10-Q 1 a12-19974_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[Mark One]

 

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

 

For the quarterly period ended September 30, 2012

 

OR

 

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

 

For the transition period from                     to                    

 

Commission File Number: 000-51293

 

Behringer Harvard REIT I, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

 

68-0509956

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer
Identification No.)

 

17300 Dallas Parkway, Suite 1010, Dallas, Texas 75248

(Address of principal executive offices)

(Zip code)

 

(972) 931-4300

(Registrant’s telephone number, including area code)

 

None

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

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of October 31, 2012, Behringer Harvard REIT I, Inc. had 298,945,798 shares of common stock, $.0001 par value, outstanding.

 

 

 



Table of Contents

 

BEHRINGER HARVARD REIT I, INC.

FORM 10-Q

Quarter Ended September 30, 2012

 

PART I

FINANCIAL INFORMATION

 

 

 

 

 

Page

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

3

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2012 and 2011

4

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2012 and 2011

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

25

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

 

 

 

Item 4.

Controls and Procedures

40

 

 

 

PART II

OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

41

 

 

 

Item 1A.

Risk Factors

41

 

 

 

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

 

2



Table of Contents

 

PART I

FINANCIAL INFORMATION

 

Item 1.                                 Financial Statements

 

Behringer Harvard REIT I, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Real estate

 

 

 

 

 

Land

 

$

402,635

 

$

438,079

 

Buildings and improvements, net

 

2,322,631

 

2,541,858

 

Real estate under development

 

3,617

 

 

Total real estate

 

2,728,883

 

2,979,937

 

 

 

 

 

 

 

Cash and cash equivalents

 

4,032

 

12,073

 

Restricted cash

 

85,120

 

100,580

 

Accounts receivable, net

 

110,629

 

105,953

 

Prepaid expenses and other assets

 

10,356

 

5,235

 

Investments in unconsolidated entities

 

65,919

 

71,280

 

Deferred financing fees, net

 

16,663

 

22,579

 

Lease intangibles, net

 

213,547

 

253,630

 

Other intangible assets, net

 

3,813

 

2,501

 

Total assets

 

$

3,238,962

 

$

3,553,768

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Notes payable

 

$

2,173,749

 

$

2,367,401

 

Accounts payable

 

716

 

1,114

 

Payables to related parties

 

1,427

 

1,397

 

Acquired below-market leases, net

 

54,352

 

68,778

 

Distributions payable

 

2,493

 

2,481

 

Accrued liabilities

 

134,373

 

130,897

 

Deferred tax liabilities

 

2,284

 

2,629

 

Other liabilities

 

17,844

 

17,080

 

Total liabilities

 

2,387,238

 

2,591,777

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Series A Convertible Preferred Stock

 

2,700

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Preferred stock, $.0001 par value per share; 17,490,000 shares authorized, none outstanding

 

 

 

Convertible stock, $.0001 par value per share; 1,000 shares authorized, none issued and outstanding at September 30, 2012 and 1,000 shares issued and outstanding at December 31, 2011

 

 

 

Common stock, $.0001 par value per share; 382,499,000 shares authorized, 298,712,342 and 297,255,771 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively

 

30

 

30

 

Additional paid-in capital

 

2,643,769

 

2,639,720

 

Cumulative distributions and net loss attributable to common stockholders

 

(1,798,639

)

(1,683,153

)

Accumulated other comprehensive loss

 

(1,890

)

(905

)

Stockholders’ equity

 

843,270

 

955,692

 

Noncontrolling interests

 

5,754

 

6,299

 

Total equity

 

849,024

 

961,991

 

Total liabilities and equity

 

$

3,238,962

 

$

3,553,768

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

Behringer Harvard REIT I, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

Three Months

 

Three Months

 

Nine Months

 

Nine Months

 

 

 

Ended

 

Ended

 

Ended

 

Ended

 

 

 

September 30, 2012

 

September 30, 2011

 

September 30, 2012

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

Rental revenue

 

$

111,200

 

$

108,986

 

$

328,517

 

$

343,886

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Property operating expenses

 

34,094

 

33,740

 

100,040

 

100,927

 

Interest expense

 

33,991

 

33,990

 

100,079

 

102,837

 

Real estate taxes

 

16,295

 

16,044

 

48,731

 

46,397

 

Property management fees

 

3,109

 

3,261

 

9,602

 

10,034

 

Asset management fees

 

436

 

4,452

 

9,965

 

13,452

 

Asset impairment losses

 

8,301

 

41,267

 

24,487

 

47,794

 

General and administrative

 

5,402

 

2,503

 

10,999

 

8,013

 

Depreciation and amortization

 

46,694

 

48,337

 

141,987

 

154,082

 

Total expenses

 

148,322

 

183,594

 

445,890

 

483,536

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

453

 

171

 

629

 

3,314

 

Gain on troubled debt restructuring

 

 

 

201

 

1,008

 

Loss from continuing operations before income taxes, equity in earnings of investments and gain on sale or transfer of assets

 

(36,669

)

(74,437

)

(116,543

)

(135,328

)

 

 

 

 

 

 

 

 

 

 

Benefit (provision) for income taxes

 

546

 

(128

)

30

 

(183

)

Equity in earnings (losses) of investments

 

398

 

(2,779

)

1,327

 

(2,186

)

Loss from continuing operations before gain on sale or transfer of assets

 

(35,725

)

(77,344

)

(115,186

)

(137,697

)

 

 

 

 

 

 

 

 

 

 

Discontinued operations

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

(612

)

(43,139

)

1,682

 

(56,870

)

Gain on sale or transfer of discontinued operations

 

5,041

 

15,347

 

19,868

 

15,986

 

Income (loss) from discontinued operations

 

4,429

 

(27,792

)

21,550

 

(40,884

)

 

 

 

 

 

 

 

 

 

 

Gain on sale or transfer of assets

 

 

 

362

 

1,385

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(31,296

)

(105,136

)

(93,274

)

(177,196

)

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests in continuing operations

 

75

 

117

 

175

 

352

 

Noncontrolling interests in discontinued operations

 

(6

)

34

 

(31

)

43

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(31,227

)

$

(104,985

)

$

(93,130

)

$

(176,801

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

298,617,928

 

296,578,847

 

298,127,216

 

296,107,513

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.11

)

$

(0.26

)

$

(0.38

)

$

(0.46

)

Discontinued operations

 

0.01

 

(0.09

)

0.07

 

(0.14

)

Basic and diluted loss per common share

 

$

(0.10

)

$

(0.35

)

$

(0.31

)

$

(0.60

)

 

 

 

 

 

 

 

 

 

 

Amounts attributable to common stockholders:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(35,650

)

$

(77,227

)

$

(114,649

)

$

(135,960

)

Discontinued operations

 

4,423

 

(27,758

)

21,519

 

(40,841

)

Net loss attributable to common stockholders

 

$

(31,227

)

$

(104,985

)

$

(93,130

)

$

(176,801

)

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(31,296

)

$

(105,136

)

$

(93,274

)

$

(177,196

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Unrealized loss on interest rate derivatives

 

(543

)

(277

)

(986

)

(277

)

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

(31,839

)

(105,413

)

(94,260

)

(177,473

)

Comprehensive loss attributable to noncontrolling interests

 

104

 

151

 

145

 

395

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to common stockholders

 

$

(31,735

)

$

(105,262

)

$

(94,115

)

$

(177,078

)

 

See Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

Behringer Harvard REIT I, Inc.

