10-K 1 behringerharvardreitiinc10.htm 10-K Behringer Harvard REIT I Inc 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-K 
(Mark One)
 
ý      Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 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)
 
Securities registered pursuant to section 12(b) of the Act:
None
 
Securities registered pursuant to section 12(g) of the Act:
Common stock, $.0001 par value per share
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate 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 ý  No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
 
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
(Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No ý
 
There is no established market for the registrant’s common stock.  The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2012 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $1.4 billion, based on the estimated per share value of $4.64 per share, as established by the registrant’s board of directors as of December 31, 2011, pursuant to the registrant’s Second Amended and Restated Policy for Estimation of Common Stock Value.
 
As of February 28, 2013, the registrant had 299,621,421 shares of common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE 

The registrant incorporates by reference portions of its Definitive Proxy Statement for the 2012 Annual Meeting of Stockholders, which is expected to be filed no later than April 26, 2013, into Part III of this Form 10-K to the extent stated herein.



BEHRINGER HARVARD REIT I, INC.
FORM 10-K
Year Ended December 31, 2012
 
 
 
Page
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 

Item 7A.
 
 

Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
 
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
 
 
 
 
 
Item 15.
 
 
 

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Forward-Looking Statements 

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

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions.  These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted due to a variety of risks and uncertainties, including but not limited to the factors listed and described under “Risk Factors” in this Annual Report on Form  10-K and the factors described below:
market and economic challenges experienced by the U.S. economy or real estate industry as a whole and the local economic conditions in the markets in which our properties are located;
our ability to renew expiring leases and lease vacant spaces at favorable rates or at all;
the inability of tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their business; 
the availability of cash flow from operating activities to fund distributions and capital expenditures;
our ability to raise capital in the future by issuing additional equity or debt securities, selling our assets or otherwise, to fund our future capital needs;
our ability to strategically dispose of assets on favorable terms;
our level of debt and the terms and limitations imposed on us by our debt agreements;
our ability to retain our executive officers and other key personnel;
the increase in our direct overhead, as a result of becoming a self-managed company;
conflicts of interest and competing demands faced by certain of our directors;
limitations on our ability to terminate our property management agreement and certain services under our administrative services agreement;
unfavorable changes in laws or regulations impacting our business or our assets; and
factors that could affect our ability to qualify as a real estate investment trust.

 Forward-looking statements in this Annual Report on Form 10-K reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect or false.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.


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PART I
 
Item 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 office properties.  As of December 31, 2012, we owned interests in 50 properties located in 18 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, acquiring, developing and disposing of investments on our behalf.
On August 31, 2012, we entered into a series of agreements, and amendments to existing agreements and arrangements (the “Self-Management Transaction”), with Behringer Harvard Holdings, LLC (“BHH”) and each of Behringer Advisors, HPT Management Services, LLC (“HPT Management”), and Behringer Harvard REIT I Services Holdings, LLC (“Services Holdings”), each a direct or indirect subsidiary of BHH. 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 certain services from Behringer Advisors on a transitional basis, such as human resources, shareholder services and information technology. HPT Management continues to provide property management services for 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 office is located at 17300 Dallas Parkway, Suite 1010, Dallas, Texas 75248, and our telephone number is (972) 931-4300.  The name Behringer Harvard is the property of BHH and is used by permission.
 
Our common stock is not listed on a national securities exchange.  However, prior to 2017, management and our board 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.
 
Investment Objectives
 
Our investment objectives are:
 
to preserve, protect and return stockholders’ capital contributions;
 
to maximize cash distributions paid to stockholders;
 
to realize growth in the value of our investments upon the ultimate sale of these investments; and
 
to list our shares for trading on a national securities exchange or, if we do not list our shares before February 2017, to make an orderly disposition of our assets and distribute the cash to our stockholders, unless a majority of our directors, including a majority of our independent directors, extends this date.
 
Operational and Investment Policies
 
We primarily own institutional quality office properties located in metropolitan cities and select suburban markets that we believe have premier business addresses, are of high quality construction, offer personalized amenities, and are primarily leased

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to highly creditworthy commercial tenants.  We also develop institutional quality office properties. Our investment strategy is intended to provide stockholders with a geographically diversified portfolio of office properties.
 
Our real estate investments are owned in fee title or a long-term leasehold estate through Behringer OP or indirectly through limited liability companies or limited partnerships or through investments in joint ventures.

Borrowing Policies
 
Our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 55% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interest.  For these purposes, the aggregate value of our assets is equal to our total assets plus acquired below-market lease intangibles, each as reflected on our balance sheet at the time of the calculation without giving effect to any accumulated depreciation or amortization attributable to our real estate assets.  Our policy limitation, however, does not apply to individual real estate assets.  As of December 31, 2012, we have borrowed approximately 54.5% of the aggregate value of our assets.  This percentage would increase if we borrow additional amounts secured by our existing real estate assets.  Our board of directors reviews our aggregate borrowings at least quarterly.

Distribution Policy
 
In order to qualify as a REIT for federal income tax purposes, we must distribute at least 90% of our REIT taxable income to our stockholders annually.  We currently intend to make distributions to holders of shares of our common stock at least at the level required to maintain our REIT status unless our results of operations, our general financial condition, general economic conditions or other factors inhibit us from doing so.  Distributions are authorized at the discretion of our board of directors based on its analysis of our forthcoming cash needs, earnings, cash flow, anticipated cash flow, capital expenditure requirements, cash on hand, general financial condition and other factors that our board deems relevant.  The board’s decisions also are influenced in substantial part by the requirements necessary to maintain our REIT status under the Internal Revenue Code of 1986, as amended (the “Code”).
 
From May 2010 to November 2012, the declared distribution rate was equal to a monthly amount of $0.0083 per share of common stock, which is equivalent to an annual rate of 1.0% based on a purchase price of $10.00 per share and 2.5% based on the December 2012 estimated valuation of $4.01 per share. On December 19, 2012, our board of directors approved the suspension of distribution payments to stockholders. Given the costs resulting from our recent leasing efforts, the anticipated cost of increasing our occupancy and the upcoming refinancing of our One Financial Place property in Chicago, Illinois, that will likely require additional equity, the board of directors believed it was prudent to preserve capital and protect our financial position by suspending distributions. There is no assurance that distributions will be declared again in any future periods or at any particular rate.
 
Public Offerings
 
We have completed three primary public offerings of our common stock.  On January 5, 2009, we commenced an additional public offering of shares of common stock under our Distribution Reinvestment Plan (“DRP”) pursuant to a Registration Statement on Form S-3 filed under the Securities Act.  We may offer shares under this registration statement until the earlier of January 5, 2014 or the date we sell all $570 million worth of shares in this offering.  However, we will not issue any additional shares under the DRP until such time that distributions are reinstated, if at all. As of December 31, 2012, we had raised a total of approximately $2.9 billion of gross offering proceeds as a result of all of our offerings (inclusive of distribution reinvestments and net of redemptions).
 
As of December 31, 2012, we had 299,191,861 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, 35,239,357 shares issued through the DRP, and 22,000 shares issued to BHH, offset by 12,943,126 shares redeemed.  Net proceeds for the shares outstanding after selling commissions, dealer manager fees and organization and offering expenses totaled approximately $2.6 billion.
 
Tax Status
 
We have elected to be taxed, and currently qualify, as a REIT for federal income tax purposes.  As long as we qualify for taxation as a REIT, we generally will not be subject to federal income tax at the corporate level to the extent we distribute annually at least 90% of our “REIT taxable income,” as defined by the Code, to our stockholders.  If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless entitled to relief under specific statutory provisions, we also will be disqualified from taxation

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as a REIT for the four taxable years following the year in which we lose our qualification. Even if we qualify as a REIT, we may be subject to certain state and local taxes on our income and property and to federal income and excise taxes on our undistributed income.  As of December 31, 2012, and the date of this filing, we believe we are organized and operate in such a manner as to qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT.
 
We elected for IPC (US), Inc. to be taxed as a REIT for federal income tax purposes since the tax year ended December 31, 2008.  IPC (US), Inc. is our indirect subsidiary that we acquired December 12, 2007 as part of our acquisition of the subsidiaries of IPC US Real Estate Investment Trust (“IPC”).
 
Competition
 
We are subject to significant competition in seeking tenants for our properties.  The competition for highly creditworthy tenants is intense, and we have been required to provide rent concessions, incur charges for tenant improvements and provide other inducements at a high level.  Without these inducements, we may not be able to continue to lease vacant space timely, or at all, which would further adversely impact our results of operations.  We also compete with sellers of similar properties when we sell properties, which may result in our receiving lower proceeds from the sale, or which may result in our not being able to sell such properties due to the lack of an acceptable investment return.  Further, we may compete with other buyers and developers who are interested in properties we may acquire or develop, which may result in an increase in the amount that we would pay for such properties or may result in us ultimately not being able to acquire or develop such properties.  Some of our competitors, including larger REITs, have substantially greater financial resources than we do and generally may be able to accept more risk.  They also may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies.
 
Regulations
 
Our investments and operations are subject to various federal, state, local and foreign laws, ordinances and regulations, including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity.  We believe that we have all permits and approvals necessary under current law to operate our investments.
 
Environmental
 
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our capital expenditures, earnings or competitive position, and management does not believe it will have such an impact in the future.  However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on our properties.
 
Employees
 
As of December 31, 2012, we had 54 employees. We continue to purchase certain services from Behringer Advisors on a transitional basis, such as human resources, shareholder services and information technology. HPT Management continues to provide property management services for our properties.
 
Financial Information About Industry Segments
 
Our current business consists of owning, operating, acquiring, developing, investing in and disposing of real estate assets.  We internally evaluate operating performance on an individual property level and view all of our real estate assets as one industry segment, and, accordingly, all of our properties are aggregated into one reportable segment.
 
Available Information
 
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the SEC.  We also have filed with the SEC a registration statement in connection with our current DRP offering.  Copies of our filings with the SEC may be obtained from the website maintained for us at www.behringerharvard.com/reit1 or from the SEC’s website at www.sec.gov.  Access to these filings is free of charge.  We are not incorporating any information from our website into this Form 10-K.
 

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Item 1A.            Risk Factors.
 
The factors described below represent our principal risks.  Other factors may exist that we do not consider to be significant based on information that is currently available or that we are not currently able to anticipate.  The occurrence of any of the risks discussed below could have a material adverse effect on our business, financial condition and results of operations and could affect our ability to pay distributions in any future periods, if at all.  Our stockholders may be referred to as “you” or “your” in this Item 1A, “Risk Factors” section.
 
Risks Related to Our Business and Operations
 
Recent market disruptions have, and may continue to, adversely impact many aspects of our operating results and operating condition.
 
The financial and real estate markets have undergone pervasive and fundamental disruptions. The disruptions have had and may continue to have an adverse impact on the availability of credit to businesses generally, and real estate in particular, and have resulted in and could lead to further weakening of the U.S. and global economies.  Our business is affected by market and other forces impacting the U.S. economy and real estate industry as a whole and by the local economic conditions in the markets in which our properties are located. Although the real estate debt financing markets are more readily available today versus recent years, sovereign debt issues and slower than anticipated economic recovery may jeopardize continued availability and could create potential for future disruptions.  These conditions have and may continue to materially affect the value of our investment properties, and will likely continue to affect our ability to pay distributions, the availability or the terms of financing that we have or may anticipate utilizing, and our ability to refinance any outstanding debt when due.  These challenging economic conditions may also continue to impact the ability of certain of our tenants to enter into new leasing transactions on terms acceptable to us or satisfy rental payments under existing leases.
 
For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the value of our investments.  Further, in light of the current economic conditions, we cannot provide assurance that we will be able to pay distributions in any future periods or at any particular rate.

Leases representing approximately 9% of the rentable area within our portfolio are scheduled to expire in 2013.  We may be unable to renew leases or lease vacant space at favorable rates or at all.
 
As of December 31, 2012, leases representing approximately 9% of the rentable area within our portfolio were scheduled to expire in 2013, and an additional 14% of the rentable area within our portfolio was available for lease.  We may be unable to extend or renew any of the expiring leases, or we may be able to re-lease these spaces only at rental rates equal to or below the expiring rental rates. We also may not be able to lease space which is currently not occupied on acceptable terms and conditions, if at all. In addition, some of our tenants have leases that include early termination provisions that permit the lessee to terminate all or a portion of its lease with us after a specified date or upon the occurrence of certain events with little or no liability to us. We may be required to offer substantial rent abatements, tenant improvements, early termination rights or below-market renewal options to retain these tenants or attract new ones.  Portions of our properties may remain vacant for extended periods of time.  Further, some of our leases currently provide tenants with options to renew the terms of their leases at rates that are less than the current market rate or to terminate their leases prior to the expiration date thereof. If we are unable to obtain new rental rates that are on average comparable to our asking rents across our portfolio, then our ability to generate cash flow growth will be negatively impacted.
 
We may be required to make significant capital expenditures to improve our properties in order to retain and attract tenants.
 
We expect that, upon the expiration of leases at our properties, we may be required to make rent or other concessions to tenants, accommodate requests for renovations, build-to-suit remodeling and other improvements or provide additional services to our tenants. As a result, we may have to pay for significant leasing costs or tenant improvements in order to retain tenants whose leases are expiring or to attract new tenants. Additionally, we may need to raise capital to fund these expenditures. If we are unable to do so or if other capital is unavailable, we will not be able to fund the required expenditures. This could result in non-renewals by tenants upon expiration of their leases or inhibit our ability to attract new or replacement tenants, which would result in declines in revenues from operations.

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We face significant competition in the leasing market, which may decrease or prevent increases in the occupancy and rental rates of our properties.
 
We own properties located in metropolitan cities and suburban markets in the United States.  We compete with numerous developers, owners and operators of office properties, many of which own properties similar to, and in the same market areas as, our properties.  If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge in order to attract new tenants and retain existing tenants when their leases expire.  Also, if our competitors develop additional office properties in locations near our properties, there may be increased competition for creditworthy tenants, which may require us to make capital improvements to properties that we would not have otherwise made or further reduce rents.
 
We depend on tenants for our revenue, and accordingly, lease terminations and tenant defaults could adversely affect the income produced by our properties.
 
The success of our investments materially depends on the financial stability of our tenants, many of which are financial, legal and other professional firms and many of whom may experience a change in their business at any time.  The current economic conditions have adversely affected, and may continue to adversely affect, one or more of our tenants. As a result, our tenants may delay lease commencements, decline to extend or renew their leases upon expiration, fail to make rental payments when due or declare bankruptcy. Any of these actions could result in the termination of the tenants’ leases, or expiration of existing leases without renewal, and the loss of rental income attributable to the terminated or expired leases. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment and re-leasing our property.  Specifically, a bankruptcy filing by, or relating to, one of our tenants or a lease guarantor would bar efforts by us to collect pre-bankruptcy debts from that tenant or lease guarantor unless we receive an order permitting us to do so from the bankruptcy court.  In addition, we cannot evict a tenant solely because of bankruptcy.  The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums.  If a lease is assumed by a tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full.  If, however, a lease is rejected by a tenant in bankruptcy, we would have only a general, unsecured claim for damages.  An unsecured claim would only be paid to the extent that funds are available and only in the same percentage as is paid to all other holders of general, unsecured claims.  Restrictions under the bankruptcy laws further limit the amount of any other claims that we can make if a lease is rejected.  As a result, it is likely that we would recover substantially less than the full value of the remaining rent during the term.
 
We have experienced aggregate net losses attributable to our common stockholders for the years ended December 31, 2012, 2011 and 2010, and we may experience future losses.
 
We had net losses attributable to our common stockholders of approximately $152.1 million, $181.5 million and, $230.5 million for the years ended December 31, 2012, 2011 and 2010, respectively.  If we continue to incur net losses in the future or such losses increase, our financial condition, results of operations, cash flow and our ability to service our indebtedness and pay distributions to our stockholders will be materially and adversely affected.
 
We are uncertain of our sources for funding of all of our future capital needs.
 
We require capital on an ongoing basis to fund tenant improvements, leasing commissions and capital expenditures.  Specifically, we may be required to expend substantial funds to improve or refurbish leasable space either to retain existing tenants or to attract new tenants.  The reserves we have established for capital improvements may not be sufficient, which would require us to seek funds from other sources.  Moreover, certain reserves required by lenders are designated for specific uses and may not be available to use for tenant improvements.  Our ability to fund future property capital needs may depend on our ability to borrow, to raise capital, including through the disposition of certain of our assets or interests in assets or equity offerings, or to generate additional cash flows from operations.  There can be no assurance that any of these sources will be available, and some of these strategies pose additional risks.  For example, if we sell assets, it will likely have the effect of reducing cash flow from operating activities.  Alternatively, if we decide to raise capital by offering shares of common or preferred stock, or any other securities that are convertible into, exercisable or exchangeable for our capital stock, the issuance could have the effect of diluting the proportionate equity interest and voting power of our existing stockholders.  Ultimately, if we are unable to fund our capital needs, we may be required to, among other things, defer necessary improvements to our properties, which may cause the properties to suffer from a greater risk of obsolescence or a decline in value, or we may experience decreased cash flow as a result of fewer tenants being attracted to a property.  If this happens, we may not be able to maintain projected rental rates for affected properties.
 

