101,845

See Notes to Unaudited Condensed Consolidated Financial Statements.

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Business and Organization

Business

Behringer Harvard Opportunity REIT II, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”) was organized as a Maryland corporation on January 9, 2007 and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.

We acquire and operate commercial real estate and real estate-related assets. In particular, we focus generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines. In addition, our investment strategy also includes investments in real estate-related assets that present opportunities for higher current income. Such investments may have capital gain characteristics, whether as a result of a discount purchase or related equity participations. We may acquire a wide variety of commercial properties, including office, industrial, retail, hospitality, recreation and leisure, single-tenant, multifamily, and other real properties. These properties may be existing, income-producing properties, newly constructed properties, or properties under development or construction. They may include multifamily properties purchased for conversion into condominiums and single-tenant properties that may be converted for multi-tenant use. We may invest in real estate-related securities, including securities issued by other real estate companies, either for investment or in change of control transactions completed on a negotiated basis or otherwise. Further, we also may originate or invest in collateralized mortgage-backed securities and mortgage, bridge or mezzanine loans, or in entities that make investments similar to the foregoing. We expect to make our investments in or in respect of real estate assets located in the United States and other countries based on our view of existing market conditions. As of September 30, 2014, we had 12 real estate investments, 11 of which were consolidated into our condensed consolidated financial statements (one wholly owned and ten properties consolidated through investments in joint ventures).

Substantially all of our business is conducted through Behringer Harvard Opportunity OP II LP, a limited partnership organized in Delaware (“Behringer Harvard Opportunity OP II”). As of September 30, 2014, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, was the sole general partner of Behringer Harvard Opportunity OP II and owned a 0.1% partnership interest in Behringer Harvard Opportunity OP II. As of September 30, 2014, our wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of Behringer Harvard Opportunity OP II and owned the remaining 99.9% interest in Behringer Harvard Opportunity OP II.

We are externally managed and advised by Behringer Harvard Opportunity Advisors II, LLC (the “Advisor”). The Advisor is responsible for managing our day-to-day affairs and for identifying and making acquisitions and investments on our behalf.

Organization

In connection with our initial capitalization, on January 19, 2007, we issued 22,471 shares of our common stock and 1,000 shares of our convertible stock to Behringer Harvard Holdings, LLC (“BHH”). BHH transferred its shares of convertible stock to one of its affiliates on April 2, 2010.

As of September 30, 2014, we had issued 26.7 million shares of our common stock, including 22,471 shares owned by BHH and 2.2 million shares issued through the distribution reinvestment plan (the “DRP”). As of September 30, 2014, we had redeemed 0.8 million shares of our common stock and had 25.9 million shares of common stock outstanding. As of September 30, 2014, we had 1,000 shares of convertible stock held by an affiliate of BHH.

Our common stock is not currently listed on a national securities exchange. The timing of a liquidity event will depend upon then prevailing market conditions. We currently intend to consider the process of disposing assets, liquidating, and distributing the net proceeds to our stockholders no later than three to six years after the termination of our initial public offering of common stock, which occurred on July 3, 2011. Economic or market conditions may, however, result in different holding periods for different assets. If we do not begin an orderly liquidation, we may seek to have our shares listed on a national securities exchange or seek alternative liquidation opportunities.

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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, 2013, which was filed with the SEC on March 26, 2014. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated balance sheet as of September 30, 2014, the condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2014 and 2013 and condensed consolidated statements of equity and cash flows for the nine months ended September 30, 2014 and 2013 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 fairly present our condensed consolidated financial position as of September 30, 2014 and December 31, 2013 and our condensed consolidated results of operations and cash flows for the periods ended September 30, 2014 and 2013. Such adjustments are of a normal recurring nature.

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.

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.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include such items as purchase price allocation for real estate acquisitions, impairment of long-lived assets, depreciation and amortization, and allowance for doubtful accounts. Actual results could differ from those estimates.

Principles of Consolidation and Basis of Presentation

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

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

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Real Estate

Upon the acquisition of real estate properties, we recognize the assets acquired, the liabilities assumed and any noncontrolling interest as of the acquisition date, measured at their fair values. The acquisition date is the date on which we obtain control of the real estate property. The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities and asset retirement obligations. Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships. Identified intangible liabilities generally consist of below-market leases. Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired. Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired. Acquisition-related costs are expensed in the period incurred. Initial valuations are subject to change until our information is finalized, which is no later than twelve months from the acquisition date.

The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings. Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants. The value of hotels and all other buildings is depreciated over the estimated useful lives of 39 years and 25 years, respectively, using the straight-line method.

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

We determine the value of above-market and below-market leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) management’s estimate of current market lease rates for the corresponding in-place leases, measured over a period equal to (a) the remaining non-cancelable lease term for above-market leases, or (b) the remaining non-cancelable lease term plus any below-market fixed rate renewal options that, based on a qualitative assessment of several factors, including the financial condition of the lessee, the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, are reasonably assured to be exercised by the lessee for below-market leases. We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the determined lease term.

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

We amortize the value of in-place leases, in-place tenant improvements and in-place leasing commissions to expense over the initial 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 or liabilities 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.

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Anticipated amortization expense associated with the acquired lease intangibles for each of the following five years as of September 30, 2014 is as follows:



Year	Lease / Other Intangibles
October 1, 2014 - December 31, 2014	$	32
2015	121
2016	106
2017	58
2018	23

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



September 30, 2014	Buildings and Improvements			Land and Improvements			Lease Intangibles			Acquired Below-Market Leases
Cost	$	212,185		$	57,613		$	3,936		$	(587	)
Less: depreciation and amortization	(22,825		)	(1,923		)	(2,896		)	345
Net	$	189,360		$	55,690		$	1,040		$	(242	)



December 31, 2013	Buildings and Improvements			Land and Improvements			Lease Intangibles			Acquired Below-Market Leases
Cost	$	241,881		$	66,828		$	8,102		$	(768	)
Less: depreciation and amortization	(22,358		)	(1,421		)	(6,282		)	444
Net	$	219,523		$	65,407		$	1,820		$	(324	)

Real Estate Held for Sale and Discontinued Operations

We classify properties as held for sale when certain criteria are met, in accordance with GAAP. At that time we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property. Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell. We had no property classified as held for sale at September 30, 2014 or December 31, 2013.

Effective as of April 1, 2014, we adopted the revised guidance regarding discontinued operations as further discussed in Note 4, New Accounting Pronouncements. For sales of real estate or assets classified as held for sale after April 1, 2014, we will evaluate whether a disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations. If the disposal represents a strategic shift, it will be classified as discontinued operations for all periods presented; if not, it will be presented in continuing operations.

Investment Impairment

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset. These projected cash flows are prepared internally by the Advisor and reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s Chief Executive Officer and Chief Financial Officer review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions that are consistent with market data or with assumptions that would be used by a third-party market participant and assume the highest and best use of the investment. We consider trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value. While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, and the projected sales price of each of the properties. A future change in these estimates and assumptions could result in understating or overstating the carrying value of our investments, which could be material to our financial statements.

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

We believe the carrying value of our operating real estate is currently recoverable. Accordingly, there were no impairment charges for the nine months ended September 30, 2014 and 2013. However, if market conditions worsen unexpectedly or if changes in our strategy significantly affect any key assumptions used in our fair value calculations, we may need to take charges in future periods for impairments related to our existing investments. Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.

Investment in Unconsolidated Joint Venture

We provide funding to third party developers for the acquisition, development and construction of real estate (“ADC Arrangement”). Under the ADC Arrangement, we may participate in the residual profits of the project through the sale or refinancing of the property. We evaluate this arrangement to determine if they have characteristics similar to a loan or if the characteristics are more similar to a joint venture or partnership such as participating in the risks and rewards of the project as an owner or an investment partner. When we determine that the characteristics are more similar to a jointly-owned investment or partnership, we account for the arrangement as an investment in an unconsolidated joint venture under the equity method of accounting or a direct investment (consolidated basis of accounting) instead of applying loan accounting. The ADC Arrangement is reassessed at each reporting period. See Note 8, Investment in Unconsolidated Joint Venture, for further discussion.

Revenue Recognition

We recognize rental income generated from leases of our operating properties on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any. Straight-line rent was income of less than $0.1 million recognized in rental revenues for the three and nine months ended September 30, 2014. Straight-line rent was income of $0.1 million and $0.4 million recognized in rental revenues for the three and nine months ended September 30, 2013, respectively, and included amounts recognized in discontinued operations. Leases associated with our multifamily, student housing, hotel and self-storage assets are generally short-term in nature, and thus have no straight-line rent. Net below-market lease amortization of less than $0.1 million was recognized in rental revenues for the three and nine months ended September 30, 2014. Net below-market lease amortization of less than $0.1 million was recognized in rental revenues for the three and nine months ended September 30, 2013 and includes amounts recognized in discontinued operations.

Hotel revenue is derived from the operations of the Courtyard Kauai at Coconut Beach Hotel and consists primarily of guest room, food and beverage, and other ancillary revenues such as laundry and parking. Hotel revenue is recognized as the services are rendered.

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Accounts Receivable

Accounts receivable primarily consist of receivables related to our consolidated properties of $1.8 million and $3 million as of September 30, 2014 and December 31, 2013, respectively, and included straight-line rental revenue receivables of $0.4 million and $1 million as of September 30, 2014 and December 31, 2013, respectively.

Furniture, Fixtures, and Equipment

Furniture, fixtures, and equipment are recorded at cost and are depreciated according to the Company’s capitalization policy which uses the straight-line method over their estimated useful lives of five to seven years. Maintenance and repairs are charged to operations as incurred. Accumulated depreciation associated with our furniture, fixtures, and equipment was $5.8 million and $4.2 million as of September 30, 2014 and December 31, 2013, respectively.

Deferred Financing Fees

Deferred financing fees are recorded at cost and are amortized to interest expense of our notes payable using a straight-line method that approximates the effective interest method over the life of the related debt. Accumulated amortization of deferred financing fees was $2 million and $1.8 million as of September 30, 2014 and December 31, 2013, respectively.

Income Taxes

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and have qualified as a REIT since the year ended December 31, 2008. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders. As a REIT, we generally will not be subject to federal income tax at the corporate level. We are organized and operate in such a manner as to qualify for taxation as a REIT under the Code and intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. Taxable income from non-REIT activities managed through a taxable REIT subsidiary (“TRS”) is subject to applicable federal, state, and local income and margin taxes. We have no taxable income associated with a TRS. Our operating partnerships are flow-through entities and are not subject to federal income taxes at the entity level.

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

Foreign Currency Translation

For our international investments where the functional currency is other than the U.S. dollar, assets and liabilities are translated using period-end exchange rates, while the statement of operations amounts are translated using the average exchange rates for the respective period. Gains and losses resulting from the change in exchange rates from period to period are reported separately as a component of other comprehensive income (loss) (“OCI”). Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations and comprehensive income.

The Euro is the functional currency for the operations of Holstenplatz and Alte Jakobstraße. We also maintain a Euro-denominated bank account that is translated into U.S. dollars at the current exchange rate at each reporting period. For the three and nine months ended September 30, 2014, the foreign currency translation adjustment was a loss of $0.5 million. For the three and nine months ended September 30, 2013, the foreign currency translation adjustment was a gain of $0.3 million and $0.1 million, respectively.