Condensed Consolidated Statements of Changes in Equity

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

Accumulated

 

 

 

 

 

 

 

Convertible Stock

 

Common Stock

 

Additional

 

Attributable to

 

Other

 

 

 

 

 

 

 

Number

 

Par

 

Number

 

Par

 

Paid-in

 

Common

 

Comprehensive

 

Noncontrolling

 

Total

 

 

 

of Shares

 

Value

 

of Shares

 

Value

 

Capital

 

Stockholders

 

Loss

 

Interests

 

Equity

 

For the nine months ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2012

 

1

 

$

 

297,256

 

$

30

 

$

2,639,720

 

$

(1,683,153

)

$

(905

)

$

6,299

 

$

961,991

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

(93,130

)

 

(144

)

(93,274

)

Unrealized loss on interest rate derivatives

 

 

 

 

 

 

 

(985

)

(1

)

(986

)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(94,260

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redemption of common stock

 

 

 

(660

)

 

(3,062

)

 

 

 

(3,062

)

Cancellation of convertible stock

 

(1

)

 

 

 

 

 

 

 

 

Distributions declared

 

 

 

 

 

 

(22,356

)

 

(400

)

(22,756

)

Shares issued pursuant to Distribution Reinvestment Plan

 

 

 

2,116

 

 

9,820

 

 

 

 

9,820

 

Cost of share issuance

 

 

 

 

 

(9

)

 

 

 

(9

)

Issuance of Series A Convertible Preferred Stock

 

 

 

 

 

(2,700

)

 

 

 

(2,700

)

Balance at September 30, 2012

 

 

$

 

298,712

 

$

30

 

$

2,643,769

 

$

(1,798,639

)

$

(1,890

)

$

5,754

 

$

849,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2011

 

1

 

$

 

295,276

 

$

29

 

$

2,632,290

 

$

(1,472,068

)

$

 

$

6,247

 

$

1,166,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

(176,801

)

 

(395

)

(177,196

)

Unrealized loss on interest rate derivatives

 

 

 

 

 

 

 

(277

)

 

(277

)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(177,473

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redemption of common stock

 

 

 

(706

)

 

(3,212

)

 

 

 

(3,212

)

Distributions declared

 

 

 

 

 

 

(22,207

)

 

(38

)

(22,245

)

Shares issued pursuant to Distribution Reinvestment Plan

 

 

 

2,194

 

1

 

9,983

 

 

 

 

9,984

 

Cost of share issuance

 

 

 

 

 

(11

)

 

 

 

(11

)

Acquisition of noncontrolling interest

 

 

 

 

 

(1,567

)

 

 

531

 

(1,036

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2011

 

1

 

$

 

296,764

 

$

30

 

$

2,637,483

 

$

(1,671,076

)

$

(277

)

$

6,345

 

$

972,505

 

 

See Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

Behringer Harvard REIT I, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30, 2012

 

September 30, 2011

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(93,274

)

$

(177,196

)

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

 

 

 

 

 

Asset impairment losses

 

25,086

 

88,986

 

Gain on sale or transfer of assets

 

(362

)

(1,385

)

Gain on sale or transfer of discontinued operations

 

(19,868

)

(15,986

)

Gain on troubled debt restructuring

 

(3,591

)

(4,907

)

Loss on derivatives

 

28

 

 

Depreciation and amortization

 

147,856

 

168,515

 

Amortization of lease intangibles

 

592

 

1,297

 

Amortization of above/below market rent

 

(9,411

)

(15,400

)

Amortization of deferred financing and mark-to-market costs

 

5,800

 

4,045

 

Equity in (earnings) losses of investments

 

(1,327

)

2,186

 

Ownership portion of management fees from unconsolidated companies

 

333

 

 

Distributions from investments

 

556

 

501

 

Change in accounts receivable

 

(11,818

)

(16,269

)

Change in prepaid expenses and other assets

 

(4,988

)

(2,416

)

Change in lease commissions

 

(13,808

)

(24,476

)

Change in other lease intangibles

 

(2,311

)

(2,243

)

Change in other intangibles

 

(1,445

)

 

Change in accounts payable

 

(388

)

1,600

 

Change in accrued liabilities

 

4,618

 

(2,386

)

Change in other liabilities

 

944

 

2,398

 

Change in payables to related parties

 

30

 

(685

)

Cash provided by operating activities

 

23,252

 

6,179

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Return of investments

 

2,270

 

561

 

Purchases of real estate

 

 

(1,035

)

Investments in unconsolidated entities

 

(730

)

(4,057

)

Capital expenditures for real estate

 

(51,415

)

(42,893

)

Capital expenditures for real estate under development

 

(454

)

 

Proceeds from notes receivable

 

 

10,355

 

Proceeds from sale of discontinued operations

 

111,142

 

91,367

 

Proceeds from sale of assets

 

 

92,982

 

Change in restricted cash

 

15,460

 

2,600

 

Cash provided by investing activities

 

76,273

 

149,880

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Financing costs

 

(40

)

(6,174

)

Proceeds from notes payable

 

34,500

 

286,000

 

Payments on notes payable

 

(125,989

)

(524,377

)

Payments on capital lease obligations

 

(44

)

(61

)

Redemptions of common stock

 

(3,062

)

(3,212

)

Offering costs

 

(9

)

(11

)

Distributions to common stockholders

 

(12,522

)

(12,212

)

Distributions to noncontrolling interests

 

(400

)

(38

)

Cash used in financing activities

 

(107,566

)

(260,085

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(8,041

)

(104,026

)

Cash and cash equivalents at beginning of period

 

12,073

 

139,139

 

Cash and cash equivalents at end of period

 

$

4,032

 

$

35,113

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.             Business

 

Organization

 

Behringer Harvard REIT I, Inc. was incorporated in June 2002 as a Maryland corporation and has elected to be taxed, and currently qualifies, as a real estate investment trust, or REIT, for federal income tax purposes.  We primarily own institutional quality real estate.  As of September 30, 2012, we owned interests in 52 properties located in 19 states and the District of Columbia.  Prior to August 31, 2012, we were externally managed and advised by Behringer Advisors, LLC (referred to herein as “Behringer Advisors”), a Texas limited liability company.  Behringer Advisors was responsible for managing our day-to-day affairs and for identifying and making acquisitions and dispositions of investments on our behalf.