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One of our liquidity strategies involves the disposition of assets; however, we may be unable to sell a property on acceptable terms and conditions, if at all.
 
One of our liquidity strategies is to sell or otherwise dispose of certain properties.  We believe it makes economic sense to do so in today’s market in certain instances, such as when we believe the value of the leases in place at a property will significantly decline over the remaining lease term, where we believe we have limited or no equity in a property that secures debt with a near-term maturity, when we do have equity in a property but the projected returns do not justify further investment or where we believe the equity in a property can be redeployed in the portfolio in order to achieve better returns or strategic goals.  However, the economic climate generally, and property specific issues such as vacancies and lease terminations, have negatively affected the value of our investment properties and therefore reduced our ability to sell or otherwise dispose of these properties on acceptable terms.  Real estate investments generally, and in particular large office properties like those that we own, often cannot be sold quickly, particularly when coupled with a debt assumption.  In addition, the capitalization rates at which properties may be sold have generally risen since our acquisition of the properties, thereby reducing our potential proceeds from sale.  Furthermore, properties that we have owned for a significant period of time or that we acquired in exchange for partnership interests in our operating partnership may have a low tax basis.  If we were to dispose of any of these properties in a taxable transaction, we may be required, under provisions of the Code applicable to REITs, to distribute a significant amount of the taxable gain, if any, to our stockholders and this could, in turn, impact our cash flow. In addition, purchase options and rights of first refusal held by tenants or partners in joint ventures may also limit our ability to sell certain properties. All of these factors limit our ability to effectuate this particular liquidity strategy.

Our indebtedness adversely affects our financial health and operating flexibility.
 
As of December 31, 2012, we had total outstanding indebtedness of approximately $2.1 billion.  As a result of our indebtedness, we are required to use a material portion of our cash flow to pay principal and interest on our debt, which limits the cash flow available for other purposes.  In addition, we have not generated sufficient cash flow after debt service to, among other things, fund capital expenditures and pay distributions.  Our level of debt and the limitations imposed on us by our debt agreements, including our credit facility agreement, could have significant adverse consequences to us, regardless of our ability to refinance or extend our debt, including:
 
limiting our ability to borrow additional amounts for, among other things, working capital, capital expenditures, debt service requirements, execution of our business plan or other purposes;
 
limiting our ability to use operating cash flow in other areas of our business or to pay distributions;
 
 increasing our vulnerability to general adverse economic and industry conditions;

limiting our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in governmental regulation;
 
limiting our ability to fund capital expenditures, tenant improvements and leasing commissions; and
 
limiting our ability or increasing the costs to refinance our indebtedness.
 
Economic, regulatory, and socio-economic changes that impact the real estate market generally, or that could affect patterns of use of commercial office space, may cause our operating results to suffer and decrease the value of our real estate properties.
 
If our properties do not generate income sufficient to meet operating expenses, including debt service and capital expenditures, it is unlikely we would reinstate distributions to our stockholders. In addition, there are significant expenditures associated with an investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) that generally do not decline even if the income from the property has declined.  The following factors, among others, may adversely affect the operating performance and long- or short-term value of our properties:
 
changes in the national, regional, and local economic climates, particularly in markets in which we have a concentration of properties;
 
local office submarket conditions such as changes in the supply of, or demand for, space in properties similar to those that we own within a particular area;
 

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changes in the patterns of office use due to technological advances which may make telecommuting more prevalent;
 
the attractiveness of our properties to potential tenants;
 
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive or otherwise reduce returns to stockholders;
 
the financial stability of our tenants, including bankruptcies, financial difficulties or lease defaults by our tenants;
 
changes in operating costs and expenses, including costs for maintenance, insurance and real estate taxes, and our ability to control rents in light of such changes;
 
the need to periodically fund the costs to repair, renovate and re-lease space;
 
earthquakes, tornadoes, hurricanes and other natural disasters, civil unrest, terrorist acts or acts of war, which may result in uninsured or underinsured losses;

changes in, or increased costs of compliance with, governmental regulations, including those governing usage, zoning, the environment and taxes; and
 
changes in accounting standards.
 
Any of these factors may prevent us from maintaining the value of our real estate properties.
 
The geographic concentration of our portfolio may make us particularly susceptible to adverse economic developments in the real estate markets of those areas.
 
In addition to general, regional and national economic conditions, our operating results are impacted by the economic conditions of the specific markets in which we have concentrations of properties.  Properties located in the metropolitan areas of Chicago, Houston and Philadelphia generated approximately 48% of the net operating income, which represents rental revenue less property operating expenses, real estate taxes, and property management expenses from our properties owned as of December 31, 2012, during the year ended December 31, 2012.  Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect our property revenue, and hence net operating income.
 
A concentration of our investments in any one property class may leave our profitability vulnerable to a downturn in that sector.
 
Substantially all of our properties are institutional quality office properties.  As a result, we are subject to risks inherent in operating a single type of property.  The impact of the downturn in demand for institutional quality office properties has been more pronounced than if we owned a more fully diversified portfolio of investments.
 
Adverse market and economic conditions may continue to adversely affect us and could cause us to recognize impairment charges on real estate assets.
 
We continually monitor events and changes in circumstances that could indicate that the carrying value of our real estate assets may not be recoverable. When indicators of potential impairment are present which indicate that the carrying value of our real estate assets may not be recoverable, we assess the recoverability of these assets by determining whether the carrying value will be recovered through the estimated future undiscounted cash flows expected to be generated over the life of the asset including its eventual disposition.  In the event that the carrying value exceeds the estimated future undiscounted cash flows and also exceeds the fair value of the asset, we adjust the real estate asset to its fair value and recognize an impairment loss.
 
Projections of expected future cash flows require management to make assumptions to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The subjectivity of assumptions used in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the

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property’s fair value and, therefore, could result in the misstatement of the carrying value of our real estate and related lease intangible assets and our net income.
 
Ongoing adverse market and economic conditions and market volatility will likely continue to make it difficult to value our real estate assets. As a result of current adverse market and economic conditions, there may be significant uncertainty in the valuation, or in the stability of, the cash flows, discount rates and other factors related to such assets that could result in a substantial decrease in their value. We may be required to recognize additional asset impairment charges in the future.
 
Our ongoing strategy depends, in part, upon future acquisitions and development, and we may not be successful in identifying and consummating these transactions.
 
A part of our business strategy contemplates strategic expansion through the acquisition and development of institutional quality office properties.  We may not be successful in identifying suitable properties or other assets or in consummating these transactions on satisfactory terms, if at all. We would likely need access to capital in order to fund any of these types of transactions. There is no assurance we would be able to raise capital on acceptable terms and conditions, if at all.
 
Further, we face significant competition for attractive investment opportunities from an indeterminate number of other real estate investors, including investors with significant capital resources such as domestic and foreign corporations and financial institutions, publicly traded and privately held REITs, private institutional investment funds, investment banking firms, life insurance companies and pension funds. As a result of competition, we may be unable to acquire additional properties as we desire or the purchase price may be significantly elevated.
 
Development and construction projects are subject to delays that may materially increase the cost to complete the project.
 
We may, from time to time, develop and construct new properties or redevelop existing properties.  In doing so, we will be subject to the risks and uncertainties associated with construction and development including the environmental concerns of governmental entities or community groups and our builder’s ability to control construction costs or to build in conformity with plans, specifications and timetables.  The builder’s failure to perform may necessitate legal action by us to rescind the purchase or the construction contract or to compel performance.  Performance also may be affected or delayed by conditions beyond the builder’s control.  Delays in completion of construction also could give tenants the right to terminate preconstruction leases for space at a newly developed project.  We may incur additional risks when we make periodic progress payments or other advances to builders prior to completion of construction.  These and other such factors can result in increased costs of a project or loss of our investment.  In addition, we are subject to normal lease-up risks relating to newly constructed projects or re-developed projects.  Furthermore, we must rely upon projections of rental income and expenses and estimates of the fair market value of property upon completion of construction when agreeing upon a price to be paid for the property at the time of acquisition of the property.  If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer.
 
We may also invest in unimproved real property.  Returns from development of unimproved properties also are subject to additional risks and uncertainties such as those associated with re-zoning.

If we lose or are unable to obtain key personnel, our ability to implement our business strategies could be delayed or hindered.
Our ability to achieve our objectives depends, to a significant degree, upon the continued contributions of our executive officers and our other key personnel. Any employment agreements that we have with our executive officers are terminable upon notice, and we cannot guarantee that we will retain our executive officers. We believe that our future success depends, in large part, on our ability to retain and hire highly-skilled managerial and operating personnel. Competition for persons with managerial and operational skills is intense, and we cannot assure you that we will be successful in retaining or attracting skilled personnel. If we lose or are unable to obtain the services of our executive officers and other key personnel, or do not establish or maintain the necessary strategic relationships, our ability to implement our business strategy could be delayed or hindered, and our operations and financial results could suffer.
Becoming self-managed has increased our employee costs.
On August 31, 2012, we entered into the Self-Management Transaction. We are now responsible for paying the salaries and benefits (including any employee benefit plan costs) of all of our employees. Further, prior to becoming self-managed, certain of our current executive officers were paid by an affiliate of Behringer Advisors and not reimbursed by the Company for, among other things, their services relating to the Company. As a result, our direct overhead related to employees, on a consolidated basis, has increased. Although we are no longer required to pay certain fees to Behringer Advisors, our overall costs resulting from

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becoming self-managed may increase. We will also be subject to potential liabilities that are commonly faced by employers, such as workers’ disability and compensation claims, potential labor disputes, and other employee-related liabilities and grievances.
The failure of any bank in which we deposit our funds could reduce the amount of cash we have available for our operations or to pay distributions or make additional investments.
 
We have diversified our cash and cash equivalents between several banking institutions in an attempt to minimize exposure to any one of these entities.  However, the Federal Deposit Insurance Corporation, or “FDIC,” generally only insures limited amounts per depositor per insured bank.  We have cash and cash equivalents and restricted cash deposited in interest bearing accounts at certain financial institutions exceeding these federally insured levels.  If any of the banking institutions in which we have deposited funds ultimately fails, we may lose the portion of our deposits that exceed the federally insured levels.  The loss of our deposits would reduce the amount of cash we have available for our operations or to pay distributions or make additional investments.

An increase in real estate taxes may decrease our income from properties.
 
Generally, from time to time our property taxes will increase as property values or assessment rates change or for other reasons deemed relevant by the assessors.  An increase in the assessed valuation of a property for real estate tax purposes results in an increase in the related real estate taxes on that property. Although some tenant leases may permit us to pass through the tax increases to the tenants for payment, there is no assurance that renewal leases or future leases will be negotiated on the same basis. Increases not passed through to tenants will adversely affect our income and our cash available to pay distributions, if any.
 
We may suffer uninsured losses relating to real property or pay excessively expensive premiums for insurance coverage.
 
Although we attempt to ensure that all of our properties are adequately insured to cover casualty losses, there are certain types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments.  Insurance risks associated with potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims.  Mortgage lenders generally insist that specific coverage against terrorism be purchased by commercial property owners as a condition for providing mortgage, bridge or mezzanine loans.  We cannot be certain that this coverage will continue to be available, or available at reasonable cost, if at all, which could inhibit our ability to finance or refinance our properties.  We may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses.  We cannot assure you that we will have adequate coverage for any losses we may suffer.  In addition, other than any capital reserve we may establish, we will have limited sources of funding to repair or reconstruct any uninsured damaged property, and we cannot assure you that those reserves will be sufficient.
 
Some of our properties are concentrated in regions that are particularly susceptible to natural disasters.
 
Certain of our properties are located in geographical areas, such as Florida, Louisiana and Texas, that are regularly impacted by severe storms, hurricanes, and flooding.  In addition, according to some experts, heightened hurricane activity in the Gulf of Mexico could occur, thus further impacting these geographical areas.  Natural disasters in these areas may cause damage to our properties beyond the scope of our insurance coverage, thus requiring us to make substantial expenditures to repair these properties and resulting in a loss of revenues from these properties.  Further, several of these properties are located near the coast and are exposed to more severe weather than our properties located inland.  Elements such as salt water and humidity in these areas can increase or accelerate wear on the properties’ weatherproofing and mechanical, electrical and other systems, and cause mold issues over time. As a result, we may incur operating costs and expenditures for capital improvements at these properties in excess of those normally anticipated.
 
The cost of complying with environmental and other governmental laws and regulations may adversely affect us.
 
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations (including those of foreign jurisdictions) relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. We also are required to comply with various local, state and federal fire, health, life-safety and similar regulations.  Some of these laws and regulations may impose joint and several liability on tenants or owners for the costs of investigating or remediating contaminated properties.  These laws and regulations often impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous or toxic substances.  The cost of removing or

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remediating could be substantial.  In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent a property or to use the property as collateral for borrowing.
 
Environmental laws and regulations also may impose restrictions on the manner in which properties may be used or businesses may be operated, and these restrictions may require substantial expenditures by us.  Environmental laws and regulations provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties.  Third parties may seek recovery from owners of real properties for personal injury or property damage associated with exposure to released hazardous substances.  Compliance with new or more stringent laws or regulations or stricter interpretations of existing laws may require material expenditures by us.  For example, various federal, regional and state laws and regulations have been implemented or are under consideration to mitigate the effects of climate change caused by greenhouse gas emissions.  Among other things, “green” building codes may seek to reduce emissions through the imposition of standards for design, construction materials, water and energy usage and efficiency, and waste management.  We are not aware of any such existing requirements that we believe will have a material impact on our current operations.  However, future requirements could increase the costs of maintaining or improving our existing properties or developing new properties.
 
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for our operations or to pay distributions or make additional investments.
 
Our real properties are generally subject to the Americans with Disabilities Act of 1990, as amended.  Under this Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons.  The Act has separate compliance requirements for “public accommodations” and “commercial facilities” generally requiring that buildings and services be made accessible and available to people with disabilities.  The Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages.  We attempt to acquire properties that comply with the Act or any relevant law or regulation of a foreign jurisdiction or place the burden on the seller or other third-party, such as a tenant, to ensure compliance with those laws or regulations.  However, we cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner.
 
Risks Related to Our Common Stock
 
Our common stock is not currently listed on an exchange and cannot be readily sold. If you are able to sell your shares, you will likely have to sell them at a substantial discount from the price you paid to acquire them.

There is no established public trading market for our shares of common stock, and we cannot assure you that one will develop. Therefore, you may not be able to sell your shares. We may never list the shares of our common stock for trading on a national stock exchange. Further, our board is not required to list our shares of common stock or liquidate prior to February 2017. Market conditions and other factors could cause us to delay a liquidity event beyond this period and to defer a stockholder vote or any liquidation event indefinitely.  As a result, there is no assurance that we will provide stockholders with a liquidity event during the period contemplated by our business plan, if at all.

If you are able to sell your shares, the price you receive is likely to be less than the proportionate value of our investments or our estimated value per share. On December 19, 2012, our board of directors suspended all redemptions under our share redemption program until further notice. Therefore, it will be difficult for you to sell your shares promptly or at all, and you may not be able to sell your shares in the event of an emergency. If you are able to sell your shares, you will likely have to sell them at a substantial discount from the price you paid to acquire your shares.

We have ceased paying distributions.

We recently ceased paying distributions and cannot estimate when we may reinstate distributions or the amount of any future distributions. There can be no assurance that we will pay any distributions in the future.

As of December 19, 2012, our board of directors suspended our share redemption program for all stockholders, and it is unlikely that we will resume the share redemption program in the near future. Therefore, you will likely not be able to sell your shares under the program.

On December 19, 2012, our board suspended all redemptions until further notice, and we have no current plans to resume the share redemption program in the near future. Therefore, until further notice, you will not be able to sell any of your shares back to us pursuant to our share redemption program. Should we resume the share redemption program, our board of directors may amend, suspend or terminate the program at any time. Our board of directors may also reject any request for redemption of

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shares. Further, our share redemption program contains many other restrictions and limitations that restrict your ability to sell your shares back to us under the program.

The estimated per share value of our common stock determined pursuant to our valuation policy is subject to certain limitations and qualifications and may not reflect the amount you would obtain if you tried to sell your shares or if we liquidated our assets.

We adopted a valuation policy in respect of estimating the per share value of our common stock, effective May 14, 2009 and amended on June 25, 2009. On December 17, 2012, pursuant to our valuation policy, our board of directors established an estimated per share value of our common stock of $4.01 per share. This estimate was determined by our board of directors after consultation with an independent, third party real estate research, valuation and advisory firm, subject to the restrictions and limitations set forth in our valuation policy. The estimated value is not intended to be related to any analysis of individual asset values performed for financial statement purposes nor values at which individual assets may be carried on financial statements under applicable accounting standards. In addition, the per share valuation method is not designed to arrive at a valuation that is related to any individual or aggregated value estimates or appraisals of the value of our assets. This estimated value may not reflect the amount you would obtain if you were to sell your shares or if we engaged in a liquidity event, including a liquidation of assets or sale of the Company.
 