Concentration of Credit Risk

At September 30, 2014 and December 31, 2013, we had cash and cash equivalents deposited in certain financial institutions in excess of federally insured levels. We have diversified our cash and cash equivalents among several banking institutions in an attempt to minimize exposure to any one of these entities. We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents or restricted cash.

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Geographic, Asset Type and Industry Concentration

At any one time, a significant portion of our investments could be in one property class or concentrated in one or several geographic regions that are subject to higher risk of foreclosure. To the extent that our portfolio is concentrated in limited geographic regions, types of assets, industries or business sectors, downturns relating generally to such region, type of asset, industry or business sector may result in defaults on a number of our investments within a short time period, which may reduce our net income and the value of our common stock and accordingly limit our ability to fund our operations.

Noncontrolling Interest

Noncontrolling interest represents the noncontrolling ownership interest’s proportionate share of the equity in our consolidated real estate investments. Income and losses are allocated to noncontrolling interest holders based generally on their ownership percentage. In certain instances, our joint venture agreement provides for liquidating distributions based on achieving certain return metrics (“promoted interest”). If a property reaches a defined return threshold, then it will result in distributions to noncontrolling interest which is different from the standard pro-rata allocation percentage.

Earnings per Share

Net income (loss) per share is calculated based on the weighted average number of common shares outstanding during each period. The weighted average shares outstanding used to calculate both basic and diluted income (loss) per share were the same for the three and nine months ended September 30, 2014 and 2013, as there were no potentially dilutive securities outstanding.

Subsequent Events

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

4. New Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-08 (“ASU 2014-08”), Presentation of Financial Statements and Property, Plant, and Equipment (Topics 205 and 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The updated guidance revised the definition of a discontinued operation by limiting discontinued operations reporting to disposals of components of an entity that represent a strategic shift that has or will have a major effect on an entity’s operations and financial results when a component of an entity or a group of components of an entity are classified as held for sale or disposed of by sale or by means other than a sale, such as an abandonment. Examples of a strategic shift could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity. In addition, ASU 2014-08 requires expanded disclosures for discontinued operations so users of the financial statements will be provided with more information about the assets, liabilities, revenues and expenses of discontinued operations. We adopted this guidance effective April 1, 2014. Our results of operations and gains on real estate sold beginning April 1, 2014 that do not meet the criteria of a strategic shift that has or will have a major effect on our operations and financial results will be presented as continuing operations in our condensed consolidated statements of operations. Any sales of real estate prior to April 1, 2014 that were reported in discontinued operations in prior reporting periods will continue to be reported as discontinued operations.

In May 2014, the FASB issued an update (“ASU 2014-09”) to ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

In July 2014, the FASB issued an update ("ASU 2014-15"), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. ASU 2014-15 requires management's assessment of a company's ability to continue as a going concern and provide related footnote disclosures when conditions give rise to substantial doubt about a company's ability to continue as a going concern within one year from the financial statement issuance date. ASU 2014-15 applies to all companies and is effective for the annual period ending after December 15, 2016, and all annual and interim periods thereafter. We are currently evaluating the impact of the adoption of ASU 2014-15 on our consolidated financial statements.

5. Assets and Liabilities Measured at Fair Value

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

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

Recurring Fair Value Measurements

Currently, we use interest rate swaps and caps to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, implied volatilities, and foreign currency exchange rates.

We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2014, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The following fair value hierarchy table presents information about our assets measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013:



September 30, 2014	Level 1		Level 2		Level 3		Total
Assets
Derivative financial instruments	$	—	$	46	$	—	$	46



December 31, 2013	Level 1		Level 2		Level 3		Total
Assets
Derivative financial instruments	$	—	$	174	$	—	$	174

Derivative financial instruments classified as assets are included in prepaid expenses and other assets on the balance sheet.

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

6. Financial Instruments not Reported at Fair Value

We determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

As of September 30, 2014 and December 31, 2013, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses, other liabilities, payables/receivables from related parties, and distributions payable to noncontrolling interests were at amounts that reasonably approximated their fair value based on their highly-liquid nature and/or short-term maturities. The notes payable of $193.2 million and $212 million as of September 30, 2014 and December 31, 2013, respectively, have a fair value of approximately $193.1 million and $207.8 million as of September 30, 2014 and December 31, 2013, respectively, based upon interest rates for debt with similar terms and remaining maturities that management believes we could obtain. The fair value of the notes payable is categorized as a Level 2 basis. The fair value is estimated using a discounted cash flow analysis valuation on the borrowing rates currently available for loans with similar terms and maturities. The fair value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate. Disclosure about fair value of financial instruments is based on pertinent information available to management as of September 30, 2014 and December 31, 2013.

7. Real Estate and Real Estate-Related Investments

As of September 30, 2014, we consolidated 11 real estate assets. The following table presents certain information about our consolidated investments as of September 30, 2014:



Property Name	Description	Location	Date Acquired	Ownership Interest
Holstenplatz	Office building	Hamburg, Germany	June 30, 2010	100%
Gardens Medical Pavilion⁽¹⁾	Medical office building	Palm Beach Gardens, Florida	October 20, 2010	79.8%
Courtyard Kauai Coconut Beach Hotel	Hotel	Kauai, Hawaii	October 20, 2010	80%
River Club and the Townhomes at River Club	Student housing	Athens, Georgia	April 25, 2011	85%
Babcock Self Storage	Self storage	San Antonio, Texas	August 30, 2011	85%
Lakes of Margate	Multifamily	Margate, Florida	October 19, 2011	92.5%
Arbors Harbor Town	Multifamily	Memphis, Tennessee	December 20, 2011	94%
Alte Jakobstraße	Office building	Berlin, Germany	April 5, 2012	99.7%
Wimberly at Deerwood (“Wimberly”)	Multifamily	Jacksonville, Florida	February 19, 2013	95%
22 Exchange	Student housing	Akron, Ohio	April 16, 2013	90%
Parkside Apartments (“Parkside”)	Multifamily	Sugar Land, Texas	August 8, 2013	90%

_____________________________

(1)

We acquired a portfolio of eight medical office buildings, known as the Original Florida MOB Portfolio on October 8, 2010. We acquired a medical office building known as Gardens Medical Pavilion on October 20, 2010. Collectively, the Original Florida MOB Portfolio and Gardens Medical Pavilion were referred to as the Florida MOB Portfolio. The Florida MOB Portfolio consisted of nine medical office buildings. On September 20, 2013, we sold the Original Florida MOB Portfolio. As of September 30, 2014, we own approximately 79.8% of the ninth building, Gardens Medical Pavilion.

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Real Estate Asset Disposition

1875 Lawrence

On May 30, 2014, we sold 1875 Lawrence for a contract sales price of approximately $46.7 million. We recorded a gain on sale of real estate property of $11.5 million and loss on early extinguishment of debt of $0.5 million which was comprised of the write-off of deferred financing fees of $0.4 million and an early termination fee of $0.1 million. A portion of the proceeds from the sale were used to pay off in full the existing indebtedness of approximately $15.6 million associated with the office building. The disposal of the 1875 Lawrence property does not represent a strategic shift, therefore it is presented in continuing operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2014. Any sales of real estate prior to April 1, 2014 that were reported in discontinued operations in prior reporting periods will continue to be reported as discontinued operations.

Sales of Real Estate Reported in Continuing Operations

The following table presents our sale of real estate for the nine months ended September 30, 2014 (in millions):



Date of Sale	Property	Ownership Interest	Sales Contract Price		Net Cash Proceeds		Gain on Sale of Real Estate
May 30, 2014	1875 Lawrence	100%	$	46.7	$	46.3	$	11.5

The following table presents net income attributable to the Company for the three and nine months ended September 30, 2014 and 2013 related to the 1875 Lawrence office building sold in 2014. Net income for the nine months ended September 30, 2014 includes the gain on sale of real estate (in millions):



	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2014		2013			2014		2013
Net income (loss) attributable to the Company	$	—	$	(0.6	)	$	9.9	$	(1.4	)

Discontinued Operations

As discussed in Note 4, New Accounting Pronouncements, we adopted the provisions of the recently issued FASB guidance regarding the reporting of discontinued operations. Accordingly, we have no discontinued operations for the three or nine months ended September 30, 2014. See Note 16, Asset Sales and Discontinued Operations, for additional disclosures regarding discontinued operations for the three and nine months ended September 30, 2013.

8. Investment in Unconsolidated Joint Venture

On May 24, 2013, we (the “Lender”) provided mezzanine financing totaling $13.7 million, (the “Initial Advance”) to an unaffiliated third-party entity that owns and is developing an apartment complex in Denver, Colorado (“Prospect Park”). The developer also has a senior construction loan with a third-party senior construction lender (the “Senior Lender”), in an aggregate original principal amount of $35.6 million. The senior construction loan is guaranteed by the owners of the developer. We also have a completion guaranty from the developer. Our mezzanine loan to the developer is subordinate to the senior construction loan and is collateralized by the property. Our Initial Advance has an annual stated interest rate of 10% for the first three years of the term, followed by two one-year extension options at which point the annual interest rate would increase to 14%. We evaluated this ADC Arrangement and determined that the characteristics are similar to a jointly-owned investment or partnership, and accordingly, the investment was accounted for as an unconsolidated joint venture under the equity method of accounting instead of loan accounting since we will participate in the residual interests through the sale or refinancing of the property.

Due to projected cost overruns in excess of the budget associated with the construction of Prospect Park, an event of default was declared by the senior construction lender on April 28, 2014. In accordance with our rights under the mezzanine loan, we also declared an event of default on May 5, 2014. In order to remedy the events of default, the following terms were agreed upon, based on negotiations between the developer and the senior construction lender, as well as with us: (i) the developer covered cost overruns totaling $6.6 million; (ii) we amended our mezzanine loan with the developer to increase our financing to $15.3 million, an increase of $1.5 million (the “Additional Advance”); and (iii) the senior construction lender

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

amended their loan to increase the amount they financed to $40 million, an increase of $4.4 million. The terms of our Initial Advance remained the same under the amended loan agreement. The terms of the Additional Advance are the same as the Initial Advance with exception of the interest rate which is 18% on the Additional Advance.

We considered the impact of these events on the accounting treatment and determined the ADC Arrangement will continue to be accounted for as an unconsolidated joint venture under the equity method of accounting. We will continue to monitor this situation and any impact these events might have on our ability to ultimately realize our investment. The ADC Arrangement is reassessed at each reporting period.

As of September 30, 2014, the outstanding principal balance under our mezzanine loan was $13.7 million. Interest capitalized for the three and nine months ended September 30, 2014 was $0.1 million and $0.4 million, respectively. Interest capitalized for the three and nine months ended September 30, 2013 was $0.1 million and $0.2 million, respectively. For the three and nine months ended September 30, 2014 and 2013, we recorded no equity in earnings (losses) of unconsolidated joint venture related to our investment in Prospect Park.

The following table sets forth our ownership interest in Prospect Park:

______________________________


(1)	For the year ended December 31, 2013, approximately $2 million of the $2.4 million of distributions was an interest reserve funded at closing (classified as restricted cash on the condensed consolidated balance sheet). The balance of the interest reserve was $0.1 million at September 30, 2014.