 

On August 31, 2012, we entered into a series of agreements, and amendments to existing agreements and arrangements, with Behringer Advisors, HPT Management Services, LLC (“HPT Management”), Behringer Harvard Holdings, LLC (“BHH”), and Behringer Harvard REIT I Services Holdings, LLC (“Services Holdings”), a subsidiary of BHH.  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.  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, among other things, provide us with the ability in the future to obtain the right to hire their employees providing property management functions on our behalf subject to certain conditions.

 

Substantially all of our business is conducted through Behringer Harvard Operating Partnership I LP (“Behringer OP”), a Texas limited partnership.  Our wholly-owned subsidiary, BHR, Inc., a Delaware corporation, is the sole general partner of Behringer OP.  Our direct and indirect wholly-owned subsidiaries, BHR Business Trust, a Maryland business trust, and BHR Partners, LLC, a Delaware limited liability company, are limited partners owning substantially all of Behringer OP.

 

Our common stock is not listed on a national securities exchange.  However, between 2013 and 2017, management anticipates either listing our common stock on a national securities exchange or commencing liquidation of our assets.  Our management continues to review various alternatives that may create future liquidity for our stockholders.  In the event we do not obtain listing of our common stock on or before February 2017, our charter requires us to liquidate our assets unless a majority of the board of directors extends such date.

 

2.             Basis of Presentation and Significant Accounting Policies

 

Interim Unaudited Financial Information

 

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and 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, 2011, which was filed with the Securities and Exchange Commission (“SEC”) on March 9, 2012.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from 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 sheets as of September 30, 2012 and December 31, 2011 and condensed consolidated statements of operations and comprehensive loss, changes in equity, and cash flows for the periods ended September 30, 2012 and 2011 have not been audited by our independent registered public accounting firm.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly our financial position as of September 30, 2012 and December 31, 2011 and our results of operations and our cash flows for the periods ended September 30, 2012 and 2011.  These adjustments are of a normal recurring nature.

 

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

 

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

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.

 

Real Estate

 

As of September 30, 2012 and December 31, 2011, the cost basis and accumulated depreciation and amortization related to our consolidated real estate properties and related lease intangibles were as follows (in thousands):

 

 

 

 

 

Lease Intangibles

 

 

 

 

 

Assets

 

Liabilities

 

 

 

 

 

 

 

Acquired

 

Acquired

 

 

 

Buildings and

 

Other Lease

 

Above-Market

 

Below-Market

 

as of September 30, 2012

 

Improvements

 

Intangibles

 

Leases

 

Leases

 

Cost

 

$

2,953,655

 

$

421,767

 

$

28,595

 

$

(125,520

)

Less: accumulated depreciation and amortization

 

(631,024

)

(219,126

)

(17,689

)

71,168

 

Net

 

$

2,322,631

 

$

202,641

 

$

10,906

 

$

(54,352

)

 

 

 

 

 

Lease Intangibles

 

 

 

 

 

Assets

 

Liabilities

 

 

 

 

 

 

 

Acquired

 

Acquired

 

 

 

Buildings and

 

Other Lease

 

Above-Market

 

Below-Market

 

as of December 31, 2011

 

Improvements

 

Intangibles

 

Leases

 

Leases

 

Cost

 

$

3,159,260

 

$

468,960

 

$

34,509

 

$

(141,795

)

Less: accumulated depreciation and amortization

 

(617,402

)

(229,211

)

(20,628

)

73,017

 

Net

 

$

2,541,858

 

$

239,749

 

$

13,881

 

$

(68,778

)

 

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 tenants’ respective initial lease terms 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.  The estimated remaining average useful lives for acquired lease intangibles range from an ending date of October 2012 to an ending date of November 2025.  Anticipated amortization associated with the acquired lease intangibles for each of the following five years is as follows (in thousands):

 

October - December 2012

 

$

5,809

 

2013

 

$

19,777

 

2014

 

$

16,265

 

2015

 

$

11,167

 

2016

 

$

8,232

 

 

Impairment

 

For our consolidated real estate assets, we monitor events and changes in circumstances that may indicate that carrying amounts of the real estate assets may not be recoverable.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted cash flows expected to be generated over the life of the asset including its eventual disposition, to the carrying amount of the asset.  In the event that the carrying amount exceeds the estimated future undiscounted cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value.

 

For the three months ended September 30, 2012 and 2011, we recorded non-cash impairment charges of approximately $8.3 million and $82.0 million, respectively, related to the impairment of consolidated real estate assets, including discontinued operations.  For the nine months ended September 30, 2012 and 2011, we recorded non-cash impairment charges of approximately $25.1 million and $89.0 million, respectively, related to the impairment of consolidated real estate assets, including discontinued

 

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

operations.  Primarily, changes in management’s estimate of the intended hold periods for certain of our properties resulted in an assessment of these properties for impairment for both the current year and the prior year periods.

 

If our assumptions regarding the cash flows expected to result from the use and eventual disposition of our properties decrease or our expected hold periods decrease, we may incur future impairment charges on our real estate related assets.  In addition, we may incur impairment charges on assets classified as held for sale in the future if the carrying amount of the assets upon classification as held for sale exceeds the estimated fair value, less costs to sell.

 

Accounts Receivable, net

 

The following is a summary of our accounts receivable as of September 30, 2012 and December 31, 2011 (in thousands):

 

 

 

September 30, 2012

 

December 31, 2011

 

Straight-line rental revenue receivable

 

$

101,179

 

$

94,541

 

Tenant receivables

 

11,808

 

11,933

 

Non-tenant receivables

 

542

 

938

 

Allowance for doubtful accounts

 

(2,900

)

(1,459

)

Total

 

$

110,629

 

$

105,953

 

 

Deferred Financing Fees, net

 

Deferred financing fees are recorded at cost and are amortized to interest expense using a straight-line method that approximates the effective interest method over the anticipated life of the related debt.  Deferred financing fees, net of accumulated amortization, totaled approximately $16.7 million and $22.6 million at September 30, 2012 and December 31, 2011, respectively.  Accumulated amortization of deferred financing fees was approximately $18.4 million and $14.1 million as of September 30, 2012 and December 31, 2011, respectively.