Risks Related to Conflicts of Interest
 
Two of our five directors face conflicts of interest because of their positions or affiliations with our property manager and our former advisor.

Two of our directors, Messrs. Aisner and Mattox, also serve as officers and directors of Behringer Advisors, HPT Management and other entities affiliated with Behringer Advisors, including Services Holdings. We continue to pay fees to Behringer Advisors and its affiliates for performing certain administrative services for us on a transitional basis, including human resources, shareholder services and information technology, and to HPT Management for managing our properties. Further, Services Holdings owns 10,000 shares of our Series A participating, voting, convertible preferred stock.

Messrs. Aisner and Mattox’s affiliation with these other entities could result in conflicts with our business and interests that are most likely to arise in their participating in deliberations or voting on matters by our board of directors related to:

enforcing our agreements with Behringer Advisors, HPT Management and their affiliates, including the administrative services agreement and the property management agreement;

property sales, which reduce the amount of property management fees payable to HPT Management;

establishing the estimated value of the Company’s common stock;

 whether and when we seek to list our common stock on a national securities exchange, which could entitle Services Holdings to the issuance of shares of our common stock through the conversion of the Series A Convertible Preferred Stock; and

whether and when we seek to sell the Company or its assets, which sale could entitle Services Holdings to the issuance of shares of our common stock through the conversion of the Series A Convertible Preferred Stock.

We may be unable to terminate the property management agreement or the administrative services agreement at the desired time or without significant costs.
 
Under the terms of our recently amended property management agreement with HPT Management, we may terminate the property management agreement upon its expiration in February 2017 or by exercising the buyout option included thereunder, which may not be exercised until June 30, 2015. Otherwise, we may only terminate the agreement upon a showing of willful misconduct, gross negligence, or deliberate malfeasance by HPT Management in performing its duties.  

Further, we may not terminate the “Core Services” provided under the administrative services agreement with Behringer Advisors prior to February 14, 2017 without paying termination fees to Behringer Advisors. Thus, even if one of our long-term liquidity strategies would be furthered by performing these services internally, we will not be able to do so unless the cost, including

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the applicable termination or buy-out fees, is less than the amounts due to Behringer Advisors or HPT Management, as applicable, for these services. The termination or buy-out fees cannot be estimated at this time, but they could be significant.
 
The percentage of our shares that you own will be diluted upon conversion of our Series A Convertible Preferred Stock.
 
In connection with the Self-Management Transaction, we issued 10,000 shares of Series A Convertible Preferred Stock to Services Holdings.  Each share of Series A Convertible Preferred Stock participates 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 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 of the shares.

Risks Related to Our Organization and Structure
 
Stockholders have limited control over changes in our policies and operations.
 
Our board of directors determines our major policies, including those regarding investment policies and strategies, financing, growth, debt capitalization, REIT qualification and distributions.  Our board of directors may amend or revise certain of these and other policies without a vote of the stockholders.

Your percentage interest in Behringer Harvard REIT I, Inc. will be reduced if we issue additional shares.

Existing stockholders do not have preemptive rights to any shares issued by us in the future.  Our charter currently has authorized 400,000,000 shares of capital stock of which 382,499,000 shares are designated as common stock, 1,000 shares are designated as convertible stock, 17,490,000 shares are designated as preferred stock, and 10,000 shares are designated as Series A Convertible Preferred Stock.  Subject to any preferential rights in favor of any class of preferred stock, our board of directors may increase the number of authorized shares of capital stock that we have the authority to issue or increase or decrease the number of shares of equity stock of any class or series of stock designated.  Shares may be issued in the discretion of our board of directors.  The percentage of our outstanding shares owned by stockholders at the time of any issuance will likely be reduced if we (1) issue or sell additional shares of our common stock in the future, including if any additional shares are issued pursuant to the DRP; (2) sell securities that are convertible into shares of our common stock; (3) issue shares of our common stock in a private offering of securities; (4) issue shares of our common stock upon the conversion of the Series A Convertible Preferred Stock; (5) issue shares of our common stock upon the exercise of the options granted to our independent directors or upon issuance of restricted stock or other awards under our 2005 Incentive Award Plan to our independent directors, employees or consultants; or (6) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of Behringer OP.  In addition, the partnership agreement for Behringer OP contains provisions that would allow, under certain circumstances, other entities to merge into, or cause the exchange or conversion of their interest for interests of, Behringer OP.  Because the limited partnership interests of Behringer OP may be exchanged for shares of our common stock, any merger, exchange or conversion between Behringer OP and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, therefore reducing the number of outstanding shares owned by our other stockholders.  Further, our board of directors could authorize the issuance of stock with terms and conditions that subordinate the rights of the current holders of our common stock or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a liquidity event for our stockholders.

A limit on the number of shares a person may own may discourage a takeover.
 
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT.  Unless exempted by our board of directors, no person or group may own more than 9.8% of our outstanding common or preferred stock, in value or number of shares, whichever is more restrictive.  This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide stockholders with a liquidity event.
 



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Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired.
 
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the holder becomes an “interested stockholder.”  These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An “interested stockholder” is defined as:
 
any person who beneficially owns 10% or more of the voting power of the then outstanding voting stock of the corporation; or
 
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.
 
A person is not an interested stockholder under the statute if the board of directors approved, in advance, the transaction by which the person otherwise would have become an interested stockholder.  However, in approving a transaction, the board of directors may condition its approval on compliance, at or after the time of approval, with any terms and conditions determined by the board.
 
After the expiration of the five-year period described above, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
 
80% of the votes entitled to be cast by holders of the then outstanding shares of voting stock of the corporation; and
 
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
 
These super-majority voting requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.  Maryland law also permits various exemptions from these provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder.  The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
 
Maryland law limits the ability of a third-party to buy a large stake in us and exercise voting power in electing directors.
 
Maryland law contains a second statute that may also have an anti-takeover effect.  This statute, known as the Control Share Acquisition Act, provides that persons or entities owning “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights with respect to those shares except to the extent approved by a vote of two-thirds of the corporation’s disinterested stockholders.  Shares of stock owned by the acquirer, by officers or by employees who are directors of the corporation, are not considered disinterested for these purposes.  “Control Shares” are shares of stock that, taken together with all other shares of stock the acquirer previously acquired, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power:

one-tenth or more but less than one-third of all voting power;
 
one-third or more but less than a majority of all voting power; or
 
a majority or more of all voting power.
 
Control Shares do not include shares of stock the acquiring person is entitled to vote as a result of having previously obtained stockholder approval.  A “control share acquisition” means the acquisition of Control Shares, subject to certain exceptions.  The Control Share Acquisition Act does not apply to (1) shares acquired in a merger, consolidation or share exchange if the

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corporation is a party to the transaction or (2) acquisitions approved or exempted by our charter or bylaws.  Our bylaws exempt any acquisition by any person of shares of our common stock from the Control Share Acquisition Act.

Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act.
 
We are not registered, and do not intend to register, as an investment company under the Investment Company Act of 1940, as amended, based on exclusions that we believe are available to us.  If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:
 
limitations on capital structure;
 
restrictions on specified investments;
 
prohibitions on transactions with affiliates; and
 
compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.
 
In order to be excluded from regulation under the Investment Company Act, we must engage primarily in the business of acquiring and owning real estate assets or real estate-related assets. We rely on exemptions or exclusions provided by the Investment Company Act for the direct ownership, or the functional equivalent thereof, of certain qualifying real estate assets or by engaging in business through one or more majority-owned subsidiaries, as well as other exemptions or exclusions.  The position of the SEC staff generally requires us to maintain at least 55% of our assets directly in qualifying real estate interests in order for us to maintain our exemption.  Mortgage-backed securities may or may not constitute qualifying real estate assets, depending on the characteristics of the mortgage-backed securities, including the rights that we have with respect to the underlying loans.
 
To maintain compliance with the Investment Company Act exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain.  In addition, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy.
 
The method we use to classify our assets for purposes of the Investment Company Act is based in large measure upon no-action positions taken by the SEC staff.  These no-action positions were issued in response to factual situations that may be substantially different from our factual situation, and a number of these no-action positions were issued more than ten years ago.  No assurance can be given that the SEC staff will concur with how we classify our assets.  In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify our assets for purposes of qualifying for exemption from regulation under the Investment Company Act.  If we are required to re-classify our assets, we may no longer be in compliance with the exemption from the definition of an “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act.
 
If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us.  In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.

Our rights, and the rights of our stockholders, to recover claims against our officers and directors are limited.
 
Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interest and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter eliminates our directors’ and officers’ liability to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property, or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our charter and bylaws require us to indemnify our directors and officers to the maximum extent permitted by Maryland law for any claim or liability to which they may become subject or which they may incur by reason of their service as directors or officers, except to the extent that the act or omission of the director or officer was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, the director or officer actually received an improper personal benefit in money, property, or services, or, in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. As a result, we and our stockholders may have more limited rights against

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our directors and officers than might otherwise exist under common law, which could reduce our and our stockholders’ recovery from these persons if they act in a negligent or grossly negligent manner. In addition, we may be obligated to fund the defense costs incurred by our officers and directors in some cases.

Risks Related to Financing
 
Our borrowings may increase our business risks.
 
Principal and interest payments reduce cash that would otherwise be available for other purposes.  Further, incurring mortgage debt increases the risk of loss because (1) loss in investment value is generally borne entirely by the borrower until such time as the investment value declines below the principal balance of the associated debt and (2) defaults on indebtedness secured by a property may result in foreclosure actions initiated by lenders and our loss of the property securing the loan that is in default.  We have experienced defaults resulting in our having to transfer properties to the respective lenders, and may do so again if our loans do not support the underlying asset values.  For tax purposes, a foreclosure is treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage.  If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds.  From time to time, we provide full or partial guarantees to lenders of mortgage debt to our indirect subsidiaries that own our properties.  When we guarantee debt on behalf of an entity that owns one of our properties, we are thus responsible to the lender for satisfaction of the debt if it is not paid by the entity.  To date, we have not been required to fund any of the guarantees that we have provided.  If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one real property may be affected by a default.
 
We may not be able to refinance or repay our indebtedness.
 
We may not be able to refinance or repay our existing indebtedness.  We have faced significant challenges refinancing our debt due to (1) the reduced value of our real estate assets; (2) limited cash flows from operating activities; (3) our debt level; (4) the cost and terms of new or refinanced indebtedness; and (5) material changes in lending parameters, including lower loan-to-value ratios.
 
Failure to refinance or extend our debt as it comes due or a failure to satisfy the conditions and requirements of that debt would likely result in an event of default and potentially the loss of the property or properties securing the debt.  We have experienced, and may continue to experience, defaults or events of default on our existing indebtedness, which has required us to either restructure the debt in a way that is supported by the underlying values of the property or properties collateralizing the debt or to purchase or pay off the debt at a discount.  If we are not able to repay or restructure our indebtedness, or to purchase or pay it off at a discount, the lender may accelerate the debt or foreclose on the property or properties securing the debt.  We have experienced this result with several properties where we ultimately transferred the underlying properties to the lenders pursuant to deeds-in-lieu of foreclosure or foreclosures losing our entire investment in these properties.  In cases where our debt is accelerated, the value of our assets may not be sufficient to repay the debt in full.

Existing loan agreements contain, and future financing arrangements will likely contain, restrictive covenants relating to our operations.
 
We are subject to certain restrictions pursuant to the restrictive covenants of our outstanding indebtedness, which may affect our distribution and operating policies and our ability to incur additional debt.  Our credit facility, for example, restricts us from paying distributions if the aggregate distributions paid or declared during a period of four consecutive quarters exceeds 95% of our funds from operations during that period and restricts us from paying any distributions, other than as required to maintain our REIT qualification.  Funds from operations, as defined in the credit facility agreement, is equal to net income (or loss), computed in accordance with accounting principals generally accepted in the United States of America (“GAAP”), excluding gains (or losses) from debt restructuring and sales of property during the applicable period and charges for impairment of real estate, plus depreciation and amortization, plus fees paid to Behringer Advisors pursuant to the administrative services agreement, plus other non-cash items, and after adjustments for unconsolidated partnerships and joint ventures.  Adjustments for unconsolidated partnerships and joint ventures will be recalculated to reflect funds from operations on the same basis.  In addition, a breach of the financial and operating covenants in our debt agreements, including our credit facility agreement, could cause a default and accelerate payment under these agreements which could have a material adverse effect on our results of operations and financial condition.  Specifically, violating the covenants contained in our credit facility agreement would likely result in us incurring higher finance costs and fees or an acceleration of the maturity date of advances under the credit facility agreement.



18



Interest-only indebtedness may increase our risk of default.
 
We have obtained, and continue to incur interest on interest-only mortgage indebtedness.  Of our approximately $2.1 billion of outstanding debt at December 31, 2012, approximately $708.6 million currently requires interest only payments.  During the interest-only period, the amount of each scheduled payment is less than that of a traditional amortizing mortgage loan, and the principal balance of the mortgage loan is not being reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period.  After the interest-only period, we will be required either to make scheduled payments of principal and interest or to make a lump-sum or “balloon” payment at maturity.  These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan and will otherwise reduce the funds available for other purposes, including funding capital expenditures or any future distributions to our stockholders.

Increases in interest rates could increase the amount of our debt payments.
 
As of December 31, 2012, approximately $368.3 million of our debt bore interest at variable rates.  Thus, we are exposed to increases in costs in a rising interest rate environment.  Increased payments will reduce the funds available for other purposes including funding capital expenditures or distributions to our stockholders.  In addition, if rising interest rates cause us to need additional capital to repay indebtedness, we may be forced to sell one or more of our properties or investments in real estate at times which may not permit us to realize the return on the investments we would have otherwise realized.
 
To hedge against interest rate fluctuations, we may use derivative financial instruments.  Derivative financial instruments may be costly.
 
From time to time we may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets and investments in collateralized mortgage-backed securities.  Derivative instruments include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements.  Our actual hedging decisions are determined in light of the facts and circumstances existing at the time of the hedge and may differ from time to time.  There is no assurance that our hedging activities will have a positive impact on our results of operations or financial condition. We might be subject to costs, such as transaction fees or breakage costs, if we terminate these arrangements.
 
To the extent that we use derivative financial instruments to hedge against interest rate fluctuations, we are exposed to credit risk, basis risk and legal enforceability risks.  In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract.  If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us.  Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective.  Finally, legal enforceability risks encompass general contractual risks including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract, particularly in light of current market conditions.  Further, the REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations.  We may be unable to manage these risks effectively.

We may enter into derivative contracts that could expose us to contingent liabilities in the future.
 
Derivative financial instruments may require us to fund cash payments upon the early termination of a derivative agreement caused by an event of default or other early termination event. The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. In addition, some of these derivative arrangements may require that we maintain specified percentages of cash collateral with the counterparty to fund potential liabilities under the derivative contract. We may have to make cash payments in order to maintain the required percentage of collateral with the counterparty. These economic losses would be reflected in our results of operations, and our ability to fund these obligations would depend on the liquidity of our respective assets and access to capital at the time.

Federal Income Tax Risks
 
Failure to qualify as a REIT would adversely affect our operations and our ability to make distributions.
 
We elected to be taxed as a REIT commencing with our 2004 tax year.  In order for us to remain qualified as a REIT, we must satisfy certain requirements set forth in the Code and Treasury Regulations and maintain other facts and circumstances that are not entirely within our control.  We intend to structure our activities in a manner designed to satisfy all of these requirements.  However, if certain of our operations were to be recharacterized by the Internal Revenue Service, such recharacterization could jeopardize our ability to satisfy all of the requirements for qualification as a REIT and may affect our ability to qualify, or continue

19



to qualify, as a REIT.  In addition, new legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualifying as a REIT or the federal income tax consequences of qualifying as a REIT.
 
Our qualification as a REIT depends upon our ability to meet, through investments, actual operating results, distributions and satisfaction of specific stockholder rules, the various tests imposed by the Code.  We cannot assure you that we will satisfy the REIT requirements in the future because qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there are only limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control.  In addition, we currently hold certain of our properties through a subsidiary that has elected to be taxed as a REIT and we may in the future determine that it is in our best interests to hold one or more of our other properties through one or more subsidiaries that elect to be taxed as REITs. If any of these subsidiaries fail to qualify as a REIT for federal income tax purposes, then we may also fail to qualify as a REIT for federal income tax purposes.
 