9. Notes Payable

The following table sets forth information on our notes payable as of September 30, 2014 and December 31, 2013:



	Notes Payable as of
Description	September 30, 2014		December 31, 2013		Interest Rate		Maturity Date
1875 Lawrence⁽¹⁾	$	—	$	15,621	30-day LIBOR + 5.35%	⁽²⁾	1/1/2016
Holstenplatz	9,576		10,581		3.887%		4/30/2015
Courtyard Kauai at Coconut Beach Hotel	38,000		38,000		30-day LIBOR + .95%	⁽²⁾	11/9/2015
Florida MOB Portfolio - Gardens Medical Pavilion	13,770		14,040		4.9%		1/1/2018
River Club and the Townhomes at River Club	24,753		25,010		5.26%		5/1/2018
Babcock Self Storage	2,148		2,182		5.80%		8/30/2018
Lakes of Margate	14,796		14,966		5.49% and 5.92%		1/1/2020
Arbors Harbor Town	25,705		26,000		3.985%		1/1/2019
Alte Jakobstraße	7,394		8,275		2.3%		12/30/2015
Wimberly	26,685		26,685		30-day LIBOR + 2.28%	⁽²⁾	3/1/2023
22 Exchange	19,500		19,500		3.93%		5/5/2023
Parkside⁽³⁾	10,916		11,177		5%		6/1/2018
	$	193,243	$	212,037

_________________________________


(1)	On May 30, 2014, we sold the 1875 Lawrence office building to an unaffiliated third party. A portion of the proceeds from the sale were used to pay off in full the existing indebtedness associated with the property.


(2)	30-day London Interbank Offer Rate ("LIBOR") was 0.15% at September 30, 2014.


(3)	Includes approximately $0.6 million of unamortized premium related to debt we assumed at acquisition.

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

At September 30, 2014, our notes payable balance was $193.2 million and consisted of the notes payable related to our consolidated properties. We have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the Courtyard Kauai at Coconut Beach Hotel, Wimberly, 22 Exchange and Parkside notes payable. On May 30, 2014, we sold 1875 Lawrence for a contract sales price of approximately $46.7 million. We recorded a gain on sale of real estate property of $11.5 million and loss on early extinguishment of debt of $0.5 million, which was comprised of the write-off of deferred financing fees of $0.4 million and an early termination fee of $0.1 million. A portion of the proceeds from the sale were used to pay off in full the existing indebtedness of approximately $15.6 million associated with the office building. For the three and nine months ended September 30, 2014, we capitalized interest of $0.1 million and $0.4 million, respectively, in connection with our equity method investment in Prospect Park. Interest capitalized for the three and nine months ended September 30, 2013 was $0.1 million and $0.2 million, respectively.

We are subject to customary affirmative, negative, and financial covenants and representations, warranties and borrowing conditions, all as set forth in our loan agreements, including, among other things, maintaining minimum debt service coverage ratios, loan to value ratios and liquidity. As of September 30, 2014, we believe we were in compliance with the covenants under our loan agreements.

Our debt secured by Courtyard Kauai at Coconut Beach Hotel, with a balance of $38 million at September 30, 2014, matures on November 9, 2015. The loan has an 18-month renewal option to extend the term to May 9, 2017. Our debt secured by Holstenplatz and Alte Jakobstraße, with balances of $9.6 million and $7.4 million at September 30, 2014, respectively, also mature in 2015. We currently expect to pay-off or refinance these two loans by their respective maturity dates of April 30, 2015 and December 30, 2015.

The following table summarizes our contractual obligations for principal payments as of September 30, 2014:



Year	Amount Due
October 1, 2014 - December 31, 2014	$	738
2015	56,755
2016	2,497
2017	2,724
2018	49,388
Thereafter	80,524
Total contractual obligations for principal payments	$	192,626
Unamortized premium	617
Total notes payable	$	193,243

10. Leasing Activity

Future minimum base rental payments of our office properties due to us under non-cancelable leases in effect as of September 30, 2014 for our consolidated properties are as follows:



Year	Amount Due
October 1, 2014 - December 31, 2014	$	400
2015	173
2016	679
2017	591
2018	485
Thereafter	1,917
Total	$	4,245

The schedule above does not include rental payments due to us from our multifamily, hotel, student housing, and self-storage properties, as leases associated with these properties typically are for periods of one year or less.

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

11. Derivative Instruments and Hedging Activities

We may be exposed to the risk associated with variability of interest rates that might impact our cash flows and the results of operations. The hedging strategy of entering into interest rate caps and swaps, therefore, is to eliminate or reduce, to the extent possible, the volatility of cash flows. As of September 30, 2014, none of our derivative instruments were designated as hedging instruments. We have two interest rate caps as of September 30, 2014.

Derivative instruments classified as assets were reported at their combined fair values of less than $0.1 million and $0.2 million in prepaid expenses and other assets at September 30, 2014 and December 31, 2013, respectively. During the nine months ended September 30, 2014 and 2013, we recorded reclassifications of unrealized loss to interest expense of less than $0.1 million and $0.1 million, respectively, to adjust the carrying amount of the interest rate caps. The reclassification out of OCI in our statement of equity for the nine months ended September 30, 2014 and 2013 was due to all derivatives being designated as non-hedging instruments as of January 1, 2013 compared to being designated as hedging instruments as of December 31, 2012.

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



Type / Description	Notional Value		Interest Rate / Strike Rate	Index	Maturity Date
Not Designated as Hedging Instruments
Interest rate cap - Courtyard Kauai Coconut Beach Hotel	$	38,000	6.00%	30-day LIBOR	October 15, 2014
Interest rate cap - Wimberly	26,685		4.56%	30-day LIBOR	March 1, 2018

We renewed the interest rate cap for Courtyard Kauai Coconut Beach Hotel effective October 15, 2014 for a notional amount of $38 million and a maturity date of October 15, 2016. The cap rate will be 3% for the first year ending October 15, 2015 and 5% in the second year ending October 15, 2016.

The table below presents the fair value of our derivative financial instruments, as well as their classification on the consolidated balance sheets as of September 30, 2014 and December 31, 2013:



		Asset Derivatives
Derivatives not designated as hedging instruments:	Balance Sheet Location	September 30, 2014		December 31, 2013

Interest rate derivative contracts	Prepaid expenses and other assets	$	46	$	174

The table below presents the effect of our derivative financial instruments on the condensed consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013:



Derivatives Not Designated as Hedging Instruments
Amount of Gain or (Loss)
Three months ended September 30,						Nine months ended September 30,
2014			2013			2014			2013
$	(29	)	$	(46	)	$	(188	)	$	(76	)

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

12. Commitments and Contingencies

Income Taxes

In the fourth quarter of 2013, we accrued income tax expense for federal income tax purposes of $183,000 associated with estimated alternative minimum taxable income that could not be offset by our net operating loss carryforward. We paid the $183,000 income tax in the first quarter of 2014. During 2014, we determined that a tax loss could be claimed from one of our properties for assets that were replaced and permanently withdrawn from use at the property. This additional tax expense allowed a recovery of a portion of the AMT tax previously paid. As a result, we recorded an income tax benefit of $168,000 during the quarter ended September 30, 2014.

Operating Leases

On September 20, 2013, we sold the Original Florida MOB Portfolio. Prior to the sale, our operating leases consisted of ground leases on each of the original eight buildings acquired in connection with the purchase of the Original Florida MOB Portfolio. Each ground lease was for a term of 50 years, with a 25-year extension option. The annual payment for each ground lease increased by 10% every 5 years. As of and for the nine months ended September 30, 2014, we do not have operating leases. For the nine months ended September 30, 2013, we incurred $0.2 million in lease expense related to our ground leases which is included in discontinued operations.

13. Distributions

Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous periods and expectations of performance for future periods. These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors that our board deems relevant. The board’s decision will be substantially influenced by its obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all.

We have paid and may in the future pay some or all of our distributions from sources other than operating cash flow. We have, for example, generated cash to pay distributions from sales activities and financing activities, components of which included proceeds from the initial public offering and the follow-on public offerings (collectively, the “Offerings”) and borrowings (including borrowings secured by our assets) in anticipation of future operating cash flow. We have also utilized cash from refinancing and dispositions, the components of which may represent a return of capital and/or the gains on sale. In addition, from time to time, our Advisor may agree to waive or defer all or a portion of the acquisition, asset management or other fees or incentives due to it, pay general administrative expenses or otherwise supplement investor returns which may increase the amount of cash that we have available to pay distributions to our stockholders.

14. Related Party Transactions

The Advisor and certain of its affiliates receive fees and compensation in connection with the acquisition, management, and sale of our assets based on the Advisory Management Agreement, as amended and restated.

Fourth Amended and Restated Advisory Management Agreement

Recently, the Advisor and the Company, through members of a special committee composed solely of independent directors, considered and discussed the calculation and application of certain fee and expense reimbursement provisions contained in the Advisory Management Agreement. We entered into the Fourth Amended and Restated Advisory Management Agreement (the “Fourth Advisory Agreement”) with our Advisor on June 6, 2014 to, among other things, revise the acquisition and advisory fees, asset management fee, and the debt financing fee that may be paid to the Advisor and to fix certain expense reimbursement provisions. The Fourth Advisory Agreement is effective as of January 1, 2014.

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Advisor or its affiliates receive acquisition and advisory fees of 1.5% of the amount paid in respect of the purchase, development, construction, or improvement of each asset we acquire, including any debt attributable to those assets. In addition, the Advisor and its affiliates will also receive acquisition and advisory fees of 1.5% of the funds advanced in respect of a loan investment. Before January 1, 2014, this rate was 2.5%. We incurred acquisition and advisory fees payable to the Advisor of less than $0.1 million for the nine months ended September 30, 2014 as a result of improvements made to our assets. We incurred acquisition and advisory fees payable to the Advisor of $2.4 million for the nine months ended September 30, 2013. During the nine months ended September 30, 2014, we had no acquisitions. During the nine months ended September 30, 2013, we made four separate real estate acquisitions, one of which was a loan investment.

The Advisor or its affiliates also receive an acquisition expense reimbursement in the amount of (i) 0.25% of the funds paid for purchasing an asset, including any debt attributable to the asset, plus 0.25% of the funds budgeted for development, construction, or improvement in the case of assets that we acquire and intend to develop, construct, or improve or (ii) 0.25% of the funds advanced in respect of a loan investment. We also pay third parties, or reimburse the Advisor or its affiliates, for any investment-related expenses due to third parties in the case of a completed investment, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, third-party brokerage or finder's fees, title insurance, premium expenses, and other closing costs.

In addition, acquisition expenses for which we will reimburse the Advisor, include any payments approved in advance by our board of directors made to (i) a prospective seller of an asset, (ii) an agent of a prospective seller of an asset, or (iii) a party that has the right to control the sale of an asset intended for investment by us that are not refundable and that are not ultimately applied against the purchase price for such asset. Previously, to the extent the Advisor or its affiliates directly provided services, formerly provided or usually provided by third parties, including, without limitation, accounting services related to the preparation of audits required by the Securities and Exchange Commission, property condition reports, title services, title insurance, insurance brokerage or environmental services related to the preparation of environmental assessments in connection with a completed investment, the direct employee costs and burden to the Advisor of providing these services was included as acquisition expenses for which we reimbursed the Advisor. Pursuant to the Fourth Advisory Agreement, effective January 1, 2014, such services will no longer be included as acquisition expenses for which the Company will reimburse the Advisor.