 

Other Intangible Assets

 

Other intangible assets include our license to use the Behringer Harvard name and logo and a ground lease on one of our properties.  As of September 30, 2012 and December 31, 2011, the cost basis and accumulated amortization related to our consolidated other intangibles assets were as follows (in thousands):

 

 

 

September 30,

 

December 31,

 

Other Intangible Assets

 

2012

 

2011

 

Cost

 

$

4,422

 

$

2,977

 

Less: accumulated depreciation and amortization

 

(609

)

(476

)

Net

 

$

3,813

 

$

2,501

 

 

We amortize the value of other intangible assets to expense over their estimated remaining useful lives which range from an ending date of June 2015 to an ending date of January 2050.   Anticipated amortization associated with other intangible assets for each of the following five years is as follows (in thousands):

 

October - December 2012

 

$

157

 

2013

 

$

629

 

2014

 

$

629

 

2015

 

$

374

 

2016

 

$

119

 

 

Derivative Financial Instruments

 

We record all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.  Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.  For derivatives designated as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged items are recorded in earnings. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of

 

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

forecasted transactions, are considered cash flow hedges.  For derivatives designated as cash flow hedges, the effective portions of changes in the fair value of the derivative are reported in accumulated other comprehensive income (loss) and are subsequently reclassified into earnings when the hedged item affects earnings.  Changes in the fair value of derivative instruments not designated as hedges and ineffective portions of hedges are recognized in earnings in the affected period.  Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation.  Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  We may enter into derivative contracts that are intended to economically hedge certain of our risk, even though hedge accounting does not apply or we elect not to apply hedge accounting.

 

As of September 30, 2012 and December 31, 2011, we do not have any derivatives designated as fair value hedges or hedges of net investments in foreign operations, nor are derivatives being used for trading or speculative purposes.

 

Revenue Recognition

 

We recognize rental income generated from all leases of consolidated real estate assets on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any.  The total net increase to rental revenues due to straight-line rent adjustments for the three months ended September 30, 2012 and 2011 was approximately $2.6 million and $6.7 million, respectively, and includes amounts recognized in discontinued operations.  The total net increase to rental revenues due to straight-line rent adjustments for the nine months ended September 30, 2012 and 2011 was approximately $13.7 million and $17.9 million, respectively, and includes amounts recognized in discontinued operations.  As discussed above, our rental revenue also includes amortization of acquired above- and below-market leases.  The total net increase to rental revenues due to the amortization of acquired above- and below-market leases for the three months ended September 30, 2012 and 2011 was approximately $3.4 million and $2.9 million, respectively, and includes amounts recognized in discontinued operations. The total net increase to rental revenues due to the amortization of acquired above- and below-market leases for the nine months ended September 30, 2012 and 2011 was approximately $9.4 million and $15.4 million, respectively, and includes amounts recognized in discontinued operations. Revenues relating to lease termination fees are recognized on a straight-line basis amortized from the time that a tenant’s right to occupy the leased space is modified through the end of the revised lease term.  We recognized lease termination fees of approximately $0.2 million and $0.8 million for the three months ended September 30, 2012 and 2011, respectively, which includes amounts recognized in discontinued operations.  We recognized lease termination fees of approximately $1.2 million and $6.4 million for the nine months ended September 30, 2012 and 2011, respectively, which includes amounts recognized in discontinued operations.

 

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, 2004.  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 (excluding net capital gains) to our stockholders.  As a REIT, we generally will not be subject to federal income tax at the corporate level (except to the extent we distribute less than 100% of our taxable income and/or net taxable capital gains).

 

We acquired IPC (US), Inc. on December 12, 2007 and have elected that it be taxed as a REIT for federal income tax purposes since the tax year ended December 31, 2008.  We believe IPC (US), Inc. is organized and operates in a manner to qualify for this election.  Prior to acquisition, IPC (US), Inc. was a taxable C-corporation, and for the balance of the year ended December 31, 2007, IPC (US), Inc. was treated as a taxable REIT subsidiary of the Company for federal income tax purposes.

 

As of September 30, 2012, we have deferred tax liabilities of approximately $2.3 million and deferred tax assets, net of related valuation allowances, of approximately $0.5 million related to various state taxing jurisdictions.  At December 31, 2011, we had deferred tax liabilities of approximately $2.6 million and deferred tax assets, net of related valuation allowances, of approximately $0.3 million related to various state taxing jurisdictions.

 

We recognize in our financial statements the impact of our tax return positions if it is more likely than not that the tax position will be sustained upon examination (defined as a likelihood of more than fifty percent of being sustained upon audit, based on the technical merits of the tax position). Tax positions that meet the more likely than not threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. We recognize the tax implications of the portion of a tax position that does not meet the more likely than not threshold together with the accrued interest and penalties in the financial statements as a component of the provision for income taxes. For the three months ended September 30, 2012 and 2011, we recognized a benefit from income taxes, including amounts recognized in discontinued operations, of approximately $0.5 million and $0.3 million, respectively, related to certain state and local income taxes.  For the

 

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

nine months ended September 30, 2012 we recognized a benefit from income taxes of less than $0.1 million, including amounts recognized in discontinued operations.  For the nine months ended September 30, 2011 we recognized a provision for income taxes, including amounts recognized in discontinued operations, of approximately $0.2 million, related to certain state and local income taxes.

 

3.             New Accounting Pronouncements

 

In April 2011, the Financial Accounting Standards Board (“FASB”) issued further clarification on when a loan modification or restructuring is considered a troubled debt restructuring. In determining whether a loan modification represents a troubled debt restructuring, an entity should consider whether the debtor is experiencing financial difficulty and the lender has granted a concession to the borrower. This guidance is to be applied retrospectively, with early application permitted.   This guidance was effective for the first interim or annual period beginning on or after June 15, 2011.  The adoption of this guidance did not have a material impact on our financial statements or disclosures.

 

In May 2011, the FASB issued updated guidance for fair value measurements.  The guidance amends existing guidance to provide common fair value measurements and related disclosure requirements between GAAP and International Financial Reporting Standards.  This guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance did not have a material impact on our financial statements, but did expand our disclosures.

 

In June 2011, the FASB issued updated guidance related to comprehensive income.  The guidance requires registrants to present the total of comprehensive income, the components of net income, and the components of other comprehensive income (loss) (“OCI”) either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted.  The adoption of this guidance did not have a material impact on our financial statements or disclosures.