If we fail to qualify as a REIT for any taxable year, then unless certain relief provisions apply, we will face serious tax consequences that could substantially reduce the funds available for payment of distributions for each of the years involved because:
 
we would not be allowed to deduct distributions paid to stockholders when computing our taxable income;
 
we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates;
 
we would become subject to additional state income tax provisions and owe greater amounts of state income tax on our taxable income;
 
we would be disqualified from being taxed as a REIT for the four years following the year during which we failed to qualify, unless entitled to relief under certain statutory provisions; and
 
we may be required to borrow additional funds during unfavorable market conditions or sell some of our assets in order to pay corporate tax obligations.
 
If we fail to qualify as a REIT but are eligible for certain relief provisions, then we may retain our status as a REIT but may be required to pay a penalty tax, which could be substantial.

Our investment strategy may cause us to incur penalty taxes, lose our REIT status, or own and sell properties through taxable REIT subsidiaries, each of which would diminish the return to our stockholders.
 
It is possible that one or more sales of our properties may be “prohibited transactions” under provisions of the Code.  If we are deemed to have engaged in a “prohibited transaction” (i.e., we sell a property held by us primarily for sale in the ordinary course of our trade or business) all profit that we derive from such sale would be subject to a 100% penalty tax.  The Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% penalty tax.  Two principal requirements of the safe harbor include: (a) that the REIT must hold the applicable property for not less than two years prior to its sale; and (b) that the number of such sales must be limited.
 
If we desire to sell a property pursuant to a transaction that does not fall within the safe harbor, we may be able to avoid the 100% penalty tax if we acquired the property through a taxable REIT subsidiary (“TRS”), or acquired the property and transferred it to a TRS for a non-tax business purpose prior to the sale (i.e., for a reason other than the avoidance of taxes).  However, there may be circumstances that prevent us from using a TRS in a transaction that does not qualify for the safe harbor.  Additionally, even if it is possible to effect a property disposition through a TRS, we may decide to forgo the use of a TRS in a transaction that does not meet the safe harbor requirements based on our own internal analysis, the opinion of counsel or the opinion of other tax advisors that the disposition should not be subject to the 100% penalty tax.  In cases where a property disposition is not effected through a TRS, the IRS might successfully assert that the disposition constitutes a prohibited transaction, in which event all of the net income from the sale of such property will be payable as a tax and none of the net income proceeds from such sale will be distributable by us to our stockholders or available for investment by us. Moreover, we may then owe additional state income taxes.
 
If we acquire a property that we anticipate will not fall within the safe harbor from the 100% penalty tax upon disposition, then we may acquire such property through a TRS in order to avoid the possibility that the sale of such property will be a prohibited transaction and subject to the 100% penalty tax.  If we already own such a property directly or indirectly through an entity other

20



than a TRS, we may contribute the property to a TRS if there is another, non-tax related business purpose for the contribution of such property to the TRS. Following the transfer of the property to a TRS, the TRS will operate the property and may sell such property and distribute the proceeds from such sale to us, net of costs and taxes, and we may distribute the net proceeds distributed to us by the TRS to our stockholders.  Though a sale of the property by a TRS likely would eliminate the danger of the application of the 100% penalty tax, the TRS itself would be subject to a tax at the federal level, and very likely at the state and local levels as well, on the gain realized by it from the sale of the property as well as on the income earned while the property is operated by the TRS.  This tax obligation would diminish the amount of the proceeds from the sale of such property that would be distributable to our stockholders. As a result, the amount available for distribution to our stockholders would be substantially less than if the REIT had not operated and sold such property through the TRS and such transaction was not successfully characterized by the IRS as a prohibited transaction.  The maximum federal corporate income tax rate currently is 35%. Federal, state and local corporate income tax rates may be increased in the future, and any such increase would reduce the amount of the net proceeds available for distribution by us to our stockholders from the sale of property through a TRS after the effective date of any increase in such tax rates.
 
As a REIT, the value of the non-mortgage securities we hold in TRSs may not exceed 25% (20% for our 2008 taxable year and before) of the value of all of our assets at the end of any calendar quarter.  If the IRS were to determine that the value of our interests in TRSs exceeded this limit at the end of any calendar quarter, then we would fail to qualify as a REIT.  If we determine it to be in our best interests to own a substantial number of our properties through one or more TRSs, then it is possible that the IRS may conclude that the value of our interests in our TRSs exceeds 25% (20% for our 2008 taxable year and before) of the value of our total assets at the end of any calendar quarter and therefore cause us to fail to qualify as a REIT.  Additionally, as a REIT, no more than 25% of our gross income with respect to any year may, in general, be from sources other than real estate-related assets.  Distributions paid to us from a TRS are typically considered to be non-real estate income.  Therefore, we may fail to qualify as a REIT if distributions from TRSs, when aggregated with all other non-real estate income with respect to any one year, are more than 25% of our gross income with respect to such year.  We will use all reasonable efforts to structure our activities in a manner intended to satisfy the requirements for our continued qualification as a REIT.  As stated above, our failure to qualify as a REIT would adversely affect our ability to pay any future distributions and the return on your investment.
 
Certain fees paid to us may affect our REIT status.
 
Income received in the nature of rental subsidies or rent guarantees, in some cases, may not qualify as rental income and could be characterized by the IRS as non-qualifying income for purposes of satisfying the “income tests” required for REIT qualification.  If any of our income were, in fact, treated as non-qualifying, and if the aggregate of such non-qualifying income in any taxable year ever exceeded 5% of our gross revenues for such year (or 5% of any of our REIT subsidiaries), we could lose our REIT status for that taxable year and the four taxable years following the year of losing our REIT status.  In addition, if income from services we perform for our tenants are determined to be impermissible by the IRS and if that amount exceeds 1% of the property’s gross revenues, then all gross revenues from that property will be deemed non-qualifying income for purposes of the 5% amount mentioned above.  For example, a property with $9.0 million of gross revenue that has $90,000 or more of impermissible tenant services would render all $9.0 million of gross revenue as non-qualifying income and thus could then cause us to lose our REIT status.  We use commercially reasonable efforts to structure our activities in a manner intended to satisfy the requirements for our continued qualification as a REIT. 

Certain equity participation in mortgage, bridge, and mezzanine loans may result in taxable income and gains from these properties, which could adversely impact our REIT status.
 
If we participate under a loan in any appreciation of the properties securing the loan or its cash flow and the IRS characterizes this participation as “equity,” we might have to recognize income, gains and other items from the property for federal income tax purposes.  This could affect our ability to qualify as a REIT.

Stockholders may have current tax liability on distributions reinvested in our common stock.
 
If we reinstate distributions in any future periods, if at all, stockholders that participate in our distribution reinvestment plan will be deemed to receive, and for income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested is not a tax-free return of capital.  In addition, these stockholders will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value.  As a result, these stockholders may have to use funds from other sources to pay their tax liability on the value of the shares of common stock received.

21



If our operating partnership fails to maintain its status as a partnership, its income may be subject to tax at corporate rates.

We intend to maintain the status of the operating partnership as a partnership for federal income tax purposes.  However, if the IRS were to challenge successfully the status of the operating partnership as an entity taxable as a partnership, the operating partnership would be taxable as a corporation, reducing the amount of distributions that the operating partnership could make to Behringer Harvard REIT I, Inc.  This might also result in our losing REIT status, which, in addition to the consequences stated above, would subject us to a corporate level tax on our own income. In addition, if any of the partnerships or limited liability companies through which the operating partnership owns its properties, in whole or in part, loses its characterization as a partnership for federal income tax purposes, the entity would be subject to tax as a corporation, thereby reducing distributions to the operating partnership.  Recharacterization of an underlying property owner also could threaten our ability to maintain REIT status.
 
In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available to pay distributions.
 
Even if we maintain our status as a REIT, we may yet become subject to federal income taxes and related state taxes.  For example:
 
We are subject to tax on any undistributed income.  We will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year plus amounts retained for which federal income tax was paid are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.

If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.
 
If we sell a property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% “prohibited transaction” tax.
 
We will be subject to a 100% penalty tax on certain amounts if the economic arrangements between our tenants, our taxable REIT subsidiaries and us are not comparable to similar arrangements among unrelated parties.
 
State laws may change so as to begin taxing REITs or non-exchange traded REITs.
 
Legislative or regulatory action could adversely affect stockholders.
 
Changes to the tax laws are likely to occur, and these changes may adversely affect the taxation of a stockholder.  Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets.
 
The maximum tax rate on qualified dividends paid by corporations to individuals is 20.0%.  REIT distributions generally are not eligible for this rate.  Therefore, our stockholders will pay federal income tax on our dividends (other than capital gains dividends or distributions which represent a return of capital for tax purposes) at the applicable “ordinary income” rate, the maximum of which is currently 39.6%.  In addition, this income also might be subject to the 3.8% Medicare surtax on certain investment income. However, as a REIT, we generally would not be subject to federal or state corporate income taxes on that portion of our ordinary income or capital gain that we distribute currently to our stockholders, and we thus expect to avoid the “double taxation” to which other corporations are typically subject.
 
It is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be taxed, for federal income tax purposes, as a corporation.  As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a corporation, without the vote of our stockholders.  Our board of directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.





22



We face possible state and local tax audits.
 
Because we are organized and qualify as a REIT, we are generally not subject to federal income taxes, but are subject to certain state and local taxes. In the normal course of business, certain entities through which we own real estate have undergone tax audits. In some instances there is no controlling precedent or interpretive guidance on the specific point at issue. Collectively, tax deficiency notices received to date have not been material. However, there can be no assurance that future audits will not occur with increased frequency or that the ultimate result of such audits will not have a material adverse effect on our results of operations.
 
Item 1B.                 Unresolved Staff Comments.
 
None.

Item 2.                    Properties.
 
General
 
As of December 31, 2012, we owned interests in 50 properties located in 18 states and the District of Columbia.  As of December 31, 2012, the properties are approximately 86% leased to tenants.  In the aggregate, these properties represent approximately 20.2 million rentable square feet.  The average effective rent per square foot for the portfolio is approximately $25.14 per square foot.  Average effective rent per square foot represents 12 times the sum of (1) the monthly contractual amounts for base rent and (2) the pro rata 2012 budgeted operating expense reimbursements, each as of December 31, 2012 related to leases in place as of December 31, 2012 and without giving effect to free rent or scheduled rent increases that would be taken into account under GAAP, divided by the total square footage under commenced leases as of December 31, 2012.

As of December 31, 2012, all of our properties, except the Wanamaker Building and 200 South Wacker properties which are accounted for under the equity method, were consolidated with and into the accounts of our operating partnership.  Substantially all of our properties are encumbered by property debt. 

23



The following table presents certain additional information about our properties as of December 31, 2012:
 
 
 
 
 
Date Acquired
 
Approximate
Rentable Square Footage
 
Approximate % Leased
 
Our
Ownership Interest
 
Ownership Type
Property Name
 
Location
 
 
 
 
 
10 & 120 South Riverside
 
Chicago, IL
 
11/2007
 
1,411,000

 
90
%
 
100.00
%
 
fee title
222 South Riverside Plaza
 
Chicago, IL
 
06/2006
 
1,184,000

 
91
%
 
100.00
%
 
fee title
One Financial Place
 
Chicago, IL
 
11/2007
 
1,041,000

 
73
%
 
100.00
%
 
fee title
200 South Wacker
 
Chicago, IL
 
11/2007
 
755,000

 
77
%
 
9.87
%
 
joint venture
Wanamaker Building
 
Philadelphia, PA
 
12/2007
 
1,390,000

 
98
%
 
60.00
%
 
joint venture
United Plaza
 
Philadelphia, PA
 
12/2007
 
617,000

 
97
%
 
100.00
%
 
fee title
Three Parkway
 
Philadelphia, PA
 
10/2006
 
561,000

 
92
%
 
100.00
%
 
fee title
1650 Arch Street
 
Philadelphia, PA
 
12/2007-03/2011
 
553,000

 
81
%
 
100.00
%
 
fee title
The Terrace Office Park
 
Austin, TX
 
06/2006
 
619,000

 
67
%
 
100.00
%
 
fee title
Burnett Plaza
 
Ft. Worth, TX
 
02/2006
 
1,025,000

 
86
%
 
100.00
%
 
fee title
Centreport Office Center
 
Ft. Worth, TX
 
06/2007
 
133,000

 
100
%
 
100.00
%
 
fee title
Loop Central
 
Houston, TX
 
12/2007
 
575,000

 
78
%
 
100.00
%
 
fee title
One & Two Eldridge Place
 
Houston, TX
 
12/2006
 
519,000

 
97
%
 
100.00
%
 
fee title
One BriarLake Plaza
 
Houston, TX
 
09/2008
 
502,000

 
95
%
 
100.00
%
 
fee title
Three Eldridge Place
 
Houston, TX
 
11/2009
 
305,000

 
100
%
 
100.00
%
 
fee title
Buena Vista Plaza
 
Burbank, CA
 
07/2005
 
115,000

 
100
%
 
100.00
%
 
fee title
1325 G Street
 
Washington, D.C.
 
11/2005
 
307,000

 
82
%
 
100.00
%
 
fee title
Colorado Building
 
Washington, D.C.
 
08/2004-12/2008
 
128,000

 
80
%
 
100.00
%
 
fee title
5104 Eisenhower Boulevard
 
Tampa, FL
 
12/2007
 
130,000

 
100
%
 
100.00
%
 
fee title
Paces West
 
Atlanta, GA
 
04/2006
 
646,000

 
84
%
 
100.00
%
 
fee title
Ashford Perimeter
 
Atlanta, GA
 
01/2005
 
288,000

 
38
%
 
100.00
%
 
fee title
Epic Center
 
Wichita, KS
 
12/2007
 
289,000

 
85
%
 
100.00
%
 
fee title
Two Brittany Place
 
Wichita, KS
 
12/2007
 
58,000

 
100
%
 
100.00
%
 
fee title
One Brittany Place
 
Wichita, KS
 
12/2007
 
57,000

 
56
%
 
100.00
%
 
fee title
Forum Office Park
 
Louisville, KY
 
12/2007
 
328,000

 
80
%
 
100.00
%
 
fee title
Hurstbourne Place
 
Louisville, KY
 
12/2007
 
235,000

 
75
%
 
100.00
%
 
fee title
One Oxmoor Place
 
Louisville, KY
 
12/2007
 
135,000

 
97
%
 
100.00
%
 
fee title
Hurstbourne Park
 
Louisville, KY
 
12/2007
 
104,000

 
87
%
 
100.00
%
 
fee title
Hurstbourne Plaza (1)
 
Louisville, KY
 
12/2007
 
94,000

 
44
%
 
100.00
%
 
fee title
Steeplechase Place
 
Louisville, KY
 
12/2007
 
77,000

 
69
%
 
100.00
%
 
fee title
Lakeview
 
Louisville, KY
 
12/2007
 
76,000

 
86
%
 
100.00
%
 
fee title
Hunnington
 
Louisville, KY
 
12/2007
 
62,000

 
79
%
 
100.00
%
 
fee title
Energy Centre
 
New Orleans, LA
 
12/2007
 
757,000

 
91
%
 
87.86
%
 
joint venture
5 & 15 Wayside
 
Burlington, MA
 
12/2006
 
270,000

 
96
%
 
100.00
%
 
fee title
One & Two Chestnut Place
 
Worcester, MA
 
12/2007
 
218,000

 
86
%
 
100.00
%
 
fee title
250 W. Pratt
 
Baltimore, MD
 
12/2004-12/2006
 
368,000

 
87
%
 
100.00
%
 
fee title
500 E. Pratt
 
Baltimore, MD
 
12/2007
 
280,000

 
100
%
 
100.00
%
 
leasehold
801 Thompson
 
Rockville, MD
 
12/2007
 
51,000

 
100
%
 
100.00
%
 
fee title
Lawson Commons
 
St. Paul, MN
 
06/2005
 
436,000

 
91
%
 
100.00
%
 
fee title
Bank of America Plaza
 
Charlotte, NC
 
10/2006
 
891,000

 
93
%
 
100.00
%
 
fee title
City Hall Plaza
 
Manchester, NH
 
12/2007
 
210,000

 
74
%
 
100.00
%
 
fee title
Woodcrest Corporate Center
 
Cherry Hill, NJ
 
01/2006
 
333,000

 
99
%
 
100.00
%
 
fee title
Tice Building
 
Woodcliff Lake, NJ
 
12/2007
 
120,000

 
56
%
 
100.00
%
 
fee title
600 & 619 Alexander Road (2)
 
Princeton, NJ
 
06/2006
 
97,000

 
82
%
 
100.00
%
 
fee title
111 Woodcrest
 
Cherry Hill, NJ
 
11/2007
 
53,000

 
60
%
 
100.00
%
 
fee title
One Edgewater Plaza
 
Staten Island, NY
 
12/2007
 
252,000

 
71
%
 
100.00
%
 
fee title
Fifth Third Center-Cleveland
 
Cleveland, OH
 
11/2006
 
508,000

 
81
%
 
100.00
%
 
fee title
Fifth Third Center-Columbus
 
Columbus, OH
 
12/2007
 
331,000

 
69
%
 
100.00
%
 
fee title
Plaza at MetroCenter
 
Nashville, TN
 
12/2007
 
361,000

 
98
%
 
100.00
%
 
fee title
Riverview Tower
 
Knoxville, TN
 
10/2005
 
334,000

 
87
%
 
100.00
%
 
fee title
 
 
 
 
 
 
20,189,000

 
 

 
 

 
 
____________
(1)    Hurstbourne Plaza is a retail shopping center.  All of our other properties are office buildings.
(2) 600 & 619 Alexander Road is held for sale at December 31, 2012.