In addition, the Advisor is responsible for paying all of the expenses it incurs associated with persons employed by the Advisor to the extent that they are dedicated to making investments for us, such as wages and benefits of the investment personnel. The Advisor and its affiliates are also responsible for paying all of the investment-related expenses that we or the Advisor or its affiliates incur that are due to third parties or related to the additional services provided by the Advisor as described above with respect to investments we do not make, other than certain non-refundable payments made in connection with any acquisition. For the nine months ended September 30, 2014 we incurred less than $0.1 million in acquisition expense reimbursements. For the nine months ended September 30, 2013, we incurred acquisition expense reimbursements of $0.2 million.

Beginning January 1, 2014, we pay the Advisor or its affiliates a debt financing fee of 0.5% of the amount available under any loan or line of credit made available to us and will pay directly all third party costs associated with obtaining the debt financing. Before January 1, 2014, we paid the Advisor a debt financing fee of 1%. We incurred no debt financing fees for the nine months ended September 30, 2014. We incurred debt financing fees of $0.5 million for the nine months ended September 30, 2013.

We pay the Advisor or its affiliates a development fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project if such affiliate provides the development services and if a majority of our independent directors determines that such development fee is fair and reasonable to us. We incurred no such fees for the nine months ended September 30, 2014 and 2013.

Prior to January 1, 2014, we paid the Advisor or its affiliates a monthly asset management fee of one-twelfth of 1.0% of the sum of the higher of the cost or value of each asset. Pursuant to the Fourth Advisory Agreement, we pay the Advisor or its affiliates a monthly asset management fee which, effective January 1, 2014, is one-twelfth of 0.7% of the value of each asset. The value of our assets will be the value as determined in connection with the establishment and publication of an estimated value per share unless the asset was acquired after our publication of an estimated value per share (in which case the value of the asset will be the contract purchase price of the asset). In addition, pursuant to the Fourth Advisory Agreement, the Advisor agreed to waive asset management fees previously accrued during the period from August 2013 to December 2013 of $0.3 million. Therefore, we reversed this accrual in the second quarter of 2014. For the nine months ended September 30, 2014 and

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

2013, we expensed $1.5 million and $2.4 million, respectively, of asset management fees. The totals for the nine months ended September 30, 2014 and 2013 include asset management fees related to our disposed properties.

Under the Fourth Advisory Agreement, beginning January 1, 2014, instead of reimbursing the Advisor for specific expenses paid or incurred in connection with providing services to us, we will pay the Advisor an administrative services fee based on a budget of expenses prepared by the Advisor. The administrative services fee is intended to reimburse for all costs associated with providing services to us under the Fourth Advisory Agreement. The administrative services fee is $1,775,000 per calendar year, payable in four equal quarterly installments within 45 days of the end of each calendar quarter beginning with calendar year 2014. Before the effective date of the Fourth Advisory Agreement, we reimbursed the Advisor or its affiliates for all expenses paid or incurred by them in connection with the services they provided us, subject to certain limitations. For the nine months ended September 30, 2014 and 2013, we incurred and expensed such costs for administrative services of $1,331,000 and $1,225,000, respectively.

Notwithstanding the fees and cost reimbursements described above, under our charter we may not reimburse the Advisor for any amount by which our operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of: (i) 2% of our average invested assets, or (ii) 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of our assets for that period unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended September 30, 2014, our total operating expenses (including the asset management fee) were excessive. On November 11, 2014, our board of directors determined that the excess expenses were justified based on unusual and non-recurring factors.

We pay our property manager and affiliate of the Advisor, Behringer Harvard Opportunity II Management Services, LLC (“BHO II Management”), or its affiliates, fees for the management, leasing, and construction supervision of our properties. Before January 1, 2014, property management fees were 4.5% of the gross revenues of the properties managed by BHO II Management or its affiliates, plus leasing commissions based upon the customary leasing commission applicable to the same geographic location of the respective property. Effective January 1, 2014, we entered into the First Amendment to the Amended and Restated Property Management and Leasing Agreement, which reduced the property management fee paid to 4.0% of gross revenues of the properties managed by BHO II Management or its affiliates. In the event that we contract directly with a third-party property manager in respect of a property, BHO II Management or its affiliates receives an oversight fee equal to 0.5% of the gross revenues of the property managed. In no event will BHO II Management or its affiliates receive both a property management fee and an oversight fee with respect to any particular property. In the event we own a property through a joint venture that does not pay BHO II Management directly for its services, we will pay BHO II Management a management fee or oversight fee, as applicable, based only on our economic interest in the property. We incurred and expensed property management fees or oversight fees to BHO II Management of approximately $0.4 million and $0.7 million for the nine months ended September 30, 2014 and 2013, respectively.

We pay the Advisor or its affiliates a construction management fee in an amount not to exceed 5% of all hard construction costs incurred in connection with, but not limited to capital repairs and improvements, major building reconstruction and tenant improvements, if such affiliate supervises construction performed by or on behalf of us or our affiliates. We incurred $0.1 million of construction management fees for each of the nine months ended September 30, 2014 and 2013.

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

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

15. Supplemental Cash Flow Information

Supplemental cash flow information is summarized below:



	Nine months ended September 30,
Description	2014		2013
Interest paid, net of amounts capitalized	$	5,572	$	5,944
Income tax paid	196		—
Non-cash investing and financing activities:
Capital expenditures for real estate in accrued liabilities	705		478
Assumed debt on acquisition of real estate investment	—		11,306
Assumed debt on disposition of real estate investment	—		17,983
Accrued distributions to noncontrolling interest holder	18		4,353

16. Asset Sales and Discontinued Operations

Effective as of April 1, 2014, we adopted the revised guidance for discontinued operations as further discussed in Note 4, New Accounting Pronouncements. For sales of real estate or assets classified as held for sale after April 1, 2014, we will evaluate whether the disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations. If the disposal represents a strategic shift, it will be classified as discontinued operations for all periods presented; if not, it will be presented in continuing operations. Any sales of real estate prior to April 1, 2014 that were reported in discontinued operations in prior reporting periods will continue to be reported as discontinued operations.

The following table summarizes the disposition of our properties during 2013 and 2014 (in millions):



Property Name	Date of Disposition	Contract Sales Price
Interchange Business Center	(1)	$	40.4
Original Florida MOB Portfolio⁽²⁾	September 20, 2013	$	63.0
1875 Lawrence	May 30, 2014	$	46.7

_________________________________

(1) On October 18, 2012, we sold one of the four industrial buildings at Interchange Business Center to an unaffiliated third party. On April 12, 2013, we sold the remaining three buildings to an unaffiliated third party.

(2) On September 20, 2013, we sold the original eight medical office buildings. We continue to own approximately 79.8% of the ninth building, Gardens Medical Pavilion.

On May 30, 2014, we sold 1875 Lawrence for a contract sales price of approximately $46.7 million. We recorded a gain on sale of real estate property of $11.5 million and loss on early extinguishment of debt of $0.5 million which was comprised of the write-off of deferred financing fees of $0.4 million and an early termination fee of $0.1 million. A portion of the proceeds from the sale were used to pay off in full the existing indebtedness of approximately $15.6 million associated with the office building. The disposal of the 1875 Lawrence property does not represent a strategic shift, therefore it is presented in continuing operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2014. See Note 7, Real Estate and Real Estate-Related Investments, for further details.

On October 18, 2012, we sold one of the four industrial buildings at Interchange Business Center for a contract sales price of approximately $7.5 million, excluding transaction costs. On April 12, 2013, we sold the remaining three buildings for a contract sales price of approximately $40.4 million, excluding transaction costs. We recorded a gain on sale of real estate property of $14.5 million and loss on early extinguishment of debt of $0.3 million, which is reflected in discontinued operations for the year ended December 31, 2013. A portion of the proceeds from the sale of the asset were used to fully satisfy the existing indebtedness of approximately $11.3 million associated with the buildings.

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

On September 20, 2013, we sold the Original Florida MOB Portfolio for an aggregate contract sales price of approximately $63 million, which was paid in cash and through the assumption by the buyer of approximately $18 million of existing indebtedness.

We have classified the results of operations for the Interchange Business Center and the Original Florida MOB Portfolio into discontinued operations in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2013.

The following table summarizes the income from discontinued operations for the three and nine months ended September 30, 2013 (in thousands):



	Three Months Ended September 30, 2013			Nine Months Ended September 30, 2013
Rental revenue	$	2,525		$	8,635

Expenses
Property operating expenses	1,535			4,130
Interest expense	201			981
Real estate taxes	64			609
Property management fees	126			385
Asset management fees	—			50
Depreciation and amortization	712			2,606
Total expenses	2,638			8,761

Loss on early extinguishment of debt⁽¹⁾	—			260
Loss from discontinued operations	(113		)	(386		)

Gain on sale of real estate	17,065			31,520
Income from discontinued operations	16,952			31,134
Income attributable to noncontrolling interests	(1,691		)	(5,447		)
Income from discontinued operations attributable to the Company	$	15,261		$	25,687

Capital expenditures	$	—		$	1,250

_________________________________

(1) Loss on early extinguishment of debt for the nine months ended September 30, 2013 was approximately $0.3 million and was comprised of the write-off of deferred financing fees of $0.1 million and an early termination fee of $0.2 million.

Changes in operating and investing noncash items related to discontinued operations were not significant for the three and nine months ended September 30, 2013.

17. Subsequent Events

Real Estate Asset Acquisition

On October 10, 2014, through a wholly-owned subsidiary of our operating partnership, we acquired a 435-unit multifamily community located in Dallas, Texas (“Lakewood Flats”), from an unaffiliated third party. The purchase price for Lakewood Flats, excluding closing costs, was $60.5 million, of which $27 million was paid in cash and the remaining $33.5 million was provided by a mortgage loan with the Prudential Insurance Company of America. We funded the cash portion of the purchase price with proceeds from asset sales. The loan bears interest at a variable annual rate of 30-day LIBOR plus 1.5% and requires monthly payments of interest only during its term, with the unpaid principal and interest due on the maturity date of November 5, 2019. The loan may be prepaid in its entirety at any time, subject to a prepayment penalty if prepaid before December 5, 2016.

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Share Redemptions

On November 11, 2014, our board of directors approved redemptions for the fourth quarter of 2014 totaling 106,548 shares with an aggregate redemption payment of approximately $0.8 million. See Part II, Item 2, “Unregistered Sale of Equity Securities and Use of Proceeds” included in this Quarterly Report on Form 10-Q for a full description of the price at which we redeem shares under our share redemption program.

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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 condensed consolidated financial statements and the notes thereto.

Forward-Looking Statements

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

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described herein and under Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2014 and the factors described below:


•	market and economic challenges experienced by the U.S. and global economies 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, if any;


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


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


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


•	the availability of credit generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions and requirements of that debt;


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


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


•	our ability to secure leases at favorable rental rates;


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


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

Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect. 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.

