Related Party Arrangements

9 Months Ended

Sep. 30, 2012

Related Party Arrangements

Related Party Arrangements

12.Related Party Arrangements

On August 31, 2012, we entered into a series of agreements, and amendments to existing agreements and arrangements, with Behringer Advisors, HPT Management, BHH and Services Holdings. BHH, through one or more of its subsidiaries, owns and controls Behringer Advisors and HPT Management.  As a result of the agreements and amendments, we now perform certain functions, including the advisory function, previously provided to us by Behringer Advisors.  In particular, we have hired personnel previously employed by affiliates of Behringer Advisors.  We are responsible for paying all of the costs, including salaries and benefits, of any person we employ.  Also, effective as of August 31, 2012, we are no longer required to pay asset management fees, acquisition fees or debt financing fees to Behringer Advisors (except for acquisition and debt financing fees related to the previously committed development of Two BriarLake Plaza).   We continue to purchase on a transitional basis certain services, such as human resources, shareholder services and information technology from Behringer Advisors.  HPT Management continues to manage our properties on substantially the same terms and conditions as our prior agreement with HPT Management; however; our agreement was amended to include a buyout option pursuant to which (1) we would acquire and assume certain assets and certain liabilities of HPT Management and (2) HPT Management would be deemed to have irrevocably waived the non-solicitation and non-hire provisions of the amended management agreement with respect to certain persons, including employees of HPT Management providing property management functions on our behalf.  We may exercise this buyout option on or after June 30, 2015 and prior to February 14, 2017, by delivering to HPT Management a notice of our irrevocable intent to exercise this option.  Upon the closing of the buyout, we would be required to pay HPT Management an amount, in cash, equal to 0.8 times the gross amount of all management and oversight fees earned by HPT Management under the amended management agreement for the trailing consecutive 12-month period, ending with the last full month prior to delivery of the buyout notice.

In connection with the August 31, 2012 self-management transaction, we issued 10,000 shares of Series A Convertible Preferred Stock to Services Holdings for an aggregate price of $1.00.  Each share of the Series A Convertible Preferred Stock will participate in dividends and other distributions on par with each share of our common stock.  In addition, the Series A Convertible Preferred Stock may be converted into shares of our common stock, reducing the percentage of our common stock owned by stockholders prior to conversion.  In general, the Series A Convertible Preferred Stock will convert into shares of our common stock: (1) automatically in connection with a listing of our common stock on a national exchange; (2) automatically upon a change of control; or (3) upon election by the holder during the period ending August 31, 2017.  The determination of the number of shares of our common stock into which each of the Series A Convertible Preferred Stock may be converted generally will be based upon 10% of the excess of our “company value” plus total distributions in excess of the current distribution rate after the issuance of the shares and through the date of the event triggering conversion, over the aggregate value of our common stock outstanding as of the issuance date of the shares.  If the shares of Series A Convertible Preferred Stock are not otherwise converted into common stock prior to August 31, 2017, then they will be redeemed for $100,000 which represents $10.00 per share.  The estimated fair value of the Series A Convertible Preferred Stock at September 30, 2012 was determined to be approximately $2.7 million.

Prior to August 31, 2012, depending on the nature of the asset, we paid Behringer Advisors an annual asset management fee of either (1) 0.6% of aggregate asset value for operating assets or (2) 0.6% of total contract purchase price plus budgeted improvement costs for development or redevelopment assets (each fee payable monthly in an amount equal to one-twelfth of 0.6% of such total amount as of the date it is determinable).  We incurred and expensed approximately $10.5 million and $15.1 million of asset management fees for the nine month periods ended September 30, 2012 and 2011, respectively, inclusive of amounts recorded within discontinued operations.  Effective as of August 31, 2012, we are no longer required to pay asset management fees to Behringer Advisors.  Asset management fees of approximately $5.7 million and $4.9 million were waived for the nine months ended September 30, 2012 and 2011, respectively.

On August 31, 2012 we paid Behringer Advisors $1.5 million in consideration for certain tangible assets located at our corporate offices and used in our business, such as IT equipment and office furniture, for the license under the license agreement regarding our use of the “Behringer Harvard” name and logo and for the other agreements, covenants and obligations of Services Holdings and its affiliates in connection with the transaction.

Prior to August 31, 2012, Behringer Advisors and certain of its affiliates earned fees and compensation in connection with the acquisition, debt financing, management and sale of our assets.  Specifically, Behringer Advisors, or its affiliates, received acquisition and advisory fees of up to 2.5% of (1) the purchase price of real estate investments acquired directly by us, including any debt attributable to these investments, or (2) when we make an investment indirectly through another entity, our pro rata share of the gross asset value of real estate investments held by that entity.  Behringer Advisors or its affiliates also received up to 0.5% of the contract purchase price of each asset purchased or the principal amount of each loan made by us for reimbursement of expenses related to making the investment.  Behringer Advisors or its affiliates were also entitled to a debt financing fee equal to 1% of the amount of any debt made available to us.  The agreement to receive these fees after August 31, 2012, remains in full force and effect with respect only to the development of Two BriarLake Plaza until the earlier to occur of: (1) our ceasing development in a manner that is reasonably consistent with the approved development plan; and (2) Behringer Advisors having received the last payment from us in connection with that development.  We expect to pay approximately $2.2 million in acquisition and advisory fees and approximately $0.7 million in debt financing fees in connection with the development of Two BriarLake Plaza.