24




The following information applies to all of our operating properties:
 
we believe all of our properties are adequately covered by insurance and suitable for their intended purposes;

we have no plans for any material renovations, improvements or development of our properties, except in accordance with planned budgets;
 
our properties are located in markets where we are subject to competition in attracting new tenants and retaining current tenants; and
 
depreciation is provided on a straight-line basis over the estimated useful lives of the buildings.

Lease Expirations
 
The following table sets forth a 10-year schedule of the lease expirations for leases in place at our operating properties (including our unconsolidated properties) as of December 31, 2012 (square footage and dollar amounts in thousands and reflect our ownership percentage): 
 
 
Number of Leases Expiring (1)
 
Rentable
Square Feet
 
Current Annualized Base Rent (2)
 
Percentage of Total Square Feet
 
Percentage of Annualized Base Rent
Year of Lease Expiration
 
 
 
 
 
 
 
 
 
 
2013
 
274

 
1,713

 
$
35,883

 
9
%
 
10
%
2014
 
150

 
1,755

 
$
36,677

 
9
%
 
10
%
2015
 
152

 
1,764

 
$
36,963

 
9
%
 
10
%
2016
 
117

 
1,251

 
$
28,814

 
7
%
 
8
%
2017
 
118

 
1,846

 
$
44,054

 
10
%
 
12
%
2018
 
49

 
1,298

 
$
30,531

 
7
%
 
8
%
2019
 
44

 
1,500

 
$
34,402

 
8
%
 
9
%
2020
 
43

 
1,270

 
$
31,942

 
7
%
 
9
%
2021
 
48

 
996

 
$
21,584

 
5
%
 
6
%
2022
 
38

 
931

 
$
25,509

 
5
%
 
7
%
 ____________
(1)    Leases with an expiration on the last day of the year are considered leased at the last day of the year (i.e., expiring on the first day of the following year). 
(2)    Represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to the expiration multiplied by 12, without consideration of tenant contraction or termination rights.  Tenant reimbursements generally include payment of real estate taxes, operating expenses and common area maintenance and utility charges.

Item 3.                    Legal Proceedings.
 
We are subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of these matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters, individually or in the aggregate, will not have a material adverse effect on our results of operations or financial condition.
On each of September 17 and November 28, 2012, lawsuits seeking class action status were filed in the United States District Court for the Northern District of Texas (Dallas Division).  On January 4, 2013, these two lawsuits were consolidated by the Court. The plaintiffs purport to file the suit individually and on behalf of all others similarly situated, referred to herein as “Plaintiffs.”
Plaintiffs named us, BHH, our previous sponsor, as well as the directors at the time of the allegations: Robert M. Behringer, Robert S. Aisner, Ronald Witten, Charles G. Dannis and Steven W. Partridge (individually a “Director” and collectively the “Directors”); and Scott W. Fordham, the Company’s President and Chief Financial Officer, and James E. Sharp, the Company’s Chief Accounting Officer (collectively, the “Officers”), as defendants. In the amended complaint filed on February 1, 2013, the Officers were dismissed from the consolidated suit.
Plaintiffs allege that the Directors each individually breached various fiduciary duties purportedly owed to Plaintiffs.  Plaintiffs also allege that the Directors violated Sections 14(a) and (e) and Rules 14a-9 and 14e-2(b) of and under federal securities law in connection with (1) the recommendations made to the shareholders in response to certain tender offers made by CMG

25



Partners, LLC and its affiliates; and (2) the solicitation of proxies for our annual meeting of shareholders held on June 24, 2011. Plaintiffs further allege that the defendants were unjustly enriched by the purported failures to provide complete and accurate disclosure regarding, among other things, the value of our common stock and the source of funds used to pay distributions.
Plaintiffs seek the following relief: (1) that the court declare the proxy to be materially false and misleading; (2) that the filings on Schedule 14D-9 were false and misleading; (3) that the defendants’ conduct be declared to be in violation of law; (4) that the authorization secured pursuant to the proxy be found null and void and that we be required to re-solicit a shareholder vote pursuant to court supervision and court approved proxy materials; (5) that the defendants have violated their fiduciary duties to the shareholders who purchased our shares from February 19, 2003 to the present; (6) that the defendants be required to account to Plaintiffs for damages suffered by Plaintiffs; and (7) that Plaintiffs be awarded costs of the action including reasonable allowance for attorneys and experts fees. Neither we nor any of the other defendants believe the consolidated suit has merit and each intend to defend it vigorously. 
Item 4.                    Mine Safety Disclosures.
 
None.

26



PART II

Item 5.                 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market Information
 
There is no established public trading market for our common stock and no assurance that one will develop or that the shares will be listed on a national securities exchange.  A stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, if at all. 

Estimated Per Share Value

On December 17, 2012, pursuant to our Second Amended and Restated Policy for Estimation of Common Stock Value (the “Estimated Valuation Policy”), our board of directors met and established an estimated per share value of the Company’s common stock equal to $4.01 per share.

Process and Methodology

Our board of directors’ objective in determining an estimated value per share was to arrive at a value that it believes is reasonable and supportable using what the board of directors deems, after consultation with Altus Group U.S., Inc. (“Altus”) and the Company’s management team, to be appropriate valuation methodologies and assumptions under then current circumstances and appropriate processes and procedures in accordance with the Estimated Valuation Policy. Altus is an independent, third party real estate research, valuation and advisory firm engaged by the Company. Altus does not have any direct or indirect material interests in any transaction with the Company or in any currently proposed transaction to which the Company is a party, and there are no material conflicts of interest between Altus, on one hand, and the Company or any of our officers or directors, on the other.
  
Altus was engaged to appraise substantially all of our real estate assets individually, as well as to estimate the fair value of our notes payable. The Company’s management team estimated the fair value of the other net assets. In arriving at the estimated value per share, the board reviewed the valuation analysis and methodologies used by Altus for the real estate assets and the notes payable and used by the Company’s management team for other net assets, which methodologies the board believed were standard and acceptable in the real estate industry for the types of assets held and liabilities owed by the Company. The board of directors conferred with both Altus and the Company’s management team regarding the methodologies and assumptions used. The board of directors, including a majority of the independent directors not otherwise interested in the estimated valuation, considered all information provided in light of its own familiarity with our assets and unanimously approved an estimated value of $4.01 per share.

The estimated valuation of $4.01 per share as of December 17, 2012, reflects a decrease from the estimated valuation of $4.64 per share as of December 2011. Four factors primarily contributed to this decrease. First, there has been very little economic recovery in the Company’s real estate markets over the 12 months leading up to the estimate. As a result, subsequent to the 2011 estimated valuation, we did not experience the annual market rent growth that was anticipated to occur in 2012, and therefore the market rent anticipated in future periods is lower than that anticipated in the prior valuation which contributed to a decline in the estimated value of our real estate of $0.13 per share. Second, the impact to our debt obligations of significantly lower interest rates contributed to a decline in the estimated valuation of $0.25 per share. Third, the payment of distributions to our stockholders resulted in a decline of $0.10 per share, and finally, the use of our other assets, primarily cash and cash equivalents and restricted cash, to fund leasing and other operating costs resulted in a decrease in other net assets of $0.15 per share as compared to 2011.
 
The following is a summary of the valuation methodologies used for each type of asset:
 
Investments in Real Estate. Altus estimated the value of our investments in real estate by using a discounted cash flow analysis, supported by a sales comparison approach analysis, to estimate values of substantially all of the properties in our portfolio. Altus calculated the value of our investments in real estate using management-prepared cash flow estimates beginning with actual results for the nine months ended September 30, 2012, and giving effect to forecasted cash flows for the fourth quarter of 2012. Altus then employed a range of terminal capitalization rates, discount rates, growth rates and other variables that fell within ranges Altus and the board believe would be used by similar investors to value the properties we own. Altus used assumptions in developing these estimates that were specific to each property (including holding periods) and that were determined based on a number of factors, including the market in which the property is located, the specific location of the property within the market, the quality of the property compared to its competitive set, the available space at the property and in the market, tenant demand for space and investor demand and return requirements. These cash flow estimates and other assumptions were developed for each property by

27



Altus with input from the Company’s management team based on their industry knowledge and expertise in managing commercial real estate, and Altus confirmed that the data, techniques, assumptions and resulting estimates were supported by information gathered from peer properties housed in their extensive proprietary database. To further support the assumptions and the results of the discounted cash flow analysis, Altus researched and analyzed comparable sales transactions in each of the individual markets.
 
While we believe a discounted cash flow analysis is standard in the real estate industry and an acceptable valuation methodology to determine fair value in accordance with GAAP, the estimated values for our investments in real estate may or may not represent current market values or fair values determined in accordance with GAAP. Real estate is currently carried at its amortized cost basis in our consolidated financial statements, subject to any adjustments applicable under GAAP.
 
Notes Payable. Altus estimated the value of our notes payable using a discounted cash flow analysis. The cash flows were based on the remaining loan terms and on estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio and type of collateral. The board reviewed the assumptions employed and determined they were appropriate and reasonable in estimating the value of our notes payable.

Other Assets and Liabilities. The carrying values of a majority of our other assets and liabilities, consisting of cash, restricted cash, accounts receivable, accounts payable and accrued liabilities, are considered to be equal to fair value due to their short maturities. Certain balances, such as acquired above/below market leases, have been eliminated for the purpose of estimating the per share value due to the fact that the value of those assets and liabilities were already considered in the valuation of the respective investments.
 
Our estimated value per share was calculated by aggregating the value of our real estate, notes payable and other net assets, and dividing the total by the number of common shares and limited partnership units outstanding at the determination date of December 17, 2012. Our estimated share value does not reflect “enterprise value,” which generally could include a premium for:
 
the large size of our portfolio given that some buyers may be willing to pay more for a large portfolio than they are willing to pay for each property in the portfolio separately;

the value related to an in-place workforce;

any other intangible value associated with a going concern; or

the possibility that our shares could trade at a premium to net asset value if we listed them on a national securities exchange.
 
The estimated per share value also does not reflect a liquidity discount for the fact that the shares are not currently traded on a national securities exchange, a discount for the non-assumability or prepayment obligations associated with certain of our debt, a discount for our leverage amount, or a discount for our corporate level overhead.

28




Allocation of Estimated Value
 
Our estimated per share value was allocated amongst our asset types as follows for 2012 as compared to 2011:
 
2012
 
2011
Real estate assets, including investments in real estate entities (1)
$
11.24

 
$
12.24

Debt, including obligations of real estate investment activities
(7.25
)
 
(7.77
)
Other net assets
0.02

 
0.17

Estimated net asset value per share (2)
$
4.01

 
$
4.64

__________
(1)
The following are the key assumptions (shown on a weighted average basis) that were used in the discounted cash flow models to estimate the value of the real estate assets we currently own (excluding nine properties valued at $164.1 million that are encumbered by non-recourse debt estimated to be valued at the same amount) within the December 2012 and 2011 valuations:
 
2012
 
2011
Exit capitalization rate
7.04
%
 
7.12
%
Discount rate
8.06
%
 
8.43
%
Annual market rent growth rate (a)
3.52
%
 
3.46
%
Annual holding period
9.81 years

 
9.76 years


(a) Rates reflect estimated average annual growth rates for market rents over the holding period.

While the board believes that these assumptions are reasonable, a change in these assumptions would impact the calculation of value of our real estate assets. For example, assuming all other factors remain unchanged, an increase in the weighted average discount rate of 25 basis points would yield a decrease in the value of our real estate assets of 1.9%, while a decrease in the weighted average discount rate of 25 basis points would yield an increase in the value of our real estate assets of 1.9%. Likewise, an increase in the weighted average exit capitalization rate of 25 basis points would yield a decrease in the value of our real estate assets of 2.2%, while a decrease in the weighted average exit capitalization rate of 25 basis points would yield an increase in the value of our real estate assets of 2.4%.

(2)
Based on 299,624,447 and 297,688,357 common shares and limited partnership units outstanding at December 17, 2012, and December 28, 2011, respectively.

The aggregate purchase price of our properties owned as of December 17, 2012, including capital expenditures made subsequent to the acquisition date, was approximately $4.4 billion, or approximately $4.1 billion after adjustment for our ownership interest. As of December 17, 2012, the estimated value of the Company’s real estate assets, including investments in real estate activities was approximately $3.6 billion, or approximately $3.4 billion after adjustment for our ownership interest.
 
Limitations of Estimated Value Per Share
 
As with any valuation methodology, our methodology was based upon a number of estimates and assumptions that may prove later to be inaccurate or incomplete. Further, different parties using different assumptions and estimates could derive a different estimated value per share, which could be significantly different from our board’s estimated value per share. The estimated per share value determined by our board of directors neither represents the fair value according to GAAP of our assets less liabilities, nor does it represent the amount our shares would trade at on a national securities exchange or the amount a stockholder would obtain if he tried to sell his shares or if we liquidated our assets.
 
Accordingly, with respect to the estimated value per share, we can give no assurance that:
        
a stockholder would be able to resell his shares at this estimated value;

a stockholder would ultimately realize distributions per share equal to our estimated value per share upon liquidation of our assets and settlement of our liabilities or a sale or merger of the Company;

our shares would trade at the estimated value per share on a national securities exchange; or

the methodologies used to estimate our value per share would be acceptable to FINRA or the applicable annual valuation requirements under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Code with respect to employee benefit plans subject to ERISA and other retirement plans or accounts subject to Section 4975 of the Code.


29



For further information regarding the limitations of the estimated value per share, see the Second Amended and Restated Policy for Estimation of Common Stock Value filed as Exhibit 99.2. Although our Estimated Valuation Policy requires us to update our estimated per share value at least every 18 months, we intend to update our estimated per share value on an annual basis.

The estimated value of our shares was calculated as of a particular point in time. The value of our shares will fluctuate over time in response to, among other things, changes in real estate market fundamentals, capital market activities, and specific attributes of the properties and leases in our portfolio.
 
Holders
 
As of February 28, 2013, we had approximately 299,621,421 shares of common stock outstanding held by a total of approximately 68,000 stockholders.
 
Distributions
 
We made an election to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2004.  As a REIT, we must distribute at least 90% of our REIT taxable income to our stockholders annually.  We have paid all or a portion of our previous distributions from cash on hand, borrowings, proceeds from the sale of assets and the proceeds of our offerings. For tax purposes, 100% of the amounts distributed by us in both 2012 and 2011 represented a return of capital. 
 
From May 2010 to November 2012, the declared distribution rate was equal to a monthly amount of $0.0083 per share of common stock, which is equivalent to an annual distribution rate of 1.0% assuming the share was purchased for $10.00 and 2.5% based on the December 2012 estimated valuation of $4.01 per share.  As previously noted, distributions are authorized at the discretion of our board of directors based on its analysis of our forthcoming cash needs, earnings, cash flow, anticipated cash flow, capital expenditure requirements, cash on hand, general financial condition and other factors that our board deems relevant. On December 19, 2012, our board of directors approved the suspension of monthly distribution payments to stockholders. Given the costs resulting from our recent leasing efforts, the anticipated cost of increasing our occupancy and the upcoming refinancing of our One Financial Place property in Chicago, Illinois, that will likely require additional equity, the board of directors believed it was prudent to preserve capital and protect the Company’s financial position by suspending distributions. There is no assurance that distributions will be declared again in any future periods or at any particular rate.
 
The following table shows our distributions declared on our stock and noncontrolling interests for each of the quarters during the years ended December 31, 2012 and 2011 (in thousands):
 
 
 
 
 
Common Stockholders
 
Preferred Stockholders
 
Noncontrolling Interests
 
 
Total
 
Cash
 
DRP
 
 
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

4th Quarter
 
4,991

 
2,820

 
2,161

 

 
10

Total
 
$
27,747

 
$
15,372

 
$
11,965

 
$

 
$
410

 
 
 
 
 
 
 
 
 
 
 
2011
 
 

 
 

 
 

 
 
 
 

1st Quarter
 
$
7,402

 
$
4,069

 
$
3,320

 
$

 
$
13

2nd Quarter
 
7,418

 
4,068

 
3,336

 

 
14

3rd Quarter
 
7,426

 
4,093

 
3,321

 

 
12

4th Quarter
 
7,442

 
4,120

 
3,308

 

 
14

Total
 
$
29,688

 
$
16,350

 
$
13,285

 
$

 
$
53


30



Securities Authorized for Issuance under Equity Compensation Plans
 
The following table provides information regarding our equity compensation plans as of December 31, 2012:
 
Plan Category
 
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
 
Weighted-average
exercise price of
outstanding options,
warrants and rights
 
Number of securities remaining
available for future issuance
under equity compensation
plans
 
Equity compensation plans approved by security holders
 
97,250

 
$
7.17

 
11,900,750

*
Equity compensation plans not approved by security holders
 
N/A

 
N/A

 
N/A

 
Total
 
97,250

 
$
7.17

 
11,900,750

*
* All shares authorized for issuance pursuant to awards not yet granted under our 2005 Incentive Award Plan.
 