 

4.             Fair Value Measurements

 

Fair value, as defined by GAAP, is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy 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 fair value hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the fair value hierarchy) has been established.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

Derivative financial instruments

 

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 of 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 and implied volatilities.  The fair values of interest rate swaps and caps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

 

We incorporate credit valuation adjustments (“CVAs”) to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

 

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 CVAs associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counterparties.  However, as of September 30, 2012, we have assessed the significance of the impact of the CVAs on the overall valuation of our derivative positions and have determined that they are not significant.  As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.  Unrealized gains or losses on derivatives are recorded in OCI within equity at each measurement date.

 

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Behringer Harvard REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Our derivative financial instruments are included in “prepaid expenses and other assets” and “other liabilities” on our condensed consolidated balance sheets.

 

The following table sets forth our financial assets and liabilities measured at fair value on a recurring basis, which equals book value, by level within the fair value hierarchy as of September 30, 2012 and December 31, 2011 (in thousands).

 

 

 

 

 

Basis of Fair Value Measurements

 

 

 

 

 

Quoted Prices

 

Significant

 

 

 

 

 

 

 

In Active

 

Other

 

Significant

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Total

 

Identical Items

 

Inputs

 

Inputs

 

Description

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

as of September 30, 2012

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

 

$

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

(1,604

)

$

 

$

(1,604

)

$

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

 

 

 

Quoted Prices

 

Significant

 

 

 

 

 

 

 

In Active

 

Other

 

Significant

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Total

 

Identical Items

 

Inputs

 

Inputs

 

Description

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

as of December 31, 2011

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

31

 

$

 

$

31

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

(621

)

$

 

$

(621

)

$

 

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

Impairment of Real Estate Related Assets

 

We have recorded non-cash impairment charges related to a reduction in the fair value of certain of our assets.  The inputs used to calculate the fair value of these assets included projected cash flows and a risk-adjusted rate of return that we estimated would be used by a market participant in valuing these assets, third-party broker valuation estimates, bona fide purchase offers or the expected sales price of an executed sales agreement.  The following table summarizes those assets which were measured at fair value and impaired during the periods presented (in thousands):

 

 

 

 

 

Basis of Fair Value Measurements

 

 

 

 

 

 

 

Quoted Prices

 

Significant

 

 

 

 

 

 

 

 

 

In Active

 

Other

 

Significant

 

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

 

 

Fair Value

 

Identical Items

 

Inputs

 

Inputs

 

Total

 

Description 

 

of Assets

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Losses (1) (2)

 

as of September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

$

40,154

 

$

 

$

 

$

40,154

 

$

(24,487

)

 

 

 

 

 

 

 

 

 

 

 

 

as of December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

$

178,500

 

$

 

$

31,900

 

$

146,600

 

$

(53,970

)

Investments in unconsolidated entitites

 

$

6,304

 

$

 

$

 

$

6,304

 

$

(276

)

 


(1) Excludes approximately $0.6 million and $38.8 million in impairment losses of our discontinued operations as of September 30, 2012 and December 31, 2011, respectively.

 

(2) The December 31, 2011 amount includes approximately $2.1 million in impairment losses for properties that were disposed of and included in discontinued operations subsequent to December 31, 2011.

 

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

The following table sets forth quantitative information about the unobservable inputs of our Level 3 real estate, which is recorded at fair value as of September 30, 2012 (in thousands):

 

 

 

Fair Value at

 

Valuation

 

Unobservable

 

 

 

 

 

September 30, 2012

 

Technique

 

Input

 

Range

 

Real estate on which impairment losses were recognized

 

$

40,154

 

Discounted Cash Flow

 

Discount rate

 

9.53% - 13.00%

 

 

 

 

 

 

 

Terminal capitalization rate

 

8.28% - 10.00%

 

 

 

 

 

 

 

Market rent growth rate

 

0% - 3.00%

 

 

 

 

 

 

 

Expense growth rate

 

0% - 3.00%

 

 

Fair Value Disclosures

 

Financial Instruments not Reported at Fair Value

 

Financial instruments held at September 30, 2012 and December 31, 2011 but not measured at fair value on a recurring basis include cash and cash equivalents, restricted cash, accounts receivable, notes payable, accounts payable, payables to related parties, distributions payable, accrued liabilities and other liabilities.  With the exception of notes payable, the financial statement carrying amounts of these items approximate their fair values due to their short-term nature. Estimated fair values for notes payable have been determined using recent trading activity and/or bid-ask spreads and are classified as Level 2 in the fair value hierarchy. Carrying amounts and the related estimated fair value of our notes payable as of September 30, 2012 and December 31, 2011 are as follows (in thousands):

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

Amount

 

Value

 

Amount

 

Value

 

Notes Payable

 

$

2,173,749

 

$

2,157,714

 

$

2,367,401

 

$

2,269,235

 

 

5.             Real Estate Activities

 

Dispositions

 

On January 5, 2012, pursuant to a foreclosure, we transferred ownership of our Minnesota Center property to the lender associated with this property resulting in a gain on troubled debt restructuring of approximately $3.4 million and a gain on transfer of discontinued operations of approximately $2.0 million.  Prior to the transaction, the loan had an outstanding principal balance of $27.3 million and a scheduled maturity date of November 2010.  Minnesota Center is located in Bloomington, Minnesota and consists of approximately 276,000 square feet.

 

On May 15, 2012, we sold our Southwest Center property, a building located in Tigard, Oregon, consisting of 89,000 square feet to an unaffiliated third party for a contract sales price of $10.6 million.  The sale generated proceeds of $10.3 million which were used to pay down debt associated with this property.

 

On June 28, 2012, we sold our 4440 El Camino Real property, a building located in Los Altos, California, consisting of 97,000 square feet to an unaffiliated third party for a contract sales price of $48.0 million.  The sale generated proceeds of $47.0 million which were used to pay down our credit facility.

 

On September 20, 2012, we sold our One City Centre property, a building located in Houston, Texas, consisting of 609,000 square feet to an unaffiliated third party for a contract sales price of $131.0 million.  The sale generated proceeds of $53.8 million, of which $50.7 million were used to pay down our credit facility.

 

6.             Investments in Unconsolidated Entities

 

Investments in unconsolidated entities consists of our undivided tenant-in-common (“TIC”) interests and noncontrolling interests in certain properties.