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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.

Executive Overview

We commenced an initial public offering of our common stock on January 21, 2008. On July 3, 2011, our initial public offering terminated in accordance with its terms. On July 5, 2011, we commenced a follow-on public offering. We terminated the primary component of the follow-on public offering effective March 15, 2012 and the DRP component effective April 3, 2012. We raised gross offering proceeds of approximately $265.3 million from the sale of approximately 26.7 million shares under the Offerings, including shares sold under the DRP.

Liquidity and Capital Resources

Our principal demands for funds will be for the (a) acquisition of real estate and real estate-related assets, (b) payment of operating expenses, (c) payment of interest and principal on our outstanding indebtedness and (d) special distributions. Generally, we expect to meet cash needs for the payment of operating expenses and interest on our outstanding indebtedness from our cash flow from operations. To the extent that our cash flow from operations is not sufficient to cover our operating expenses, interest on our outstanding indebtedness, redemptions or distributions, we expect to use borrowings and asset sales to fund such needs.

We continually evaluate our liquidity and ability to fund future operations and debt obligations. As part of those analyses, we consider lease expirations and other factors. Leases at our consolidated office properties representing 9% of our annualized base rent and 8% of our rentable square footage (effective monthly rent per square foot of $1.85) will expire by the end of 2014. As a normal course of business, we are pursuing renewals, extensions and new leases. If we are unable to renew or extend the expiring leases under similar terms or are unable to negotiate new leases, it would negatively impact our liquidity and adversely affect our ability to fund our ongoing operations.

We had cash and cash equivalents of $105.2 million at September 30, 2014. We expect to fund our short-term liquidity requirements by using cash on hand, cash flow from the operations of our investments and asset sales. Operating cash flows are expected to increase as additional stabilized real estate assets are added to the portfolio and our existing portfolio stabilizes. To the extent our portfolio is concentrated in certain geographic regions, types of assets, industries or business sectors, downturns relating generally to such regions, assets, industry or business sectors may result in tenants defaulting on their lease obligations at a number of our properties within a short time period. Such defaults could negatively affect our liquidity and adversely affect our ability to fund our ongoing operations.

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We may, but are not required to, establish capital reserves from cash flow generated by operating properties and other investments, or net sales proceeds from the sale of our properties and other investments. Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions and major capital expenditures. Alternatively, a lender may establish its own criteria for escrow of capital reserves.

We intend to borrow money to acquire properties and make other investments. There is no limitation on the amount we may invest in any single property or other asset or on the amount we can borrow for the purchase of any individual property or other investment. Under our charter, the maximum amount of our indebtedness is limited to 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors. In addition to our charter limitation, our board of directors adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests. Our policy limitation, however, does not apply to individual real estate assets.

Commercial real estate debt markets may experience volatility and uncertainty as a result of certain related factors, including the tightening of underwriting standards by lenders and credit rating agencies, macro-economic issues related to fiscal, tax and regulatory policies, and global financial issues arising from the European debt crisis and recessionary implications. Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our acquisitions, developments and investments. This may result in our investment operations generating lower overall economic returns and a reduced level of cash flow, which could potentially impact our ability to make distributions to our stockholders. In addition, the disruptions in the debt markets may reduce the amount of capital that is available to finance real estate, which in turn could: (i) lead to a decline in real estate values generally; (ii) slow real estate transaction activity; (iii) reduce the loan to value ratio upon which lenders are willing to extend debt; and (iv) result in difficulty in refinancing debt as it becomes due, all of which may reasonably be expected to have a material adverse impact on the value of real estate investments and the revenues, income or cash flow from the operations of real properties and mortgage loans.

Debt Financings

We may, from time to time, obtain mortgage, bridge or mezzanine loans for acquisitions and investments, as well as property development. We may obtain financing at the time an asset is acquired or an investment is made or at such later time as determined to be necessary, depending on multiple factors.

At September 30, 2014, our notes payable balance was $193.2 million and had a weighted average interest rate of 3.5% compared to a balance of $212 million and weighted average interest rate of 3.7% at December 31, 2013. We have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the Courtyard Kauai at Coconut Beach Hotel, Wimberly, 22 Exchange and Parkside notes payable.

Our debt secured by Courtyard Kauai at Coconut Beach Hotel with a balance of $38 million at September 30, 2014, matures on November 9, 2015. The loan has an 18-month renewal option to extend the term to May 9, 2017. Our debt secured by Holstenplatz and Alte Jakobstraße, with balances of $9.6 million and $7.4 million at September 30, 2014, respectively, also mature in 2015. We currently expect to pay-off or refinance these two loans by their respective maturity dates of April 30, 2015 and December 30, 2015.

Our loan agreements stipulate that we comply with certain reporting and financial covenants. These covenants include, among other things, maintaining minimum debt service coverage ratios, loan to value ratios and liquidity. As of September 30, 2014, we believe we were in compliance with the debt covenants under our loan agreements.

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One of our principal long-term liquidity requirements includes the repayment of maturing debt. The following table provides information with respect to the maturities and scheduled principal repayments of our indebtedness as of September 30, 2014 (in thousands):



	Payments Due by Period⁽¹⁾
	October 1, 2014 -December 31, 2014		2015		2016		2017		2018		Thereafter		Total
Principal payments - variable rate debt	$	—	$	38,446	$	536	$	536	$	535	$	24,631	$	64,684
Principal payments - fixed rate debt	738		18,309		1,961		2,188		48,853		55,893		127,942
Interest payments - variable rate debt (based on rates in effect as of September 30, 2014)	272		1,054		643		629		615		2,465		5,678
Interest payments - fixed rate debt	1,463		5,564		5,175		5,059		3,393		4,029		24,683
Total⁽²⁾	$	2,473	$	63,373	$	8,315	$	8,412	$	53,396	$	87,018	$	222,987

_________________________________


(1)	Does not include approximately $0.6 million of unamortized premium related to debt we assumed on our acquisition of Parkside.


(2)	Does not include assumptions for any available extension options.

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Results of Operations

As of September 30, 2014, we had 12 real estate investments, 11 of which were consolidated (one wholly owned and ten properties consolidated through investments in joint ventures). As of September 30, 2013, we had 13 real estate investments, 12 of which were consolidated. We made no acquisitions during the nine months ended September 30, 2014. We sold 1875 Lawrence in the second quarter of 2014. The results of operations for 1875 Lawrence will remain in continuing operations based on the new accounting treatment for discontinued operations which was issued in April 2014. See Note 4, New Accounting Pronouncements. During 2013, we completed one acquisition in the first quarter, two acquisitions, including an investment in an unconsolidated joint venture, in the second quarter, and one acquisition in the third quarter. We sold the remaining three buildings at Interchange Business Center in the second quarter of 2013 and the Original Florida MOB Portfolio in the third quarter of 2013, with results of operations for these two properties included in discontinued operations.

Three months ended September 30, 2014 as compared to the three months ended September 30, 2013.

The following table provides summary information about our results of operations for the three months ended September 30, 2014 and 2013 ($ in thousands):



	Three Months Ended September 30,
	2014		2013		Increase (Decrease)			Percentage Change		$ Change due to Acquisitions⁽¹⁾		$ Change due to Dispositions⁽²⁾			$ Change due to Same Store⁽³⁾
Rental revenue	$	7,545	$	7,615	$	(70	)	(0.9	)%	$	295	$	(636	)	$	271
Hotel revenue	3,812		3,982		(170		)	(4.3	)%	—		—			(170		)
Property operating expenses	2,944		2,857		87			3.0	%	162		(268		)	193
Hotel operating expenses	3,028		3,008		20			0.7	%	—		—			20
Interest expense, net	1,785		2,053		(268		)	(13.1	)%	45		(285		)	(28		)
Real estate taxes	1,144		1,278		(134		)	(10.5	)%	53		(185		)	(2		)
Property management fees	380		399		(19		)	(4.8	)%	12		(26		)	(5		)
Asset management fees⁽⁴⁾	601		990		(389		)	(39.3	)%	9		(210		)	(188		)
General and administrative	1,125		1,225		(100		)	(8.2	)%	n/a		n/a			n/a
Acquisition expense	4		996		(992		)	(99.6	)%	n/a		n/a			(992		)
Depreciation and amortization	3,167		3,447		(280		)	(8.1	)%	64		(399		)	55
Gain on sale of real estate	9		—		9			100.0	%	—		9			—

______________________


(1)	Represents the dollar amount increase for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 related to real estate and real estate-related investments acquired on or after January 1, 2013.


(2)	Represents the dollar amount increase (decrease) for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 related to the disposition of 1875 Lawrence on May 30, 2014. The gain on sale of real estate during the three months ended September 30, 2014 is an adjustment to the gain on sale of 1875 Lawrence.

(3)

Represents the dollar amount increase (decrease) for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 with respect to real estate and real estate-related investments owned by us during the entire periods presented (“Same Store”). Same Store for the periods ended September 30, 2014 and 2013 include Holstenplatz, Gardens Medical Pavilion, River Club and the Townhomes at River Club, Babcock Self Storage, Lakes of Margate, Arbors Harbor Town, Courtyard Kauai Coconut Beach Hotel, Alte Jakobstraße, Wimberly at Deerwood and 22 Exchange.


(4)	Asset management fees payable to the Advisor are an obligation of the Company, and as such, asset management fees associated with all investments owned during the period are classified in continuing operations. Therefore, the amount above includes asset management fees associated with any property owned during a particular period, including those related to our disposed properties.

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The following table reflects rental revenue and property operating expenses for the three months ended September 30, 2014 and 2013 for (i) our Same Store operating portfolio; (ii) our acquisition of Parkside Apartments in 2013; and (iii) our disposition of 1875 Lawrence on May 30, 2014 which is included in continuing operations (in thousands):



	Three Months Ended September 30,
Description	2014			2013		Change
Rental revenue
Same Store	$	6,832		$	6,561	$	271
Acquisitions	732			437		295
Dispositions	(19		)	617		(636		)
Total rental revenue	$	7,545		$	7,615	$	(70	)

Property operating expenses
Same Store	$	2,668		$	2,475	$	193
Acquisitions	270			108		162
Dispositions	6			274		(268		)
Total property operating expenses	$	2,944		$	2,857	$	87

The tables below reflect occupancy and effective monthly rental rates for our Same Store operating properties and occupancy and average daily rate (“ADR”) for Courtyard Kauai Coconut Beach Hotel:



	Occupancy (%)		Effective Monthly Rent per Square Foot/Unit/Bed ($)
	As of September 30,		As of September 30,
Property	2014	2013	2014		2013
Holstenplatz	95%	100%	$	1.26	$	1.37	per sq ft
Gardens Medical Pavilion	82%	78%	2.24		2.45		per sq ft
River Club and the Townhomes at River Club	100%	80%	363.24		342.68		per bed
Babcock Self Storage	89%	84%	101.79		101.50		per unit
Lakes of Margate	90%	94%	1,134.52		1,068.61		per unit
Arbors Harbor Town	93%	96%	1,192.86		1,124.33		per unit
Alte Jakobstraße	100%	100%	0.94		0.94		per sq ft
Wimberly at Deerwood	93%	93%	1,000.05		948.20		per unit
22 Exchange	85%	73%	508.89		506.81		per bed



	Occupancy (%)⁽¹⁾				ADR ($)
	Three Months Ended September 30,				Three Months Ended September 30,
Property	2014		2013		2014		2013
Courtyard Kauai Coconut Beach Hotel	77	%	81	%	$	130.06	$	129.84

_______________________________________


(1)	Represents average occupancy for the three months ended September 30. The Courtyard Kauai Coconut Beach Hotel has 311 rooms and approximately 6,200 square feet of meeting space. Occupancy is for the entire three month period and is based on standard industry metrics, including rooms available for rent.