Share Redemption Program
 
Our board of directors has authorized a share redemption program to provide limited interim liquidity to stockholders.  In 2009, the board made a determination to suspend 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”).  The board set funding limits for exceptional redemptions considered in 2011 and 2012, and on December 19, 2012, the board of directors made a determination to suspend all redemptions until further notice.
 
During the quarter ended December 31, 2012, we redeemed 219,949 shares, which represents a pro rata portion of the 1,179 exceptional exemption requests received as of the November 30, 2012 redemption date.  The price of the shares redeemed during the quarter was $4.64 per share.  Requests to redeem a total of 2,978,664 shares of common stock for the period were received.  Because the total shares requested for redemption exceeded the limit set by our board for the period, we fulfilled the requests pro rata, and accordingly requests to redeem 2,758,715 shares were not fulfilled.  We have not kept a record of ordinary redemption requests received since March 2009 and have not kept, and will not keep going forward, a record of redemption requests received since the December 2012 suspension of redemptions.  If the board of directors determines at a later time that circumstances permit the share redemption program to resume, we will communicate the pertinent information regarding the share redemption program to all stockholders at that time. Cash amounts paid to stockholders for redemption requests during the year ended December 31, 2012 were approximately $4.1 million for redemption of 879,877 shares and were funded from cash on hand.  Our board maintains its right to reinstate the share redemption program, subject to the limits set forth in the program, if it deems it to be in the best interest of the Company and its stockholders.
 
Two of the limits of the share redemption program, which is currently suspended, are that 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, and in no event may the funds used for redemption during any period exceed the proceeds from our 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 also reserves the right in its sole discretion at any time and from time to time to (1) reject any request for redemption; (2) change the purchase price for redemptions; (3) limit the funds to be used for redemptions or otherwise change the limitations on redemption; or (4) amend, suspend (in whole or in part) or terminate the program.
 
During the quarter ended December 31, 2012, we redeemed shares as follows:
Month
 
Total Number of 
Shares
Redeemed
 
Average
Price Paid
per Share
 
Total Number of Shares Purchased as Part of Publicly
Announced Plans
or Programs
 
Maximum Number of Shares That May Yet be
Purchased Under the
Plans or Programs
October 2012
 

 
$

 

 
(1
)
November 2012
 
219,949

 
$
4.64

 
219,949

 
(1
)
December 2012
 

 
$

 

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


31



Item 6.                                                           Selected Financial Data.
 
The following data should be read in conjunction with our audited consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. The selected historical consolidated financial data presented below has been derived from our audited consolidated financial statements (in thousands, except number of properties and per share amounts).
 
As of December 31
 
2012
 
2011
 
2010
 
2009
 
2008
Total assets
 
$
3,125,294

 
$
3,553,768

 
$
4,149,305

 
$
4,680,640

 
$
5,408,600

 
 
 
 
 
 
 
 
 
 
 
Notes payable
 
$
2,107,380

 
$
2,367,401

 
$
2,720,858

 
$
2,973,617

 
$
3,066,529

Other liabilities
 
227,829

 
224,376

 
261,949

 
279,714

 
397,529

Series A convertible preferred stock
 
2,700

 

 

 

 

Stockholders’ equity
 
781,757

 
955,692

 
1,160,251

 
1,418,139

 
1,926,608

Noncontrolling interests (1)
 
5,628

 
6,299

 
6,247

 
9,170

 
17,934

Total liabilities and equity
 
$
3,125,294

 
$
3,553,768

 
$
4,149,305

 
$
4,680,640

 
$
5,408,600

 
Year Ended December 31
 
2012
 
2011
 
2010
 
2009
 
2008
Rental revenue
 
$
437,197

 
$
454,007

 
$
462,223

 
$
487,775

 
$
501,410

 
 
 
 
 
 
 
 
 
 
 
Loss from continuing operations before gain on sale or transfer of assets
 
(209,347
)
 
(152,487
)
 
(132,975
)
 
(314,567
)
 
(143,787
)
Income (loss) from discontinued operations
 
48,903

 
(30,773
)
 
(98,253
)
 
(124,520
)
 
(22,118
)
Gain on sale or transfer of assets
 
8,083

 
1,385

 

 

 
5,253

Net loss
 
(152,361
)
 
(181,875
)
 
(231,228
)
 
(439,087
)
 
(160,652
)
 
 
 
 
 
 
 
 
 
 
 
Noncontrolling interests in continuing operations
 
330

 
380

 
586

 
5,753

 
259

Noncontrolling interests in discontinued operations
 
(70
)
 
45

 
143

 
2,702

 
(28
)
Net loss attributable to common stockholders
 
$
(152,101
)
 
$
(181,450
)
 
$
(230,499
)
 
$
(430,632
)
 
$
(160,421
)
 
 
 
 
 
 
 
 
 
 
 
Cash provided by operating activities
 
$
48,534

 
$
2,363

 
$
49,308

 
$
63,010

 
$
68,484

Cash provided by (used in) investing activities
 
$
84,981

 
$
129,040

 
$
33,498

 
$
22,131

 
$
(212,471
)
Cash (used in) provided by financing activities
 
$
(135,842
)
 
$
(258,469
)
 
$
(123,250
)
 
$
(243,016
)
 
$
386,498

 
 
 
 
 
 
 
 
 
 
 
Basic and diluted income (loss) per common share
 
 

 
 

 
 

 
 

 
 

Continuing operations
 
$
(0.67
)
 
$
(0.51
)
 
$
(0.45
)
 
$
(1.05
)
 
$
(0.58
)
Discontinued operations
 
0.16

 
(0.10
)
 
(0.33
)
 
(0.42
)
 
(0.09
)
Basic and diluted loss per common share
 
$
(0.51
)
 
$
(0.61
)
 
$
(0.78
)
 
$
(1.47
)
 
$
(0.67
)
 
 
 
 
 
 
 
 
 
 
 
Distributions declared to common stockholders per share
 
$
0.09

 
$
0.10

 
$
0.17

 
$
0.40

 
$
0.64

 
 
 
 
 
 
 
 
 
 
 
Number of properties (2)
 
50

 
57

 
65

 
73

 
74

Total rentable square feet
 
20,189

 
22,018

 
23,767

 
25,665

 
25,570

___________
(1)   Noncontrolling interests reflects the noncontrolling interests related to certain of our real estate properties and includes 432,586 units of limited partnership interest in Behringer OP. 
(2)   At December 31, 2010 and 2009, we owned one unleased, newly developed, non-operating property which is excluded from these numbers.

32



 
Item 7.                                                           Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.

Critical Accounting Policies and Estimates
 
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On a regular basis, we evaluate these estimates, including investment impairment.  These estimates are based on management’s industry experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates.  Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.
 
Real Estate
 
Upon the acquisition of real estate properties, we recognize the assets acquired, the liabilities assumed, and any noncontrolling interest as of the acquisition date, measured at their fair values.  The acquisition date is the date on which we obtain control of the real estate property.  The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities and asset retirement obligations.  Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships.  Identified intangible liabilities generally consist of below-market leases.  Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired.  Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired.  Acquisition-related costs are expensed in the period incurred.  Initial valuations are subject to change until our information is finalized, which is no later than twelve months from the acquisition date.

The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings.  Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants.  The value of buildings is depreciated over the estimated useful life of 25 years using the straight-line method.
 
We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain at the date of the debt assumption.  Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.
 
We determine the value of above-market and below-market leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) management’s estimate of current market lease rates for the corresponding in-place leases, measured over a period equal to (a) the remaining non-cancelable lease term for above-market leases, or (b) the remaining non-cancelable lease term plus any below-market fixed rate renewal options that, based on a qualitative assessment of several factors, including the financial condition of the lessee, the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, are reasonably assured to be exercised by the lessee for below-market leases.  We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the determined lease term.
 
The total value of identified real estate intangible assets acquired is further allocated to in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant.  The aggregate value for tenant improvements and leasing commissions is based on estimates of these costs incurred at inception of the acquired leases, amortized through the date of acquisition.  The aggregate value of in-place leases acquired and tenant relationships is determined by applying a fair value model.  The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease-up periods

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for the respective spaces considering current market conditions.  In estimating the carrying costs that would have otherwise been incurred had the leases not been in place, we include such items as real estate taxes, insurance and other operating expenses as well as lost rental revenue during the expected lease-up period based on current market conditions.  The estimates of the fair value of tenant relationships also include costs to execute similar leases including leasing commissions, legal fees and tenant improvements as well as an estimate of the likelihood of renewal as determined by management on a tenant-by-tenant basis.
 
We amortize the value of in-place leases, in-place tenant improvements and in-place leasing commissions to expense over the initial term of the respective leases.  The tenant relationship values are amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets or liabilities exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the acquired intangibles related to that tenant would be charged to expense.
 
In allocating the purchase price of each of our properties, management makes assumptions and uses various estimates, including, but not limited to, the estimated useful lives of the assets, the cost of replacing certain assets, discount rates used to determine present values, market rental rates per square foot and the period required to lease the property up to its occupancy at acquisition as if it were vacant.  Many of these estimates are obtained from independent third party appraisals.  However, management is responsible for the source and use of these estimates.  A change in these estimates and assumptions could result in the various categories of our real estate assets and/or related intangibles being overstated or understated which could result in an overstatement or understatement of depreciation and/or amortization expense and/or rental revenue.  These variances could be material to our financial statements.  We made no property acquisitions in 2012 or 2011.

Impairment of Real Estate Related Assets
 
For our consolidated real estate assets, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted 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 and also exceeds the fair value of the asset, we recognize an impairment loss to adjust the carrying amount of the asset to its estimated fair value. Our process to estimate the fair value of an asset involves using third-party broker valuation estimates, bona fide purchase offers or the expected sales price of an executed sales agreement, which would be considered Level 1 or Level 2 assumptions within the fair value hierarchy. To the extent that this type of third-party information is unavailable, we estimate projected cash flows and a risk-adjusted rate of return that we believe would be used by a third party market participant in estimating the fair value of an asset. This is considered a Level 3 assumption within the fair value hierarchy. These projected cash flows are prepared internally by the Company’s asset management professionals and are updated quarterly to reflect in place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s Chief Financial Officer, Chief Investment Officer and Chief Accounting Officer review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions which are consistent with market data or with assumptions that would be used by a third party market participant and assume the highest and best use of the real estate investment. For the years ended December 31, 2012, 2011 and 2010 we recorded non-cash impairment charges of approximately $98.1 million, $92.8 million and $82.7 million, respectively, related to the impairment of consolidated real estate assets, including discontinued operations.  The impairment losses recorded were primarily related to assets assessed for impairment due to changes in management’s estimates of the intended hold period for certain of our properties and the sale or held for sale classification of certain properties. 

For our unconsolidated real estate assets, including those we own through an investment in a joint venture, undivided tenant-in-common (“TIC”) interest or other similar investment structure, at each reporting date we compare the estimated fair value of our investment to the carrying amount.  An impairment charge is recorded to the extent the fair value of our investment is less than the carrying amount and the decline in value is determined to be other than a temporary decline.  We had no impairment charges related to our investments in unconsolidated entities for the year ended December 31, 2012. For the years ended December 31, 2011 and 2010, we recorded non-cash impairment charges of approximately $0.3 million and $5.1 million, respectively, related to the impairment of our investments in unconsolidated entities. 
 
In evaluating our investments for impairment, management makes several estimates and assumptions, including, but not limited to, the projected date of disposition and sales price for each property, the estimated future cash flows of each property during our estimated ownership period, and for unconsolidated investments, the estimated future distributions from the investment.  A change in these estimates and assumptions could result in understating or overstating the carrying amount of our investments which could be material to our financial statements.
 

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We undergo continuous evaluations of property level performance, credit market conditions and financing options.  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 asset upon classification as held for sale exceeds the estimated fair value, less costs to sell.

Overview
On August 31, 2012, we entered into the Self-Management Transaction, and as a result 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 as it related to the development and construction financing of Two BriarLake Plaza). We continue to purchase certain services from Behringer Advisors on a transitional basis, such as human resources, shareholder services and information technology. HPT Management continues to provide property management services for 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. We anticipate that the Self-Management Transaction will result in substantial cost savings, net of the increase in direct employee costs, primarily from the fact that we are no longer required to pay asset management fees to Behringer Advisors.
 
At December 31, 2012 we owned interests in 50 operating properties with approximately 20.2 million rentable square feet.  At December 31, 2011, we owned interests in 57 operating properties with approximately 22.0 million rentable square feet.  During the year ended December 31, 2012 we disposed of seven properties, which included two TIC investment properties, and as of December 31, 2012, we had one property held for sale.   During the year ended December 31, 2011 we had one non-operating property that became fully leased and became classified as an operating property, and we disposed of nine properties. 
Adverse economic conditions have impacted and continue to impact our business, results of operations and financial condition. As an owner of real estate, the majority of our income and cash flow is derived from rental revenue received pursuant to tenant leases for space at our properties. Our earnings have been and continue to be negatively impacted by a decline of our rental revenue, which has occurred as a result of (1) a decrease in rental rates for new leases which have been less than the rates for previous leases in certain of our markets, (2) the significant tenant concessions we provide in connection with leases, and (3) a decline in our overall portfolio occupancy as compared to late 2008.  As a result of the deterioration of our rental revenue, we have operated, and continue to operate, under a strategic plan that includes, conserving cash, refinancing or restructuring debt, strategically selling assets, leasing space to increase occupancy and pursuing property and company level capital and other strategic opportunities.
 
Cash Conservation.  At December 31, 2012, we had cash and cash equivalents of approximately $9.7 million and restricted cash of approximately $78.2 million.  Restricted cash includes restricted money market accounts, as required by our lenders or under certain lease agreements, which may be used to fund tenant improvements and pay leasing commissions, property taxes and property insurance. As of December 31, 2012, we had approximately $127.9 million of available borrowings under our revolving line of credit of which approximately $18.1 million may only be used for leasing and capital expenditures at the collateral properties under our credit facility agreement. Given the approximate $54.7 million of commitments we have as of December 31, 2012, for future tenant improvements and leasing commissions, we expect our cash and cash equivalents and restricted cash to decline in future quarters, excluding cash increases that we may realize from strategic asset sales and draws under our credit facility. Over the last few years, in order to conserve cash, we have reduced and then suspended paying distributions and limited and then suspended share redemptions in comparison to amounts funded in 2008. We have also re-bid vendor contracts, continued to challenge asset valuations assessed by taxing authorities which impacts our real estate taxes owed on an annual basis, and structured leases to conserve capital.
Refinance and Restructure Debt. Substantially all of our assets are currently subject to mortgages, generally for property level non-recourse debt incurred. Excluding debt that has an accelerated maturity because it is in default, we have approximately $206.5 million and $244.1 million of debt maturing in 2013 and 2014, respectively. However, certain loans maturing in those periods will likely require additional equity to be invested in the collateralized property upon refinancing, such as our One Financial Place property in Chicago, Illinois. The reduction in our property net operating income, as well as the increased costs of retaining and attracting new tenants, coupled with increases in vacancy rates and cap rates, has caused us to reconsider our initial long-term strategy for certain of our properties, especially a limited number of properties where we believe the principal balance of the debt encumbering the property exceeds the value of the asset under current market conditions. In those cases where we believe the value of a property is not likely to recover, our board of directors has decided to redeploy our capital to what they believe are more effective uses by reducing the amount of monies we fund as capital expenditures and leasing costs or having us cease making debt service payments on certain property level non-recourse debt, resulting in defaults or events of default under the related loan

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agreements. See “Liquidity and Capital Resources - Notes Payable” for a more detailed discussion. We are in active negotiations with certain lenders, and we believe that some of these loans may be resolved by marketing the property for sale on behalf of the lender or negotiating agreements conveying the properties to the lender.
Strategic Asset Sales. In general, we believe it makes economic sense to sell properties in today’s market in certain instances, such as when we believe the value of the leases in place at a property will significantly decline over the remaining lease term, when we have limited or no equity in the particular property, when we believe the projected returns on our invested equity do not justify further investment or when we believe the equity in a property can be redeployed within the portfolio in order to achieve better returns or other strategic goals. For example, in 2012 we sold three consolidated properties and a TIC investment property which resulted in combined cash proceeds of approximately $132.4 million net of any loan assumptions.
Leasing. Leasing continues to be a key area of focus for us. In certain markets, we continue to experience an increased level of concessions required to acquire a new tenant, including a combination of free rent, tenant improvement allowances, lower rental rates, or other financial incentives. Also, a number of current tenants are leveraging the current economic environment to negotiate lease renewals or extensions with similar increased concessions. If these trends continue, we expect the decline in our property net operating income to continue.