 

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

The following is a summary of our investments in unconsolidated entities as of September 30, 2012 and December 31, 2011 (in thousands):

 

 

 

September 30,
2012

 

December 31,
2011

 

 

 

 

 

Property Name

 

Ownership
Interest

 

Ownership
Interest

 

September 30,
2012

 

December 31,
2011

 

Wanamaker Building

 

60.00

%

60.00

%

$

48,985

 

$

48,170

 

Alamo Plaza

 

40.66

%

40.66

%

13,831

 

13,992

 

St. Louis Place

 

0.00

%

35.71

%

 

6,304

 

200 South Wacker

 

9.86

%

9.82

%

3,103

 

2,814

 

Total

 

 

 

 

 

$

65,919

 

$

71,280

 

 

On February 10, 2012, pursuant to a foreclosure, we transferred our TIC interest in St. Louis Place to the lender associated with the property resulting in a gain on troubled debt restructuring of approximately $0.2 million and a gain on transfer of assets of approximately $0.4 million.  For the three months ended September 30, 2012 and 2011, we recorded approximately $0.4 million in equity in earnings of investments and $2.8 million in equity in losses of investments, respectively.   For the nine months ended September 30, 2012 and 2011, we recorded approximately $1.3 million in equity in earnings of investments and $2.2 million in equity in losses of investments, respectively.  For the nine months ended September 30, 2012 and 2011, we recorded approximately $2.8 million and $1.1 million of distributions from our investments in unconsolidated entities.  For the nine months ended September 30, 2012 and 2011, we made additional investments in unconsolidated entities of approximately $0.7 million and $4.1 million, respectively.  The equity in losses in 2011 were primarily due to a non-cash impairment charge recorded on our former TIC interest in the St. Louis Place property.  Our equity in earnings (losses) of investments for the three and nine months ended September 30, 2012 and 2011 from these investments represents our proportionate share of the combined earnings for the period of our ownership.  On October 16, 2012, we sold our interest in Alamo Plaza to an unaffiliated third party.  Our ownership interest in the total contract sales price was approximately $21.8 million and generated approximately $8.8 million in net cash proceeds to us.

 

7.             Noncontrolling Interests

 

Noncontrolling interests consists of our third-party partners’ proportionate share of equity in certain consolidated real estate properties, limited partnership units issued to third parties, and preferred stock issued by IPC (US), Inc.  The following is a summary of our noncontrolling interests as of September 30, 2012 and December 31, 2011 (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Noncontrolling interests in real estate properties

 

$

4,958

 

$

5,331

 

Limited partnership units

 

801

 

970

 

IPC (US), Inc. preferred shares

 

(5

)

(2

)

Total

 

$

5,754

 

$

6,299

 

 

8.             Real Estate Under Development

 

We capitalize interest, property taxes, insurance and direct construction costs on our real estate under development, which includes the development of a new commercial office building at Two BriarLake Plaza in Houston, Texas (“Two BriarLake Plaza”).  For the three and nine month periods ended September 30, 2012 we capitalized a total of approximately $1.1 million for the development of Two BriarLake Plaza, including less than $0.1 million in interest.  We had no capitalized costs associated with real estate under development for the nine months ended September 30, 2011. Total real estate under development at September 30, 2012 was approximately $3.6 million, which includes previously purchased land of approximately $2.5 million.

 

9.             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.  Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements.  To accomplish this objective, we have used interest rate caps and swaps as part of our interest rate risk management strategy.  Our interest rate caps and swaps involve the receipt of variable rate amounts from counterparties in

 

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Behringer Harvard REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

exchange for us making capped rate or fixed rate payments over the life of the agreements without exchange of the underlying notional amount.  Our 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, 2012, we have interest rate cap and swap agreements.  The following table summarizes the notional values of these derivative financial instruments (in thousands) as of September 30, 2012.  The notional values provide an indication of the extent of our involvement in these instruments at September 30, 2012, but do not represent exposure to credit, interest rate, or market risks:

 

Type/Description

 

Notional Value

 

Index

 

Strike Rate

 

Maturity

Interest rate cap - cash flow hedge

 

$

  90,000

 

one-month LIBOR

 

1.75% - 2.00%

 

August 15, 2013

Interest rate cap - cash flow hedge

 

$

  70,000

 

one-month LIBOR

 

1.75% - 2.00%

 

August 15, 2013

Interest rate swap - cash flow hedge

 

$

  150,000

 

one-month LIBOR

 

0.79%

 

October 25, 2014

 

The table below presents the fair value of our derivative financial instruments, included in “prepaid expenses and other assets” and “other liabilities” on our condensed consolidated balance sheets, as of September 30, 2012 and December 31, 2011 (in thousands):

 

 

 

Derivative Assets

 

Derivative Liabilities

 

Derivatives designated as hedging instruments:

 

September 30,
2012

 

December 31,
2011

 

September 30,
2012

 

December 31,
2011

 

Interest rate caps

 

$

 

$

31

 

$

 

$

 

Interest rate swaps

 

 

 

(1,604

)

(621

)

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

$

 

$

31

 

$

(1,604

)

$

(621

)

 

The tables below present the effect of the change in fair value of our derivative financial instruments in our condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2012 and 2011 (in thousands):

 

Derivatives in Cash Flow Hedging Relationship

 

 

 

Gain (loss) recognized in OCI on derivative

 

 

 

(effective portion)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 30,
2012

 

September 30,
2011

 

September 30,
2012

 

September 30,
2011

 

Interest rate caps

 

$

17

 

$

(277

)

$

(3

)

$

(277

)

Interest rate swap

 

(242

)

 

(983

)

 

Total

 

$

(225

)

$

(277

)

$

(986

)

$

(277

)

 

 

 

 

 

 

 

 

 

 

 

 

Amount reclassified from OCI into income

 

 

 

(effective portion)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

Location

 

September 30,
2012

 

September 30,
2011

 

September 30,
2012

 

September 30,
2011

 

Interest expense (1)

 

$

228

 

$

 

$

645

 

$

 

Total

 

$

228

 

$

 

$

645

 

$

 

 


(1)   Increases in fair value as a result of accrued interest associated with our swap and cap transactions are recorded in accumulated OCI and subsequently reclassified into income.  Such amounts are shown net in the condensed consolidated statements of changes in equity and offset dollar for dollar.

 

Approximately $1.2 million of the unrealized loss held in accumulated OCI at September 30, 2012 will be reclassified to earnings over the next twelve months.

 

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Behringer Harvard REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

10.          Notes Payable

 

Our notes payable was approximately $2.2 billion in principal amount at September 30, 2012 as compared to approximately $2.4 billion at December 31, 2011.  As of September 30, 2012, all of our debt is fixed rate debt, with the exception of $368.3 million in debt which bears interest at variable rates.  Approximately $310.0 million of this variable rate debt has been effectively fixed or capped through the use of interest rate hedges.