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Continuing Operations

Our results of operations for the respective periods presented primarily reflect decreases in most categories due to the disposition of 1875 Lawrence in May 2014, partially offset by acquisitions of three consolidated properties and one equity investment during the year ended December 31, 2013. Management expects increases in most categories in the near future as we purchase additional real estate and real estate-related assets and as we begin to realize the full-year impact of our acquisitions.

Revenues. Revenues for the three months ended September 30, 2014, including Courtyard Kauai at Coconut Beach Hotel, were $11.4 million, a decrease of $0.2 million from the three months ended September 30, 2013. Same Store rental revenue for the three months ended September 30, 2014 and 2013 was $10.6 million and $10.5 million, respectively, while rental revenue from acquisitions was $0.7 million and $0.4 million, respectively, and rental revenue from the disposition of 1875 Lawrence in 2014 classified in continuing operations was less than $0.1 million and $0.6 million, respectively. The change in revenue is primarily due to:


•	a decrease of $0.6 million related to 1875 Lawrence which was disposed of in May 2014. This decrease was partially offset by an increase in rental revenue of $0.3 million as a result of our 2013 acquisition of Parkside and an increase of $0.2 million for investments we owned during the entire periods presented; and


•	a decrease in hotel revenue of $0.2 million, or 4%, at the Courtyard Kauai at Coconut Beach Hotel. Due to inclement weather during the third quarter of 2014, we had a 5% decrease in occupancy which resulted in the decrease in hotel revenue during the third quarter of 2014 compared to the same period of 2013.

Property Operating Expenses. Property operating expenses for the three months ended September 30, 2014 and 2013 remained relatively flat at $2.9 million. Property operating expenses for Same Store and acquisitions increased approximately $0.2 million each. These increases were partially offset by a decrease in property operating expense of approximately $0.3 million for the three months ended September 30, 2014 related to the disposition of 1875 Lawrence in 2014.

Hotel Operating Expenses. Hotel operating expenses for the three months ended September 30, 2014 and 2013 remained fairly constant at approximately $3 million.

Interest Expense, net. Interest expense for the three months ended September 30, 2014 and 2013 was $1.8 million and $2.1 million, respectively. The $0.3 million decrease was primarily due to the disposition of our 1875 Lawrence property in May 2014, which is classified as continuing operations. We capitalized interest of $0.1 million in connection with our equity method investment in Prospect Park during the three months ended September 30, 2014 and 2013.

Real Estate Taxes. Real estate taxes were $1.1 million and $1.3 million for the three months ended September 30, 2014 and 2013, respectively. The disposition of our 1875 Lawrence property in May 2014, which is classified as continuing operations, accounted for a $0.2 million decrease while acquisitions accounted for less than $0.1 million increase. Same Store real estate taxes remained constant year-over-year.

Property Management Fees. Property management fees, which are based on revenues, were $0.4 million for the three months ended September 30, 2014 and 2013, and were comprised of property management fees paid to unaffiliated third parties and our Property Manager or its affiliates.

Asset Management Fees. Asset management fees for the three months ended September 30, 2014 and 2013 were $0.6 million and $1 million, respectively, and were comprised of asset management fees paid to our Advisor and third parties with respect to our investments. Our monthly asset management fees payable to the Advisor were one-twelfth of 1.0% based on the higher of cost or value for each asset in 2013. Pursuant to the Fourth Advisory Agreement, effective January 1, 2014, our monthly asset management fees payable to the Advisor are one-twelfth of 0.7% and are based on the value for each asset as determined in connection with our establishment and publication of an estimated value per share. Assets acquired after the publication of an estimated value per share will be valued at the contract purchase price of the asset plus amounts expended in connection with the development, construction or improvement of an asset until the next estimated value per share is determined. The $0.4 million decrease in asset management fees for the quarter ended September 30, 2014 was primarily due to a decrease of $0.2 million related to dispositions and a decrease of $0.2 million in Same Store as a result of the change in rate effective January 1, 2014. Asset management fees payable to the Advisor are an obligation of the Company, and as such, asset management fees associated with all investments owned during the period are classified in continuing operations. Asset management fees for the three months ended September 30, 2013 include such fees related to our disposed properties. We expensed $0.2 million in asset management fees related to disposed properties during the three months ended September 30, 2013.

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General and Administrative Expenses. General and administrative expenses for the three months ended September 30, 2014 and 2013 were $1.1 million and $1.2 million, respectively, and were comprised of audit fees, legal fees, board of directors’ fees, and other administrative expenses. The $0.1 million decrease in general and administrative expense for the three months ended September 30, 2014 was primarily the result of a decrease in legal expenses associated with our joint ventures.

Acquisition Expense. We incurred less than $0.1 million acquisition expense in the third quarter of 2014 related to acquisition fees as a result of improvements made to our assets. Acquisition expense for the three months ended September 30, 2013 of $1 million was primarily due to expenses incurred as a result of our acquisition of Parkside.

Depreciation and Amortization. Depreciation and amortization for the three months ended September 30, 2014 and 2013 was approximately $3.2 million and $3.4 million, respectively. The disposition of 1875 Lawrence in May 2014 resulted in a decrease of $0.4 million. This was partially offset by an increase of less than $0.1 million in Same Store depreciation and amortization for the third quarter of 2014 and an increase of less than $0.1 million in the third quarter of 2014 for the acquisition of Parkside in August 2013.

Gain on Sale of Real Estate. We did not sell any real estate during the three months ended September 30, 2014. The gain on sale of real estate of less than $0.1 million during the three months ended September 30, 2014 represents an adjustment to the gain on sale of 1875 Lawrence which we sold in May 2014. As discussed in Note 16, Asset Sales and Discontinued Operations, sales of real estate during 2013 were considered discontinued operations.

Nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013.

The following table provides summary information about our results of operations for the nine months ended September 30, 2014 and 2013 ($ in thousands):



	Nine Months Ended September 30,
	2014		2013		Increase (Decrease)			Percentage Change		$ Change due to Acquisitions⁽¹⁾			$ Change due to Dispositions⁽²⁾			$ Change due to Same Store⁽³⁾
Rental revenue	$	23,315	$	20,564	$	2,751		13.4	%	$	3,308		$	(1,207	)	$	650
Hotel revenue	12,313		10,994		1,319			12.0	%	—			—			1,319
Property operating expenses	8,293		6,975		1,318			18.9	%	1,338			(282		)	262
Hotel operating expenses	9,037		8,496		541			6.4	%	—			—			541
Interest expense, net	5,903		5,776		127			2.2	%	508			(327		)	(54		)
Real estate taxes	3,909		3,418		491			14.4	%	710			(303		)	84
Property management fees	1,209		1,090		119			10.9	%	125			(52		)	46
Asset management fees⁽⁴⁾	1,669		2,535		(866		)	(34.2	)%	78			(523		)	(421		)
General and Administrative	3,082		2,858		224			7.8	%	n/a			n/a			n/a
Acquisition expense	30		4,053		(4,023		)	(99.3	)%	(4,023		)	n/a			n/a
Depreciation and amortization	10,229		10,202		27			0.3	%	430			(573		)	170
Gain on sale of real estate	11,454		—		11,454			100.0	%	—			11,454			—

_______________________________________


(1)	Represents the dollar amount increase (decrease) for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 related to real estate and real estate-related investments acquired on or after January 1, 2013.


(2)	Represents the dollar amount increase (decrease) for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 related to the disposition of 1875 Lawrence on May 30, 2014.

(3)

Represents the dollar amount increase (decrease) for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 with respect to real estate and real estate-related investments owned by us during the entire periods presented (“Same Store”). Same Store for the periods ended September 30, 2014 and 2013 include Holstenplatz, Gardens Medical Pavilion, River Club and the Townhomes at River Club, Babcock Self Storage, Lakes of Margate, Arbors Harbor Town, Courtyard Kauai Coconut Beach Hotel, and Alte Jakobstraße.


(4)	Asset management fees payable to the Advisor are an obligation of the Company, and as such, asset management fees associated with all investments owned during the period are classified in continuing operations. Therefore, the amount above includes asset management fees associated with any property owned during a particular period, including those related to our disposed properties.

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The following table reflects rental revenue and property operating expenses for the nine months ended September 30, 2014 and 2013 for (i) our Same Store operating portfolio; (ii) our acquisitions in 2013, Wimberly at Deerwood, 22 Exchange and Parkside Apartments; and (iii) our disposition of 1875 Lawrence on May 30, 2014, which is included in continuing operations (in thousands):



	Nine Months Ended September 30,
Description	2014		2013		Change
Rental revenue
Same Store	$	14,668	$	14,018	$	650
Acquisitions	7,604		4,296		3,308
Dispositions	1,043		2,250		(1,207		)
Total rental revenue	$	23,315	$	20,564	$	2,751

Property operating expenses
Same Store	$	4,952	$	4,690	$	262
Acquisitions	2,693		1,355		1,338
Dispositions	648		930		(282		)
Total property operating expenses	$	8,293	$	6,975	$	1,318

The tables below reflect occupancy and effective monthly rental rates for our Same Store operating properties and occupancy and average daily rate (“ADR”) for Courtyard Kauai Coconut Beach Hotel:



	Occupancy (%)		Effective Monthly Rent per Square Foot/Unit/Bed ($)
	As of September 30,		As of September 30,
Property	2014	2013	2014		2013
Holstenplatz	95%	100%	$	1.26	$	1.37	per sq ft
Gardens Medical Pavilion	82%	78%	2.24		2.45		per sq ft
River Club and the Townhomes at River Club	100%	80%	363.24		342.68		per bed
Babcock Self Storage	89%	84%	101.79		101.50		per unit
Lakes of Margate	90%	94%	1,134.52		1,068.61		per unit
Arbors Harbor Town	93%	96%	1,192.86		1,124.33		per unit
Alte Jakobstraße	100%	100%	0.94		0.94		per sq ft



	Occupancy (%)⁽¹⁾				ADR ($)
	Nine Months Ended September 30,				Nine Months Ended September 30,
Property	2014		2013		2014		2013
Courtyard Kauai Coconut Beach Hotel	82	%	79	%	$	134.72	$	122.63

_______________________________________


(1)	Represents average occupancy for the nine months ended September 30. The Courtyard Kauai Coconut Beach Hotel has 311 rooms and approximately 6,200 square feet of meeting space. Occupancy is for the entire nine month period and is based on standard industry metrics, including rooms available for rent.