In the following discussion, our leasing and occupancy amounts reflect our ownership interest of our properties.  Our 50 properties are comprised of approximately 20.2 million rentable square feet in total and, after adjustment for our ownership interest, equate to approximately 18.9 million rentable square feet.
 
During the year ended December 31, 2012, expiring leases comprised approximately 2.7 million square feet.  We executed renewals, expansions and new leases totaling approximately 2.8 million square feet at weighted average net rental rates that exceeded expiring rents by approximately $0.73 per square foot per year, or 5%. During the year ended December 31, 2011, expiring leases comprised approximately 4.0 million square feet, and we executed renewals, expansions and new leases totaling approximately 3.9 million square feet at weighted average net rental rates that were approximately $1.16 per square foot per year, or 7%, lower than expiring rents. 

The weighted average leasing costs for renewals, expansions and new leases executed in the year ended December 31, 2012 was approximately $29.45 per square foot as compared to approximately $26.64 per square foot for the year ended December 31, 2011. The weighted average lease term for renewals, expansions and new leases executed in the year ended December 31, 2012 was approximately 6.5 years as compared to approximately 6.8 years for the year ended December 31, 2011.

During the year ended December 31, 2012, renewals were approximately 1.4 million square feet with weighted average leasing costs of approximately $19.17 per square foot and a weighted average lease term of approximately 5.1 years. Expansions were approximately 0.6 million square feet with weighted average leasing costs of approximately $38.67 per square foot and a weighted average lease term of approximately 8.0 years. New leases totaled approximately 0.8 million square feet with weighted average leasing costs of approximately $40.29 per square foot and a weighted average lease term of approximately 7.7 years. During the year ended December 31, 2012, our lease renewals represented 55% of expiring leases and 52% of expiring square feet.

Our portfolio occupancy was 86% at December 31, 2012 as compared to 84% at December 31, 2011. We have approximately 1.7 million square feet of scheduled lease expirations in 2013. We will continue to focus on leasing with the objective of increasing occupancy as we seek to overcome lease expirations. If free rent concessions moderate and our occupancy increases, we would expect our operations to provide increased cash flow in future periods.
 
Property and Company Level Capital Sources.  We believe that the value for most of our properties may be increased by holding them until market conditions improve.  Rather than selling these assets before market conditions improve, we are exploring opportunities to raise both property level and company level capital.  For example, in January 2013, we completed a joint venture arrangement with a third party for our Paces West property that provided the necessary capital to restructure the property’s debt while retaining a 10% ownership interest, and in October 2011 we obtained a $340.0 million credit facility. Obtaining additional property or company level capital may result, however, in significant dilution of our interest in a property or our existing stockholders’ equity interests.
 
Other Strategic Opportunities. Although our primary purpose for conserving cash, strategically selling certain assets and identifying other property and company level capital sources is to have the necessary capital resources available for leasing space in our portfolio, we may also be able to use those resources to capitalize on certain other strategic investment opportunities, such as an acquisition or development of a property that may be uniquely attractive and accretive. For example, in July 2012 we commenced development of Two BriarLake Plaza, a 333,000 square foot Class A commercial office building in the Westchase district of Houston, Texas, because we believe it will be accretive.

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 If market conditions stabilize or improve and we are successful with our efforts under our strategic plan, we believe we can achieve the following three important objectives for our stockholders: (1) increase our estimated value per share; (2) increase distributable cash flow; and (3) provide liquidity to our stockholders. 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.

Results of Operations
    
During 2012, we disposed of five consolidated properties, and as of December 31, 2012, we had one consolidated property held for sale.  During 2011 and 2010, we disposed of nine and seven consolidated properties, respectively. The results of operations for each of these properties have been reclassified as discontinued operations in the accompanying consolidated statements of operations and comprehensive loss for the years ended December 31, 2012, 2011 and 2010, and are excluded from the discussions below.

Year ended December 31, 2012 as compared to the year ended December 31, 2011
 
Rental Revenue.  We generated rental revenue from our consolidated real estate properties for the year ended December 31, 2012 of approximately $437.2 million as compared to approximately $454.0 million for the year ended December 31, 2011.  The $16.8 million decrease was primarily attributable to a decrease of approximately $6.8 million related to the deconsolidation of 200 South Wacker as a result of a partial sale in 2011, a decrease in net above- and below-market lease adjustments of approximately $6.1 million, primarily related to 2011 early lease terminations, a decrease in lease termination fee income of approximately $6.0 million, a decrease in the straight-line rent adjustment of approximately $2.8 million and a decrease in tenant recovery income of approximately $3.1 million.  These decreases were partially offset by an increase in revenue of approximately $6.9 million primarily due to an increase in revenue from our property leases.
 
Property Operating Expenses. Property operating expenses from our consolidated properties for the year ended December 31, 2012 were approximately $134.1 million as compared to approximately $137.1 million for the year ended December 31, 2011. The $3.0 million decrease was primarily attributable to a decrease of approximately $2.6 million related to the 2011 deconsolidation of 200 South Wacker, a decrease of approximately $2.3 million in utility costs, and a decrease of approximately $1.1 million in repairs and maintenance, partially offset by increases of approximately $1.4 million in bad debt expense and approximately $1.0 million in engineering costs.
 
Interest Expense.  Interest expense for the year ended December 31, 2012 was approximately $129.1 million as compared to approximately $132.5 million for the year ended December 31, 2011 and was comprised of interest expense and amortization of deferred financing fees and interest rate mark-to-market adjustments related to our notes payable associated with our consolidated real estate properties, TIC interest investments, credit facility and interest rate cap and swap agreements.  The $3.4 million decrease from prior year was primarily a result of a decrease of approximately $3.5 million due to the deconsolidation of 200 South Wacker and a decrease in interest expense of approximately $2.1 million primarily due to lower principal borrowings, partially offset by an increase in amortization of deferred financing fees of approximately $2.2 million due to fees incurred related to new borrowings entered into during the second half of 2011.
 
Real Estate Taxes.  Real estate taxes for our consolidated real estate properties for the year ended December 31, 2012 were approximately $62.5 million as compared to approximately $60.2 million for the year ended December 31, 2011.  The $2.3 million increase primarily resulted from approximately $1.1 million in lower property tax refunds received in 2012 as compared to 2011 and a $1.5 million increase in expense primarily due to higher property tax rates and value assessments at certain properties, partially offset by a decrease of approximately $0.4 million related to the deconsolidation of 200 South Wacker.
 
Property Management Fees. Property management fees for both our consolidated real estate properties and TIC investments for the year ended December 31, 2012 were approximately $12.8 million as compared to approximately $13.2 million for the year ended December 31, 2011.  The $0.4 million decrease is comprised of a decrease of approximately $0.3 million primarily due to lower rooftop management fees and a decrease of approximately $0.1 million due to the deconsolidation of 200 South Wacker.


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Asset Management Fees. Asset management fees, net of amounts waived, for both our consolidated real estate properties and TIC investments for the year ended December 31, 2012 were approximately $9.8 million as compared to approximately $17.8 million for the year ended December 31, 2011.  Behringer Advisors waived approximately $5.7 million in asset management fees in the year ended December 31, 2012 as compared to approximately $6.2 million waived in the year ended December 31, 2011.  The $8.0 million decrease in asset management fees was primarily attributable to becoming self-managed and no longer paying asset management fees to Behringer Advisors, effective as of August 31, 2012.
 
Asset Impairment Losses.  Asset impairment losses for the year ended December 31, 2012 were approximately $97.3 million for seven consolidated properties as compared to approximately $33.3 million for the year ended December 31, 2011 for four consolidated properties and an investment in an unconsolidated entity.  These impairment losses were primarily related to properties assessed for impairment primarily due to changes in management’s estimates of intended hold periods. 
 
General and Administrative Expenses.  General and administrative expenses for the year ended December 31, 2012 were approximately $15.5 million as compared to approximately $10.8 million for the year ended December 31, 2011  and were comprised of corporate general and administrative expenses including directors’ and officers’ insurance premiums, audit and tax fees, legal fees, and prior to August 31, 2012, reimbursement of certain expenses of Behringer Advisors incurred before we became self-managed. After August 31, 2012, we incurred new expenses that had previously been paid by Behringer Advisors, such as payroll costs. The increase of approximately $4.7 million is primarily due to approximately $2.5 million of payroll costs and $2.3 million in costs associated with evaluating and negotiating the Self-Management Transaction that became effective August 31, 2012.
 
Depreciation and Amortization Expense. Depreciation and amortization expense from each of our consolidated real estate properties for the year ended December 31, 2012 was approximately $188.2 million as compared to approximately $201.9 million for the year ended December 31, 2011.  The $13.7 million decrease is primarily related to overall lower depreciation and amortization expense of approximately $10.9 million primarily due to higher lease intangible amortization in 2011 resulting from early lease terminations and lower depreciable asset values due to asset impairments. In addition, approximately $2.8 million of the decrease was due to the 2011 deconsolidation of 200 South Wacker.
 
Gain on Troubled Debt Restructuring.  Gain on troubled debt restructuring for the year ended December 31, 2012 was approximately $0.2 million as compared to approximately $1.0 million for the year ended December 31, 2011.  The 2012 gain relates to the foreclosure on our former TIC interest investment in the St. Louis Place property. The 2011 gain is related to our acquisition of debt secured by our 1650 Arch Street property in February 2010. The total gain was approximately $10.1 million of which approximately $9.1 million was recognized in 2010 upon our acquisition of the approximately $42.8 million note from the lender at a discount, and approximately $1.0 million was deferred and recognized in March 2011 when we purchased the 10% ownership of the 1650 Arch Street property held by our partner, an unaffiliated third party.

Equity in Earnings (Losses) of Investments.  Equity in earnings (losses) of investments for the year ended December 31, 2012 was earnings of approximately $1.7 million as compared to a loss of approximately $2.3 million for year ended December 31, 2011 and was comprised of our share of equity in the earnings of unconsolidated investments.  The $4.0 million change is primarily related to a 2011 impairment loss of approximately $3.0 million recorded at St. Louis Place, our former TIC investment property, and an approximate $1.0 million increase in 2012 earnings primarily related to increased revenue at the Wanamaker Building.

Gain on Sale or Transfer of Assets.  Gain on sale or transfer of assets was approximately $8.1 million for the year ended December 31, 2012 and was primarily related to the sale of our TIC interest in Alamo Plaza.  Gain on sale or transfer of assets was approximately $1.4 million for the year ended December 31, 2011 and was primarily related to our sale of 200 South Wacker to a joint venture in which we hold an ownership interest.

Year ended December 31, 2011 as compared to the year ended December 31, 2010
 
Rental Revenue.  We generated rental revenue from our consolidated real estate properties for the year ended December 31, 2011 of approximately $454.0 million as compared to approximately $462.2 million for the year ended December 31, 2010.  The $8.2 million decrease was primarily attributable to decreases in tenant rental income of approximately $10.1 million primarily related to free rent, reduced rental rates and lower occupancy as compared to the prior year; a decrease of approximately $9.7 million related to the 2011 deconsolidation of 200 South Wacker; a decrease in tenant recovery income of approximately $1.3 million; and a decrease in other income of approximately $2.8 million.  These decreases were partially offset by a favorable increase in net above- and below-market lease adjustments of approximately $4.5 million primarily as a result of an early lease termination of a below-market lease at our Bank of America Plaza property, an increase in straight-line rent adjustments of approximately $8.2 million as a result of increased leasing and an increase in lease termination fee income of approximately $3.0 million.

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Property Operating Expenses. Property operating expenses from our consolidated real estate properties for the year ended December 31, 2011 were approximately $137.1 million as compared to approximately $143.5 million for the year ended December 31, 2010. The $6.4 million decrease was primarily attributable to a decrease of approximately $3.1 million related to the 2011 deconsolidation of 200 South Wacker, a decrease of approximately $1.9 million in utility costs, a decrease of approximately $1.1 million in bad debt expense and a decrease in other expenses of approximately $0.3 million.
 
Interest Expense.  Interest expense for the year ended December 31, 2011 was approximately $132.5 million as compared to approximately $140.4 million for the year ended December 31, 2010 and was comprised of interest expense and amortization of deferred financing fees and interest rate mark-to-market adjustments related to our notes payable associated with our consolidated real estate properties, TIC interest investments, credit facility and interest rate swap agreements.  The $7.9 million decrease from prior year was primarily a result of overall decreased principal borrowings resulting in a decrease of approximately $8.4 million and a decrease of approximately $2.7 million due to the deconsolidation of 200 South Wacker, partially offset by a decrease in interest capitalized of approximately $3.2 million.
 
Real Estate Taxes.  Real estate taxes from our consolidated real estate properties for the year ended December 31, 2011 were approximately $60.2 million as compared to approximately $61.0 million for the year ended December 31, 2010.  The $0.8 million decrease was comprised of a decrease of approximately $0.9 million related to the deconsolidation of 200 South Wacker, partially offset by an increase of approximately $0.1 million in 2011 as compared to 2010 primarily resulting from higher property tax rates and value assessments at certain properties.
 
Property Management Fees. Property management fees for both our consolidated real estate properties and TIC investments for the year ended December 31, 2011 were approximately $13.2 million as compared to approximately $14.1 million for the year ended December 31, 2010.  The $0.9 million decrease is comprised of a decrease of approximately $0.5 million primarily due to lower property revenue and a decrease of approximately $0.4 million due to the deconsolidation of 200 South Wacker.
 
Asset Management Fees. Asset management fees, net of amounts waived, for both our consolidated real estate properties and TIC investments for the year ended December 31, 2011 were approximately $17.8 million as compared to approximately $16.5 million for the year ended December 31, 2010.  Behringer Advisors waived approximately $6.2 million in asset management fees in the year ended December 31, 2011 as compared to $8.9 million waived in the year ended December 31, 2010. The $1.3 million increase in asset management fees was primarily attributable to a larger portion of the total 2010 asset management fees being allocated to properties that are included in discontinued operations. The portion of our asset management fees waived was allocated pro rata to all of our properties. 
 
Asset Impairment Losses.  Asset impairment losses for the year ended December 31, 2011 were approximately $33.3 million for four consolidated properties and an investment in an unconsolidated entity as compared to approximately $5.1 million for the year ended December 31, 2010 for an investment in an unconsolidated entity.  The $28.2 million increase is due to approximately $33.1 million in increased impairment losses in 2011 as compared to 2010 related to our consolidated real estate properties. These impairment losses were related to assets assessed for impairment primarily due to changes in management’s estimates of intended hold periods.  This increase was partially offset by approximately $4.9 million in reduced impairment losses in 2011 as compared to 2010 related to changes in the estimated fair value of investments in unconsolidated entities.
 
Goodwill Impairment Losses. In connection with the May 17, 2010 estimation of value of our outstanding common stock, we evaluated our goodwill for impairment between annual tests and determined that the implied fair value of goodwill was equal to zero; therefore, approximately $11.5 million was recorded as a goodwill impairment loss during 2010.  During 2011 we had no goodwill or indefinite lived assets.
 
General and Administrative Expenses.  General and administrative expenses for the year ended December 31, 2011 were approximately $10.8 million as compared to approximately $10.0 million for the year ended December 31, 2010 and were comprised of corporate general and administrative expenses including directors’ and officers’ insurance premiums, audit and tax fees, legal fees, other administrative expenses and reimbursement of certain expenses of Behringer Advisors.  The $0.8 million increase was primarily a result of increases in business and franchise taxes.
 
Depreciation and Amortization Expense. Depreciation and amortization expense from each of our consolidated properties for each of the years ended December 31, 2011 and December 31, 2010 was approximately $201.9 million. There was a $3.2 million decrease in depreciation and amortization expense due to the 2011 deconsolidation of 200 South Wacker, offset by a $3.2 million increase primarily due to increased amortization due to early lease terminations in 2011.  


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Gain on Troubled Debt Restructuring.  Gain on troubled debt restructuring for the year ended December 31, 2011 was approximately $1.0 million as compared to approximately $9.1 million for the year ended December 31, 2010. Each of these gains is related to our acquisition of debt secured by our 1650 Arch Street property in February 2010.  The total gain was approximately $10.1 million of which approximately $9.1 million was recognized in 2010 upon our acquisition of the approximately $42.8 million note from the lender at a discount, and approximately $1.0 million was deferred and recognized in March 2011 when we purchased the 10% ownership of the 1650 Arch Street property held by our partner, an unaffiliated third party.
 
Benefit (Provision) for Income Taxes.  We had a benefit from income taxes of approximately $0.6 million for the year ended December 31, 2011 as compared to a provision for income taxes of approximately $2.8 million for the year ended December 31, 2010.  The $3.4 million change primarily relates to approximately $1.8 million of federal net operating loss carryovers that are no longer available to us and were expensed in 2010, greater valuation allowances for certain state and local deferred tax assets in 2010 as compared to 2011 of approximately $0.9 million and an increase of approximately $0.7 million in other state and local tax benefit.