 

At September 30, 2012, the stated annual interest rates on our notes payable ranged from 3.23% to 9.80%, with an effective weighted average annual interest rate of approximately 5.53%.  For each of our loans that are in default, as detailed below, we incur default interest rates which are 400 to 500 basis points higher than their stated interest rate, which results in an overall effective weighted average interest rate of approximately 5.77%.

 

Our loan agreements generally require us to comply with certain reporting and financial covenants.  As of September 30, 2012, we were in default on six non-recourse property loans with a combined outstanding balance of approximately $158.8 million secured by nine of our properties, including one property for which a receiver was appointed in August 2012 and a second property for which a receiver was appointed in October 2012.  We believe each of the loans noted above may be resolved through a discounted purchase or payoff of the debt or a write-down or subordination of a portion of the debt by the lender and, in certain situations, may be resolved by marketing the property for sale on behalf of the lender or negotiating agreements conveying these properties to the lenders.  At September 30, 2012, other than the defaults discussed above, we believe we were in compliance with each of the debt covenants under each of our other loan agreements.  We believe an additional non-recourse loan, totaling approximately $82.6 million and secured by one of our properties, may have an imminent default or event of default and may need to be modified in the near future in order to justify further investment.  At September 30, 2012, our notes payable had maturity dates that range from August 2013 to August 2021.

 

The following table summarizes our notes payable as of September 30, 2012, (in thousands):

 

Principal payments due in: (1) (2)

 

 

 

October - December 2012

 

$

5,799

 

2013

 

227,670

 

2014

 

264,633

 

2015

 

503,839

 

2016

 

950,065

 

Thereafter

 

221,762

 

unamortized discount

 

(19

)

Total

 

$

2,173,749

 

 


(1)   Approximately $93.4 million of non-recourse loans secured by our 17655 Waterview, Ashford Perimeter and Riverview Tower properties are in default and have scheduled maturity dates after 2012, but as of September 30, 2012 we have received notification from these lenders demanding immediate payment.  The table above reflects the required principal payments of these loans using the original maturity dates.  If these loans were shown as payable in full on October 1, 2012, the principal payments in 2012 would increase by approximately $93.1 million, while principal payments in 2013, 2014, 2015 and 2016 would decrease by approximately $0.5 million, $0.5 million, $32.4 million and $59.7 million, respectively.

 

(2)   Subsequent to September 30, 2012, we received notification from the lender demanding immediate payment of approximately $49.0 million of non-recourse loans secured by our Epic Center, One Brittany, Two Brittany, Tice Building and One Edgewater Plaza properties.  The impact of accelerating the payment requirements of these loans is not reflected in the table above.

 

Credit Facility

 

On October 25, 2011, through our operating partnership, Behringer OP, we entered into a secured credit agreement providing for borrowings of up to $340.0 million, available as a $200.0 million term loan and $140.0 million as a revolving line of credit (subject to increase by up to $110.0 million in the aggregate upon lender approval and payment of certain activation fees to the agent and lenders).  The borrowings are supported by additional collateral (the “Collateral Properties”) owned by certain of our subsidiaries, each of which has guaranteed the credit facility and granted a first mortgage or deed of trust on its real property as security for the credit facility.  The credit facility matures in October 2014 with two one-year renewal options available.  The annual interest rate on the credit facility is equal to either, at our election, (1) the “base rate” (calculated as the greatest of (i) the agent’s “prime rate”; (ii) 0.5% above the Federal Funds Effective Rate; or (iii) LIBOR for an interest period of one month plus

 

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Behringer Harvard REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.0%) plus the applicable margin or (2) LIBOR plus the applicable margin.  The applicable margin for base rate loans is 2.0%; the applicable margin for LIBOR loans is 3.0%.  In connection with the credit agreement, we entered into a three year swap agreement to effectively fix the annual interest rate at 3.79% on $150.0 million of the borrowings under the term loan.  As of September 30, 2012, the term loan was fully funded, and approximately $8.3 million was outstanding under the revolving line of credit.  As of September 30, 2012, we had approximately $125.9 million of available borrowings under our revolving line of credit of which approximately $22.7 million may only be used for leasing and capital expenditures at the Collateral Properties.  As of September 30, 2012, the weighted average annual interest rate for draws under the credit agreement, inclusive of the swap, was 3.63%.

 

Troubled Debt Restructuring

 

In February 2010, we completed a discounted purchase, through a wholly-owned subsidiary, of the note totaling approximately $42.8 million associated with our 1650 Arch Street property, resulting in a gain on troubled debt restructuring of approximately $10.1 million, of which $1.0 million was deferred until March 2011, when we acquired the outstanding 10% ownership in the 1650 Arch Street property held by our partner, an unaffiliated third party, for a cash payment of approximately $1.0 million.

 

In January 2011, pursuant to a deed-in-lieu of foreclosure, we transferred ownership of our Executive Park property to the lender associated with the property.  This transaction was accounted for as a full settlement of debt and resulted in a gain on troubled debt restructuring of approximately $1.0 million and is included in income (loss) from discontinued operations.

 

In February 2011, pursuant to a foreclosure, we transferred ownership of our Grandview II property to the lender associated with the property.  This transaction was accounted for as a full settlement of debt and resulted in a gain on troubled debt restructuring of approximately $1.0 million and is included in income (loss) from discontinued operations.

 

In August 2011, we sold our 1300 Main property, which was held in receivership at the date of sale.  All proceeds were used to fully settle the related debt at a discount and resulted in a gain on troubled debt restructuring of approximately $1.6 million which is included in income from discontinued operations.

 

In January 2012, pursuant to a foreclosure, we transferred ownership of our Minnesota Center property to the lender associated with this property.  This transaction was accounted for as a full settlement of debt and resulted in a gain on troubled debt restructuring of approximately $3.4 million and is included in income (loss) from discontinued operations.

 

In February 2012, pursuant to a foreclosure, we transferred our 35.71% ownership interest in St. Louis Place to the lender associated with this property.  This transaction was accounted for as a full settlement of debt and resulted in a gain on troubled debt restructuring of approximately $0.2 million.

 

We had no gain on troubled debt restructuring for the three months ended September 30, 2012.  For the three months ended September 30, 2011, the gain on troubled debt restructuring was approximately $1.4 million and had no impact on gain or loss per common share, on both a basic and diluted income per share basis.  These totals include gains on troubled debt restructuring recorded in both continuing operations and discontinued operations.