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Continuing Operations

Our results of operations for the respective periods presented primarily reflect increases in most categories due to the acquisition of three consolidated properties and one equity investment during the year ended December 31, 2013, offset by the disposal in May 2014 of one consolidated property. Management expects increases in most categories in the near future as we purchase additional real estate and real estate-related assets and as we begin to realize the full-year impact of our acquisitions.

Revenues. Revenues for the nine months ended September 30, 2014 were $35.6 million, an increase of $4 million from the nine months ended September 30, 2013. Same Store rental revenue for the nine months ended September 30, 2014 and 2013 was $14.7 million and $14 million, respectively, while rental revenue from acquisitions were $7.6 million and $4.3 million respectively, and rental revenue from 1875 Lawrence, which was disposed of in 2014 and is classified in continuing operations, was $1 million and $2.2 million, respectively. The change in revenue is primarily due to:

•

an increase in rental revenue of $3.3 million as a result of our 2013 acquisitions of Wimberly, 22 Exchange, and Parkside, and an increase of $0.7 million for investments we owned during the entire periods presented, partially offset by a decrease of $1.2 million related to the disposition of 1875 Lawrence in 2014. The increase in revenues for Same Stores was primarily due to increases of $0.3 million, $0.2 million, and $0.1 million at Lakes of Margate, Arbors Harbor Town, and River Club and the Townhomes at River Club, respectively.


•	an increase in hotel revenue of $1.3 million at the Courtyard Kauai at Coconut Beach Hotel due to a 4% increase in occupancy and a 10% increase in ADR, resulting in a 13% increase in RevPar year-over-year. These improvements are primarily the result of improved operating performance and an increase in the hotel’s group sales.

Property Operating Expenses. Property operating expenses for the nine months ended September 30, 2014 and 2013 were $8.3 million and $7 million, respectively. Property operating expenses increased $1.3 million primarily as a result of acquisitions during 2013. Same Store remained relatively flat increasing by only $0.3 million which was offset by a decrease of $0.3 million due to the disposal of 1875 Lawrence in May 2014.

Hotel Operating Expenses. Hotel operating expenses for the nine months ended September 30, 2014 and 2013 were $9 million and $8.5 million, respectively. The increase in hotel operating expenses was due to additional costs as a result of the increased occupancy at Courtyard Kauai at Coconut Beach Hotel.

Interest Expense, net. Interest expense for the nine months ended September 30, 2014 and 2013 was $5.9 million and $5.8 million, respectively. The $0.1 million increase was primarily due to interest expense related to acquisitions of $0.5 million, partially offset by decreases related to the disposition in 2014 included in continuing operations and Same Store. For the nine months ended September 30, 2014, we capitalized interest of $0.4 million in connection with our equity method investment in Prospect Park. Interest capitalized for the nine months ended September 30, 2013 was $0.2 million.

Real Estate Taxes. Real estate taxes were $3.9 million and $3.4 million for the nine months ended September 30, 2014 and 2013, respectively. Acquisitions and Same Store accounted for increases of $0.7 million and $0.1 million, respectively, while the disposition of 1875 Lawrence in 2014 resulted in a decrease of $0.3 million.

Property Management Fees. Property management fees, which are based on revenues, were $1.2 million and $1.1 million for the nine months ended September 30, 2014 and 2013, respectively, and were comprised of property management fees paid to unaffiliated third parties and our Property Manager or its affiliates. Annual property management fees for the nine months ended September 30, 2014 increased over the same period in 2013, primarily due to our acquisitions in 2013.

Asset Management Fees. Asset management fees for the nine months ended September 30, 2014 and 2013 were approximately $1.7 million and $2.5 million, respectively, and were comprised of asset management fees paid to our Advisor and third parties with respect to our investments. Our monthly asset management fees payable to the Advisor were one-twelfth of 1.0% and based on the higher of cost or value for each asset in 2013. Pursuant to the Fourth Advisory Agreement, effective January 1, 2014, our monthly asset management fees payable to the Advisor are one-twelfth of 0.7% and based on the value for each asset as determined in connection with our establishment and publication of an estimated value per share. Assets acquired after the publication of an estimated value per share will be valued at the contract purchase price of the asset plus amounts expended in connection with the development, construction or improvement of an asset until the next estimated per share value is determined. The $0.9 million decrease in asset management fees for the nine months ended September 30, 2014 was primarily due to a decrease of $0.5 million due to the disposition of 1875 Lawrence in 2014 and Interchange Business Center and the Original Florida MOB Portfolio in 2013 and $0.4 million in Same Store due to fees waived by the Advisor in the second quarter of 2014 for fees previously accrued during 2013 and the change in rate effective January 1, 2014. Without this one-time adjustment, asset management fees for the nine months ended September 30, 2014 would have been approximately $2

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million. Asset management fees payable to the Advisor are an obligation of the Company, and as such, asset management fees associated with all investments owned during the period are classified in continuing operations. Asset management fees for the nine months ended September 30, 2014 and 2013 include such fees related to our disposed properties. We expensed $0.1 million and $0.6 million in asset management fees related to disposed properties during the nine months ended September 30, 2014 and 2013, respectively.

General and Administrative Expenses. General and administrative expenses for the nine months ended September 30, 2014 and 2013 were $3.1 million and $2.9 million, respectively, and were comprised of auditing fees, legal fees, board of directors’ fees, and other administrative expenses. The $0.2 million increase in general and administrative expenses for the nine months ended September 30, 2014 was primarily due to an increase of $0.1 million in legal expenses associated with our joint ventures.

Acquisition Expense. We had less than $0.1 million acquisition expense in the first nine months of 2014 as a result of improvements made to our assets. Acquisition expense for the nine months ended September 30, 2013 of $4.1 million was primarily due to expenses incurred as a result of our acquisitions of Wimberly, 22 Exchange and Parkside. Acquisition cost capitalized related to our equity method investment in Prospect Park for the nine months ended September 30, 2013 was $0.4 million.

Depreciation and Amortization. Depreciation and amortization for the nine months ended September 30, 2014 and 2013 remained relatively flat at $10.2 million. The disposition of 1875 Lawrence in 2014 contributed an approximate $0.6 million decrease year-over-year. This decrease was offset by a $0.4 million increase due to the acquisitions in 2013 of Wimberly, 22 Exchange and Parkside and a $0.2 million increase in Same Store.

Gain on Sale of Real Estate. Gain on sale of real estate for the nine months ended September 30, 2014 was approximately $11.5 million and represents the gain recognized from the sale of the 1875 Lawrence office building on May 30, 2014. As discussed in Note 16, Asset Sales and Discontinued Operations, the disposition of 1875 Lawrence was not considered a discontinued operation and the results of operations are presented in continuing operations. Sales of real estate during 2013 were considered discontinued operations.

See Note 16 to Condensed Consolidated Financial Statements for further information regarding asset sales and discontinued operations for the three and nine months ended September 30, 2013.

Cash Flow Analysis

During the nine months ended September 30, 2014, net cash provided by operating activities was $2.6 million compared to net cash provided of $0.3 million for the nine months ended September 30, 2013. The favorable increase of $2.3 million is primarily the result of acquisition expenses of $4.1 million in 2013 associated with our acquisitions of Wimberly, 22 Exchange and Parkside, partially offset by a decrease in working capital items of $1.4 million.

During the nine months ended September 30, 2014, net cash provided by investing activities was $39.8 million compared to cash used in investing activities during the nine months ended September 30, 2013 of $11 million. The $50.8 million difference is due to the following: (i) proceeds of $46.3 million from the sale of 1875 Lawrence in 2014; (ii) our acquisitions of Wimberly, 22 Exchange, Parkside and an investment in Prospect Park for an $89 million use of funds in 2013; and (iii) proceeds of $83.5 from the sales of the remaining three buildings at Interchange Business Center and the Original Florida MOB Portfolio in 2013.

During the nine months ended September 30, 2014, net cash used in financing activities was $31.9 million compared to net cash provided by financing activities of $34.8 million for the nine months ended September 30, 2013. During the nine months ended September 30, 2014, we paid off the existing indebtedness of approximately $15.6 million from the sale of 1875 Lawrence. On September 18, 2014, we paid a special distribution to stockholders totaling $13 million. These cash outflows were partially offset by a year-over-year decrease in distributions to noncontrolling interest holders, net of contributions, of $1.8 million. During the nine months ended September 30, 2013, we received proceeds from notes payable of $47.7 million related to the acquisitions of Wimberly, 22 Exchange and Parkside. We also received reimbursement of $3.8 million of offering costs from our Advisor. These 2013 receipts were partially offset by the pay-off of existing indebtedness of approximately $11.3 million from the sale of the three remaining industrial buildings at Interchange Business Center.

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Funds from Operations

Funds from operations (“FFO”) is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) in the April 2002 “White Paper of Funds From Operations” which is net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property and impairments of depreciable real estate (including impairments of investments in unconsolidated joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciable real estate held by the joint venture or partnership), plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures, subsidiaries, and noncontrolling interests as one measure to evaluate our operating performance. In October 2011, NAREIT clarified the FFO definition to exclude impairment charges of depreciable real estate (including impairments of investments in unconsolidated joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciable real estate held by the joint venture or partnership). The exclusion of impairment charges is not applicable for our third quarter 2014 and 2013 calculations of FFO as we recorded no impairments during those time periods.

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

We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, impairments of depreciable assets, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income.

FFO should not be considered as an alternative to net income (loss), as an indication of our liquidity, nor as an indication of funds available to fund our cash needs, including our ability to make distributions and should be reviewed in connection with other GAAP measurements. Additionally, the exclusion of impairments limits the usefulness of FFO as a historical operating performance measure since an impairment charge indicates that operating performance has been permanently affected. FFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO. Our FFO as presented may not be comparable to amounts calculated by other REITs that do not define these terms in accordance with the current NAREIT definition or that interpret the definition differently.

Our calculation of FFO for the three and nine months ended September 30, 2014 and 2013 is presented below ($ in thousands except per share amounts):



	Three Months Ended September 30,												Nine Months Ended September 30,
	2014						2013						2014						2013
	Amount			Per Share			Amount			Per Share			Amount			Per Share			Amount			Per Share
Net income (loss) attributable to the Company	$	(2,490	)	$	(0.10	)	$	10,840		$	0.42		$	3,810		$	0.15		$	12,522		$	0.48
Adjustments for⁽¹⁾:
Real estate depreciation and amortization⁽²⁾	2,896			0.12			3,585			0.13			9,256			0.35			11,603			0.45
Gain on sale of real estate⁽³⁾	(9		)	—			(15,387		)	(0.59		)	(11,454		)	(0.44		)	(25,956		)	(1.00		)
Funds from operations (FFO)	$	397		$	0.02		$	(962	)	$	(0.04	)	$	1,612		$	0.06		$	(1,831	)	$	(0.07	)

GAAP weighted average shares:
Basic and diluted				25,935						26,032						25,980						26,041

_________________________________


(1)	Reflects continuing operations, as well as discontinued operations. There were no discontinued operations for the three or nine months ended September 30, 2014.


(2)	Includes our consolidated amount and the noncontrolling interest adjustment for the third-party partners’ share.