Behringer Advisors earned no acquisition and advisory fees, reimbursement of acquisition-related expenses or debt financing fees in the nine months ended September 30, 2012.  Behringer Advisors earned and we expensed approximately $0.1 million in acquisition and advisory fees or reimbursement of acquisition-related expenses in the nine months ended September 30, 2011.  Behringer Advisors earned approximately $2.7 million in debt financing fees for the nine months ended September 30, 2011.

Under the previous advisory agreement, Behringer Advisors required us to reimburse it for costs and expenses paid or incurred to provide services to us, including the costs of goods, services or materials used by us and the salaries and benefits of persons employed by it and its affiliates and performing services for us; provided, however, no reimbursement was made for salaries and benefits to the extent Behringer Advisors received a separate fee for the services provided.  Effective August 31, 2012, we and Behringer Advisors amended and restated the advisory agreement as an Administrative Services Agreement (the “Services Agreement”). Under the Services Agreement, Behringer Advisors is no longer responsible for performing the day-to-day management services it had been required to perform under the advisory agreement, except as otherwise set forth in the agreement.  Pursuant to the Services Agreement, Behringer Advisors, directly or through its affiliates, continues to provide standard human resources services, shareholder services and information technology services, collectively referred to herein as the “Core Services,” to us through the term of the Services Agreement or the respective Core Services. In addition, we may request that Behringer Advisors, directly or through its affiliates, provide certain additional services, collectively referred to herein as the “Non-Core Services,” which include non-standard human resources services, shareholder services and information technology services, as well as real estate transactional support, information management, internal audit, risk management, marketing and cash management services.  Behringer Advisors has agreed to perform, or cause its affiliates to perform, these services in the manner and at the locations and level of service consistent with past practice and with the same standard of care as historically provided under the advisory agreement. We are required to pay Behringer Advisors for services performed on our behalf, based upon either fixed or flat fee amounts or the hourly billing rate of the persons providing the services. These amounts and rates will increase by 1.5% on January 1, 2013 and by 3% on an annual basis thereafter throughout the term of the Services Agreement. In addition, we are required to reimburse Behringer Advisors for: (1) the costs of subcontractors retained on our behalf or for our benefit and paid by Behringer Advisors or its affiliates including, but not limited to, their products, services, materials and expenses; (2) the cost of materials, provided, that the aggregate amount of reimbursements from us and any other entities that receive similar services from Behringer Advisors or its affiliates may not exceed the aggregate cost of those materials; and (3) any out-of-pocket travel and other expenses, consistent with past practice under the advisory agreement.  For the nine months ended September 30, 2012 and 2011, we incurred and expensed approximately $3.2 million and $2.9 million, respectively, for reimbursement of costs and expenses to Behringer Advisors, inclusive of amounts incurred after August 31, 2012.

The Services Agreement terminates on February 14, 2017. However, specific categories of services may be terminated earlier.  In connection with any termination of the Services Agreement or a particular service, in addition to any reimbursable costs due, we are required to reimburse Behringer Advisors for “exit costs,” comprised of any cost, including early termination charges and transition fees, incurred by Behringer Advisors and its affiliates as a result of any cessation of the service or services, subject to certain limitations.  On October 1, 2012, we notified Behringer Advisors that we would be terminating the following Non-Core Services effective December 29, 2012: information management, risk management, marketing and cash management services.

HPT Management receives fees for management and construction supervision of our properties, which may be subcontracted to unaffiliated third parties.  The management fees are generally equal to approximately 3% of gross revenues of the respective property, and construction supervision fees are generally equal to an amount not greater than 5% of all hard construction costs incurred in connection with capital improvements, major building reconstruction and tenant improvements.  In the event that we contract directly with a non-affiliated third party property manager for management of a property, we pay HPT Management an oversight fee equal to 0.5% of gross revenues of the property managed.  In no event will we pay both a property management fee and an oversight fee to HPT Management with respect to any particular property.  We incurred fees of approximately $10.4 million and $10.8 million in the nine months ended September 30, 2012 and 2011, respectively, inclusive of amounts recorded within discontinued operations, for the services provided by HPT Management.

HPT Management also requires us to reimburse it for costs and expenses paid or incurred to provide services to us, including salaries and benefits of persons employed by it and its affiliates and engaged in the operation, management and maintenance of our properties.  For the nine months ended September 30, 2012 and 2011, we incurred and expensed approximately $17.7 million and $18.7 million, respectively, for reimbursement of these costs and expenses to HPT Management.

At both September 30, 2012 and December 31, 2011 we had payables to related parties of approximately $1.4 million, consisting primarily of expense reimbursements payable to Behringer Advisors and property management fees payable to HPT Management.

In December 2011, we leased approximately 14,000 square feet of office space in Bent Tree Green, a property owned by Behringer Harvard Bent Tree, LP, a wholly-owned subsidiary of Behringer Harvard Opportunity REIT I, Inc., an investment program that is sponsored by BHH.  Under the terms of the sixty-six month lease, we currently pay annual base rent of approximately $0.2 million.  In October 2012, Behringer Harvard Opportunity REIT I, Inc. sold Bent Tree Green to an unaffiliated third party.