 

For the nine months ended September 30, 2012 and 2011, the gain on troubled debt restructuring of approximately $3.6 million and $4.6 million, respectively, were approximately $0.01 and $0.02 per common share, respectively, on both a basic and diluted income per share basis.  These totals include gains on troubled debt restructuring recorded in both continuing operations and discontinued operations.

 

11.          Capitalization

 

As of September 30, 2012, we had 298,712,342 shares of our common stock outstanding, which includes 271,352,628 shares issued through our primary offerings, 5,521,002 shares issued as a result of our 10% stock dividend in October 2005, 34,539,889 shares issued through distribution reinvestment, and 22,000 shares issued to Behringer Harvard Holdings, LLC, offset by 12,723,177 shares repurchased.  As of September 30, 2012, we had outstanding options to purchase 107,875 shares of our common stock at a weighted average exercise price of $7.34 per share.   At September 30, 2012, Behringer OP had 432,586 units of limited partnership interest held by third parties.  These units of limited partnership interest are convertible into an equal number of shares of our common stock.

 

We sold 1,000 shares of our non-participating, non-voting convertible stock to Behringer Advisors for $1,000 on March 22, 2006.  However, in connection with the August 31, 2012 self-management transaction, Behringer Advisors surrendered for cancellation the existing 1,000 shares of convertible stock owned by it in exchange for 10,000 shares of Series A participating,

 

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

voting, convertible preferred stock (the “Series A Convertible Preferred Stock”) issued by us 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 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.  Since the number of shares of common stock that would be issued upon conversion of the Series A Convertible Preferred Stock cannot be determined prior to the conversion date and may exceed the currently available number of unissued shares of common stock, the settlement of these shares is considered to be outside the control of the Company. Therefore, as required by GAAP, the shares of Series A Convertible Preferred Stock are recorded at fair value and classified as temporary equity, outside the stockholders’ equity section, on our condensed consolidated balance sheets.  Management determined the fair value of the shares to be approximately $2.7 million at September 30, 2012.  In estimating the fair value of these shares, management considered various potential outcomes for the conversion of the shares within the context of a probability weighted expected returns model.  Future changes in the estimated fair value of these convertible shares will be recorded as adjustments between stockholders’ equity and temporary equity on our condensed consolidated balance sheets.

 

Share Redemption Program

 

Our board of directors has authorized a share redemption program to provide limited interim liquidity to stockholders.  In 2009, the board determined to suspend until further notice redemptions other than those submitted in respect of a stockholder’s death, disability or confinement to a long-term care facility (referred to herein as “exceptional redemptions”).  In November 2011, the board set a funding limit of the lesser of $1.0 million or 220,000 shares for exceptional redemptions considered for each redemption period in 2012.

 

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.  Further, our board may, from time to time, in its sole discretion, limit the funds that we use to redeem shares; provided that in no event may the funds used for redemption during any period exceed the proceeds from our distribution reinvestment plan (“DRP”) during the period consisting of the preceding four fiscal quarters for which financial statements are available, less any redemptions during the same period.  Our board reserves the right in its sole discretion at any time and from time to time to (1) waive the one-year hold period applicable to requests for exceptional redemptions or other exigent circumstances such as bankruptcy, a mandatory distribution requirement under a stockholder’s IRA or with respect to shares purchased under or through our DRP, (2) accept or reject any request for redemption, (3) change the purchase price for redemptions, (4) limit the funds to be used for redemptions or otherwise change the limitations on redemption or (5) amend, suspend (in whole or in part) or terminate the program. For the nine months ended September 30, 2012 and 2011, we redeemed approximately 0.7 million and 0.7 million shares for approximately $3.1 million and $3.2 million, respectively.

 

Stock Plans

 

Our stockholders have approved and adopted the 2005 Incentive Award Plan which allows for equity-based incentive awards to be granted to our Employees and Key Personnel (as defined in the plan).  The 2005 Incentive Award Plan replaced the Non-Employee Director Stock Option Plan, the Non-Employee Director Warrant Plan and the 2002 Employee Stock Option Plan, each of which was terminated upon the approval of the 2005 Incentive Award Plan.  Prior to an amendment to the 2005 Incentive Award Plan on August 31, 2012, each non-employee director was automatically granted an option to purchase 5,000 shares of common stock on the date he first becomes a director and upon each reelection as a director.  As of September 30, 2012, we had outstanding options to purchase 107,875 shares of our common stock at a weighted average exercise price of $7.34 per share. These options have a maximum term of ten years.  For the grants made in 2005, 2006 and 2007 under the 2005 Incentive Award Plan, the options are exercisable as follows:  25% during 2011, 25% during 2012 and 50% during 2013.  For the grants made in 2008 and thereafter under the 2005 Incentive Award Plan, the options become exercisable one year after the date of grant.  The options were anti-dilutive to earnings per share for each period presented.

 

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Behringer Harvard REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Distributions

 

Effective since May 2010, the declared distribution rate has been equal to a monthly amount of $0.0083 per share of common stock, which is equivalent to an annual distribution rate of 1.0% based on a purchase price of $10.00 per share and 2.2% based on the December 2011 estimated valuation of $4.64 per share.

 

Pursuant to our DRP, stockholders may elect to reinvest any cash distribution in additional shares of common stock.  We record a liability for distributions when declared.  The stock issued through the DRP is recorded to equity when the shares are issued.  Distributions declared and payable as of both September 30, 2012 and December 31, 2011, were approximately $2.5 million, which included approximately $1.4 million of cash distributions payable and approximately $1.1 million of DRP distributions payable.

 

The following are the distributions declared for both our stock and noncontrolling interests during the nine months ended September 30, 2012 and 2011 (in thousands):

 

 

 

 

 

Common Stockholders

 

Preferred

 

Noncontrolling

 

 

 

Total

 

Cash

 

DRP

 

Stockholders

 

Interests

 

2012

 

 

 

 

 

 

 

 

 

 

 

1st Quarter

 

$

7,450

 

$

4,171

 

$

3,268

 

$

 

$

11

 

2nd Quarter

 

7,830

 

4,177

 

3,275

 

 

378

 

3rd Quarter

 

7,476

 

4,204

 

3,261

 

 

11

 

 

 

$

22,756

 

$

12,552

 

$

9,804

 

$

 

$

400

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

1st Quarter

 

$

7,401

 

$

4,069

 

$

3,320

 

$

 

$

12

 

2nd Quarter

 

7,418

 

4,068

 

3,336

 

 

14

 

3rd Quarter

 

7,426

 

4,093

 

3,321

 

 

12

 

 

 

$

22,245

 

$

12,230

 

$

9,977

 

$

 

$

38

 

 

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

 

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Behringer Harvard REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

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 affilia