(3)	For the nine months ended September 30, 2014, includes the gain on the sale of real estate related to the 1875 Lawrence office building. For the three and nine months ended September 30, 2013, includes our proportionate share of the gain on the sale of real estate related to the remaining three buildings at Interchange Business Center and the Original Florida MOB Portfolio.

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

•

Straight-line rent was income of less than $0.1 million recognized in rental revenues for the three and nine months ended September 30, 2014. Straight-line rent was income of $0.1 million and $0.4 million recognized in rental revenues for the three and nine months ended September 30, 2013, respectively, and includes amounts recognized in discontinued operations. The noncontrolling interest portion of straight-line rent was revenue of less than $0.1 million for the nine months ended September 30, 2014 and 2013.


•	Net above/below market lease amortization of less than $0.1 million was recognized as a decrease to rental revenue for the nine months ended September 30, 2014 and 2013. The noncontrolling interest portion of net above/below market lease amortization for the nine months ended September 30, 2014 and 2013 was less than $0.1 million.

•

Amortization of deferred financing costs of $0.2 million and $0.6 million was recognized as interest expense for our notes payable for the three and nine months ended September 30, 2014, respectively. Amortization of deferred financing costs of $0.2 million and $0.7 million was recognized as interest expense for our notes payable for the three and nine months ended September 30, 2013, respectively.


•	We recognized acquisition expense of $4.1 million for the nine months ended September 30, 2013 primarily due to expenses incurred as a result of our acquisitions of Wimberly, 22 Exchange and Parkside. We did not have any acquisitions during the nine months ended September 30, 2014.

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

Distributions

On August 8, 2014, our board of directors authorized a special distribution of $0.50 per share of common stock payable to stockholders of record as of September 15, 2014. The total special distribution of $13 million, which represents a portion of proceeds from asset sales, was paid on September 18, 2014. We did not pay any distributions to stockholders during the nine months ended September 30, 2013. Future distributions declared and paid may exceed cash flow from operating activities or funds from operations until such time as we invest in additional real estate or real estate-related assets at favorable yields and our investments reach stabilization.

We have paid and may in the future pay some or all of our distributions from sources other than operating cash flow. We have, for example, generated cash to pay distributions from sales activities and financing activities, components of which included proceeds from the Offerings and borrowings (including borrowings secured by our assets) in anticipation of future operating cash flow. We have also utilized cash from refinancing and dispositions, the components of which may represent a return of capital and/or the gains on sale. In addition, from time to time, our Advisor may agree to waive or defer all or a portion of the acquisition, asset management or other fees or incentives due to it, pay general administrative expenses or otherwise supplement investor returns which may increase the amount of cash that we have available to pay distributions to our stockholders.

Our board of directors suspended accepting Ordinary Redemptions effective April 1, 2012 until further notice. On May 15, 2014, our board of directors adopted the Third Amended and Restated Share Redemption Program and reopened the share redemption program for Ordinary Redemptions, to be effective on that date. The board of directors also determined to increase the cash available for redemptions from $1 million to no more than $10 million in any twelve-month period. The board of directors first considered requests for Ordinary Redemptions in August 2014 and quarterly thereafter.

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.

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Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including investment impairment. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

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

Our condensed consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control. All inter-company transactions, balances, and profits have been eliminated in consolidation.

Interests in entities acquired will be evaluated based on applicable GAAP, which includes the requirement to consolidate entities deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary. If the interest in the entity is determined not to be a VIE, then the entity will be evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement. For entities in which we have less than a controlling interest or entities which we are not deemed to be the primary beneficiary, we account for the investment using the equity method of accounting.

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

Real Estate

Upon the acquisition of real estate properties, we recognize the assets acquired, the liabilities assumed, and any noncontrolling interest as of the acquisition date, measured at their fair values. The acquisition date is the date on which we obtain control of the real estate property. The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities and asset retirement obligations. Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in place leasing commissions and tenant relationships. Identified intangible liabilities generally consist of below market leases. Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired. Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired. Acquisition-related costs are expensed in the period incurred. Initial valuations are subject to change until our information is finalized, which is no later than twelve months from the acquisition date.

The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings. Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants. The value of buildings is depreciated over the estimated useful life of 25 years using the straight-line method.

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

Investment in Unconsolidated Joint Venture

We provide funding to third party developers for the acquisition, development and construction of real estate. Under the ADC Arrangement, we may participate in the residual profits of the project through the sale or refinancing of the property. We evaluate these arrangements to determine if they have characteristics similar to a loan or if the characteristics are more similar to a joint venture or partnership such as participating in the risks and rewards of the project as an owner or an investment partner. When we determine that the characteristics are more similar to a jointly-owned investment or partnership, we account for the arrangement as an investment in an unconsolidated joint venture under the equity method of accounting or a direct investment (consolidated basis of accounting) instead of applying loan accounting. The ADC Arrangement is reassessed at each reporting period. See Note 8 for further discussion.

Investment Impairments

For all of our real estate and real estate related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the 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: a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers and changes in the global and local markets or economic conditions. Our assets may at times be concentrated in limited geographic locations and, to the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at a portion of our properties within a short time period, which may result in asset impairments. When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset. These projected cash flows are prepared internally by the Advisor and reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s Chief Executive Officer and Chief Financial Officer review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions that are consistent with market data or with assumptions that would be used by a third-party market participant and assume the highest and best use of the investment. We consider trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. In the event that the carrying amount exceeds the estimated

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future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value. While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Risk

As of September 30, 2014, we maintained approximately $2.1 million in Euro-denominated accounts at European financial institutions. We currently have two investments in Europe. As the cash is held in the same currency as the real estate assets and related loans, we believe that we are not materially exposed to any significant foreign currency fluctuations related to these accounts as it relates to ongoing property operations.

Interest Rate Risk

We may be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments. Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we will borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps, or floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate portion of our variable rate debt. Of our $193.2 million in notes payable at September 30, 2014, $64.7 million represented debt subject to variable interest rates. If our variable interest rates increased 100 basis points, we estimate that total annual interest cost, including interest expensed and interest capitalized, would increase by $0.6 million.

Interest rate caps classified as assets were reported at their combined fair value of less than $0.1 million within prepaid expenses and other assets at September 30, 2014. A 100 basis point decrease in interest rates would result in a less than $0.1 million net decrease in the fair value of our interest rate caps. A 100 basis point increase in interest rates would result in a $0.1 million net increase in the fair value of our interest rate caps.

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Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of September 30, 2014, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e) using the criteria established in the Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of September 30, 2014, to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

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

Changes in Internal Control over Financial Reporting

There has been no change in internal control over financial reporting that occurred during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

We are not a 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, 2013.

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

Recent Sales of Unregistered Securities

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

Share Redemption Program

Our board of directors has adopted a share redemption program that permits stockholders to sell their shares back to us, subject to the significant conditions and limitations of the program. Our board of directors can amend the provisions of our share redemption program at any time without the approval of our stockholders.

The terms on which we redeem shares may differ between redemptions upon a stockholder’s death, “qualifying disability” (as defined in the share redemption program) or confinement to a long-term care facility (collectively, “Exceptional Redemptions”) and all other redemptions (“Ordinary Redemptions”). Our board of directors determined to suspend until further notice accepting Ordinary Redemptions effective April 1, 2012. On May 15, 2014, our board of directors adopted the Third Amended and Restated Share Redemption Program and reopened the share redemption program for Ordinary Redemptions, to be effective on that date. In addition, for periods beginning on or after May 15, 2014, the cash available for redemptions was increased from $1 million to no more than $10 million in any twelve-month period. The redemption limitations apply to all redemptions, whether Ordinary or Exceptional Redemptions.

The per share redemption price for Ordinary Redemptions equals the lesser of 80% of (a) our current estimated value per share and (b) the average price per share the investor paid for all of his shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock) less the Special Distributions (as defined in the share redemption program). The per share redemption price for Exceptional Redemptions equals the lesser of 90% of (a) our current estimated value per share and (b) the average price per share the investor paid for all of his shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock) less the Special Distributions.

As of August 1, 2013, our estimated value per share was $10.09. For a full description of the methodologies used to estimate the value of our common stock as of August 1, 2013, see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Market Information" included in our Annual Report on Form 10-K for the year ended December 31, 2013. Effective September 15, 2014, in accordance with our Amended and Restated Policy for Estimation of Common Stock Value adopted March 20, 2012, our estimated value per share is $9.59, which reflects an adjustment to our previously published estimated value per share to account for payment of a special distribution to stockholders of record as of September 15, 2014, in a per share amount of $0.50. The total special distribution paid out on September 18, 2014 of $13 million represents a portion of proceeds from asset sales.

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

Any shares approved for redemption will be redeemed on a periodic basis as determined from time to time by our board of directors, and no less frequently than annually. We will not redeem, during any twelve-month period, more than 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption. In addition, the cash available for redemptions is limited to no more than $10 million in any twelve-month period. The redemption limitations apply to all redemptions, whether Ordinary or Exceptional Redemptions.

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Any Ordinary Redemption requests submitted while Ordinary Redemptions were suspended were returned to investors and must be resubmitted. We gave all stockholders notice that we were resuming Ordinary Redemptions, so that all stockholders would have an equal opportunity to submit shares for redemption. Any redemption requests will be honored pro rata among all requests received based on funds available. Requests will not be honored on a first come, first served basis. During the three months ended September 30, 2014, our board of directors redeemed all 24 Ordinary Redemption requests received that complied with the applicable requirements and guidelines of the share redemption program for an aggregate of 58,356 shares redeemed for $0.4 million (approximately $7.56 per share). All redemptions were funded with cash on hand.

During the three months ended September 30, 2014, our board of directors redeemed all nine Exceptional Redemption requests received that complied with the applicable requirements and guidelines of the share redemption program for an aggregate of 22,048 shares redeemed for $0.2 million (approximately $8.52 per share). All redemptions were funded with cash on hand.

During the third quarter ended September 30, 2014, we redeemed shares as follows (including both Ordinary Redemptions and Exceptional Redemptions):



2014	Total Number of Shares Redeemed	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Be Purchased Under the Plans or Programs
July	80,404	$	7.83	80,404	(1)
August	—	—		—
September	—	—		—
	80,404	$	7.83	80,404

_______________________________


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

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

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.

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SIGNATURE

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



	BEHRINGER HARVARD OPPORTUNITY REIT II, INC.


Dated: November 13, 2014	By:	/s/ S. Jason Hall
		S. Jason Hall
		Chief Financial Officer
		Principal Financial Officer

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Index to Exhibits



Exhibit Number		Description

3.1		Third Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 to Form 10-Q filed on November 14, 2012

3.2		Second Amended and Restated Bylaws, as amended by Amendment No. 1.

4.1		Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.1 to Form 10-K filed on March 28, 2013)

99.1		Third Amended and Restated Share Redemption Program of Behringer Harvard Opportunity REIT II, Inc. adopted as of May 15, 2014 (incorporated by reference to Exhibit 99.2 to Form 8-K filed on May 16, 2014)

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

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

32.1*		Section 1350 Certification**

32.2*		Section 1350 Certification**

101*		The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed on November 13, 2014, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements.


*	Filed or furnished herewith

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

Property Name

Ownership Interest at September 30, 2014

Carrying Amount at September 30, 2014

Prospect Park