 Equity in Earnings (Losses) of Investments.  Equity in earnings (losses) of investments for the year ended December 31, 2011 was a loss of approximately $2.3 million as compared to earnings of approximately $1.0 million for year ended December 31, 2010 and was comprised of our share of equity in the earnings of unconsolidated investments.  The $3.3 million decrease is primarily related to an impairment loss recorded at St. Louis Place, our former TIC investment property, in the year ended December 31, 2011.

Gain on Sale or Transfer of Assets.  Gain on sale or transfer of assets was approximately $1.4 million for the year ended December 31, 2011 and was primarily related to our sale of 200 South Wacker to a joint venture in which we hold an ownership interest.  We had no gain on sale or transfer of assets for the year ended December 31, 2010.

Cash Flow Analysis

During 2012, we disposed of five consolidated properties, and as of December 31, 2012, we had one consolidated property held for sale.  During 2011 and 2010, we disposed of nine and seven consolidated properties, respectively. The discussions below include cash flows from both our continuing and discontinued operations.
 
Year ended December 31, 2012 as compared to year ended December 31, 2011
 
Cash flows provided by operating activities were approximately $48.5 million for the year ended December 31, 2012 compared to approximately $2.4 million for the year ended December 31, 2011.  The $46.1 million increase in cash flows provided by operating activities is attributable to (1) the timing of receipt of revenues and payment of expenses which resulted in approximately $28.3 million more net cash inflows from working capital assets and liabilities in 2012 compared to 2011; (2) the factors discussed in our analysis of results of operations for the year ended December 31, 2012 as compared to December 31, 2011, which resulted in approximately $5.2 million more cash received from the results of our consolidated real estate property operations, net of interest expense, asset management fees and general and administrative expenses; and (3) a decrease in cash paid for lease commissions and other lease intangibles of approximately $12.6 million.
 
Cash flows provided by investing activities for the year ended December 31, 2012 were approximately $85.0 million and were primarily comprised of proceeds from the sale of properties of approximately $132.4 million and a change in restricted cash of approximately $21.0 million, partially offset by monies used to fund capital expenditures for existing real estate and real estate under development of approximately $69.4 million. During the year ended December 31, 2011, cash flows provided by investing activities were approximately $129.0 million and were primarily comprised of proceeds from the sale of properties of approximately $183.0 million and proceeds from notes receivable of approximately $10.4 million, partially offset by monies used to fund capital expenditures for existing real estate of approximately $58.6 million and purchases of real estate and investments in unconsolidated entities of approximately $5.1 million.
 
Cash flows used in financing activities for the year ended December 31, 2012 were approximately $135.8 million and were comprised primarily of payments on notes payable of approximately $147.5 million, distributions to our common stockholders of approximately $16.7 million, and redemptions of common stock of approximately $4.1 million, partially offset by proceeds from notes payable of approximately $34.5 million.  During the year ended December 31, 2011, cash flows used in financing activities were approximately $258.5 million and were comprised primarily of payments on notes payable of approximately $780.9 million, distributions to our common stockholders of approximately $16.3 million, payment of financing costs of approximately $14.3 million, and redemptions of common stock of approximately $4.3 million, partially offset by proceeds from notes payable of approximately $557.5 million. 
 

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Year ended December 31, 2011 as compared to year ended December 31, 2010
 
Cash flows provided by operating activities totaled approximately $2.4 million for the year ended December 31, 2011 compared to approximately $49.3 million for the year ended December 31, 2010.  The reduction in cash flows provided by operating activities of approximately $46.9 million is attributable to (1) the factors discussed in our analysis of results of operations for the year ended December 31, 2011 compared to December 31, 2010, including approximately $10.4 million less cash received from the net of the results of our consolidated real estate property operations, interest expense, asset management fees and general and administrative expenses; (2) increases in cash paid for lease commissions and other lease intangibles of approximately $9.9 million; and (3) the timing of receipt of revenues and payment of expenses which resulted in approximately $26.6 million more in net cash outflows from working capital assets and liabilities in 2011 compared to 2010.
 
Cash flows provided by investing activities for the year ended December 31, 2011 were approximately $129.0 million and were primarily comprised of proceeds from the sale of discontinued operations of approximately $183.0 million and proceeds from notes receivable of approximately $10.4 million. These proceeds were partially offset by monies used to fund capital expenditures for existing real estate of approximately $58.6 million and purchases of real estate and investments in unconsolidated entities of approximately $5.1 million.  During the year ended December 31, 2010, cash flows provided by investing activities were approximately $33.5 million and were primarily comprised of proceeds from the sale of properties of approximately $55.3 million and approximately $27.3 million in proceeds from the change in restricted cash, partially offset by monies used to fund capital expenditures for existing real estate of approximately $44.0 million and capital expenditures for real estate development of approximately $6.6 million.
 
Cash flows used in financing activities for the year ended December 31, 2011 were approximately $258.5 million and were comprised primarily of payments on notes payable of approximately $780.9 million, distributions to our common stockholders of approximately $16.3 million, payment of financing costs of approximately $14.3 million, and redemptions of common stock of approximately $4.3 million, partially offset by proceeds from notes payable of approximately $557.5 million. During the year ended December 31, 2010, cash flows used in financing activities were approximately $123.3 million and were comprised primarily of payments on notes payable of approximately $83.2 million, distributions to our common stockholders of approximately $30.4 million, redemptions of common stock of approximately $7.2 million and distributions to noncontrolling interests of approximately $2.2 million.
 
Funds from Operations (“FFO”) and Modified Funds from Operations (“MFFO”)
     
Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time.  Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient for evaluating operating performance.  FFO is a non-GAAP financial measure that is widely recognized as a measure of a REIT’s operating performance.  We use FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) in the April 2002 “White Paper on Funds From Operations” which is net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, gains (or losses) from sales of property and impairments of depreciable real estate (including impairments of investments in unconsolidated joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciable real estate held by the joint venture or partnership), plus depreciation and amortization on real estate assets, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and noncontrolling interests.  The determination of whether impairment charges have been incurred is based partly on anticipated operating performance and hold periods.  Estimated undiscounted cash flows from a property, derived from estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows are taken into account in determining whether an impairment charge has been incurred.  While impairment charges for depreciable real estate are excluded from net income (loss) in the calculation of FFO as described above, impairments reflect a decline in the value of the applicable property which we may not recover.
 
We believe that the use of FFO, together with the required GAAP presentations, is helpful to our stockholders and our management in understanding our operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, impairments of depreciable real estate assets, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income.  Factors that impact FFO include fixed costs, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on debt financing and operating expenses.
 

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Since FFO was promulgated, several new accounting pronouncements have been issued, such that management, industry investors and analysts have considered the presentation of FFO alone to be insufficient to evaluate operating performance.  Accordingly, in addition to FFO, we use MFFO, as defined by the Investment Program Association (“IPA”).  The IPA definition of MFFO excludes from FFO the following items:

(1)
acquisition fees and expenses;
(2)
straight line rent amounts, both income and expense;
(3)
amortization of above- or below-market intangible lease assets and liabilities;
(4)
amortization of discounts and premiums on debt investments;
(5)
impairment charges on real estate related assets to the extent not already excluded from net income in the calculation of FFO, such as impairments of non-depreciable properties, loans receivable, and equity and debt investments;
(6)
gains or losses from the early extinguishment of debt;
(7)
gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivative holdings except where the trading of such instruments is a fundamental attribute of our operations;
(8)
gains or losses related to fair value adjustments for interest rate swaps and other derivatives not qualifying for hedge accounting, foreign exchange holdings and other securities;
(9)
gains or losses related to consolidation from, or deconsolidation to, equity accounting;
(10)
gains or losses related to contingent purchase price adjustments; and
(11)
adjustments related to the above items for unconsolidated entities in the application of equity accounting.

We believe that MFFO is a helpful measure of operating performance because it excludes certain non-operating activities and certain recurring non-cash operating adjustments as outlined above.  Accordingly, we believe that MFFO can be a useful metric to assist management, stockholders and analysts in assessing the sustainability of operating performance.
 
As explained below, management’s evaluation of our operating performance excludes the items considered in the calculation based on the following economic considerations:
 
Acquisition fees and expenses. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analyses differentiate costs to acquire the investment from the operations derived from the investment. GAAP requires acquisition costs related to business combinations and investments be expensed. We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for our real estate investments and is consistent with management’s analysis of the investing and operating performance of our properties.  Acquisition expenses include those paid to Behringer Advisors or third parties.
 
Adjustments for straight line rents and amortization of discounts and premiums on debt investments.  In the application of GAAP, rental receipts and discounts and premiums on debt investments are allocated to periods using various systematic methodologies. This application will result in income recognition that could be significantly different than the underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance.
 
Adjustments for amortization of above- or below-market intangible lease assets.  Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes predictably over time and that these charges be recognized currently in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of our real estate assets and aligns results with management’s analysis of operating performance.

Impairment charges and gains or losses related to fair value adjustments for derivatives not qualifying for hedge accounting.  Each of these items relates to a fair value adjustment, which, in part, is based on the impact of current market fluctuations and underlying assessments of general market conditions, which may not be directly attributable to our current operating performance. As these gains or losses relate to underlying long-term assets and liabilities where we are not speculating or trading assets, management believes MFFO provides useful supplemental information by focusing on the changes in our core operating fundamentals rather than changes that may reflect anticipated gains or losses. In particular, because in most circumstances GAAP impairment charges are not allowed to be reversed if the underlying fair values improve or because the timing of impairment charges may lag the onset of certain operating consequences, we believe MFFO provides useful supplemental

42



information related to current consequences, benefits and sustainability related to rental rates, occupancy and other core operating fundamentals.
 
Adjustment for gains or losses related to early extinguishment of hedges, debt, consolidation or deconsolidation and contingent purchase price.  Similar to extraordinary items excluded from FFO, these adjustments are not related to our continuing operations.  By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.
 
By providing MFFO, we believe we are presenting useful information that assists stockholders in better aligning their analysis with management’s analysis of long-term core operating activities.  Many of these adjustments are similar to adjustments required by SEC rules for the presentation of pro forma business combination disclosures, particularly acquisition expenses, gains or losses recognized in business combinations and other activity not representative of future activities.
 
MFFO also provides useful information in analyzing comparability between reporting periods that also assists stockholders and analysts in assessing the sustainability of our operating performance.  MFFO is primarily affected by the same factors as FFO, but without certain non-operating activities and certain recurring non-cash operating adjustments; therefore, we believe fluctuations in MFFO are more indicative of changes and potential changes in operating activities.  MFFO is also more comparable in evaluating our performance over time.  We also believe that MFFO is a recognized measure of sustainable operating performance by the real estate industry and is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies that do not have a similar level of involvement in acquisition activities or are not similarly affected by impairments and other non-operating charges.
 
FFO or MFFO should neither be considered as an alternative to net income (loss), nor as indications of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make distributions.  Additionally, the exclusion of impairments limits the usefulness of FFO and MFFO as historical operating performance measures since an impairment charge indicates that operating performance has been permanently affected.  FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.  Both FFO and MFFO are non-GAAP measurements and should be reviewed in connection with other GAAP measurements.  Our FFO attributable to common stockholders and MFFO attributable to common stockholders as presented may not be comparable to amounts calculated by other REITs that do not define these terms in accordance with the current NAREIT or IPA definitions or that interpret those definitions differently.
 
The following section presents our calculations of FFO attributable to common stockholders and MFFO attributable to common stockholders for the years ended December 31, 2012, 2011 and 2010, and provides additional information related to our FFO attributable to common stockholders and MFFO attributable to common stockholders.  Beginning in 2011, our presentation of FFO attributable to common stockholders was modified to exclude impairment of depreciable real estate assets consistent with “Updated Guidance on Reporting FFO: Write-Downs for Impairment” as published by NAREIT on October 31, 2011, with further guidance published on November 4, 2011 and January 6, 2012, and our definition of MFFO was modified to be consistent with the definition established by the IPA.  Prior to these modifications, our primary adjustments to FFO attributable to common stockholders in arriving at MFFO attributable to common stockholders included acquisition expenses, impairment charges and fair value adjustments for derivatives not qualifying for hedge accounting.  All periods presented have been modified to reflect these changes.


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The table below is presented in thousands, except per share amounts: 
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
Net loss
 
$
(152,361
)
 
$
(181,875
)
 
$
(231,228
)
Net loss attributable to noncontrolling interests
 
260

 
425

 
729

Adjustments (1):
 
 

 


 
 

Real estate depreciation and amortization from consolidated properties
 
194,908

 
221,169

 
238,944

Real estate depreciation and amortization from unconsolidated properties
 
7,021

 
7,447

 
7,027

Impairment of depreciable real estate assets (2)
 
98,050

 
96,066

 
87,825

Gain on sale of depreciable real estate
 
(28,213
)
 
(18,086
)
 
(2,920
)
Noncontrolling interests share of above adjustments
 
(1,152
)
 
(1,241
)
 
(1,390
)
FFO attributable to common stockholders
 
$
118,513

 
$
123,905

 
$
98,987

 
 
 
 
 
 
 
Impairment of goodwill
 

 

 
11,470

Fair value adjustments to derivatives
 

 

 
(193
)
Acquisition expenses
 

 
238

 

Straight-line rent adjustment
 
(17,263
)
 
(25,498
)
 
(14,383
)
Amortization of above- and below-market rents, net
 
(12,507
)
 
(18,823
)
 
(12,323
)
Gain on troubled debt restructuring
 
(35,622
)
 
(38,911
)
 
(23,539
)
Noncontrolling interests share of above adjustments
 
94

 
122

 
58

MFFO attributable to common stockholders
 
$
53,215

 
$
41,033

 
$
60,077

 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
298,372

 
296,351

 
294,241

Weighted average common shares outstanding - diluted (3)
 
298,372

 
296,365

 
294,241

 
 
 
 
 
 
 
Net loss per common share - basic and diluted (3)
 
$
(0.51
)
 
$
(0.61
)
 
$
(0.78
)
FFO per common share - basic and diluted
 
$
0.40

 
$
0.42

 
$
0.34

MFFO per common share - basic and diluted
 
$
0.18

 
$
0.14

 
$
0.20

____________
(1)
Reflects the adjustments of continuing operations, as well as discontinued operations.
(2)
Includes impairment of our investments in unconsolidated entities which resulted from a measurable decrease in the fair value of the depreciable real estate held by the joint venture or partnership.
(3)
There are no dilutive securities for purposes of calculating the net loss per common share.

FFO attributable to common stockholders for the year ended December 31, 2012 was approximately $118.5 million as compared to approximately $123.9 million for the year ended December 31, 2011, a decrease of approximately $5.4 million.  The decrease in FFO attributable to common stockholders is primarily comprised of a decrease of approximately $6.1 million due to lower rental rates on leasing activity at the properties included in continuing operations, a decrease in lease termination fees of approximately $6.0 million, an increase in general and administrative expenses, primarily as a result of our becoming self-managed in 2012, of approximately $4.7 million and a decrease of approximately $0.8 million in gain on troubled debt restructuring. The decrease is partially offset by a decrease in asset management fees as a result of our becoming self-managed in 2012 of approximately $7.9 million and a decrease of approximately $7.6 million due to the disposition of properties included in discontinued operations.
 
MFFO attributable to common stockholders for the year ended December 31, 2012 was approximately $53.2 million as compared to approximately $41.0 million for the year ended December 31, 2011, an increase of approximately $12.2 million. The increase in MFFO attributable to common stockholders is primarily comprised of an increase of approximately $15.8 million due to the disposition of properties included in discontinued operations and a decrease in asset management fees as a result of our becoming self-managed in 2012 of approximately $7.9 million.  The increase was partially offset by a decrease in lease termination fees of approximately $6.0 million and an increase in general and administrative expenses, primarily as a result of our becoming self-managed in 2012, of approximately $4.7 million.

FFO attributable to common stockholders for the year ended December 31, 2011 was approximately $123.9 million as compared to approximately $99.0 million for the year ended December 31, 2010, an increase of approximately $24.9 million.  The increase in FFO attributable to common stockholders is primarily comprised of an increase of approximately $11.0 million due to the disposition of properties included in discontinued operations, a decrease of approximately $11.5 million due to impairment of goodwill losses in 2010 that were not incurred in 2011 and lower interest expense in continuing operations of approximately $7.1 million due to principal paydowns on debt and lower interest rates obtained in debt refinancings.  The increase is partially offset by a decrease in troubled debt restructuring of approximately $8.1 million.
 

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MFFO attributable to common stockholders for the year ended December 31, 2011 was approximately $41.0 million as compared to approximately $60.1 million for the year ended December 31, 2010, a decrease of approximately $19.1 million.  The decrease in MFFO attributable to common stockholders is primarily comprised of a decrease of approximately $17.5 million due to the disposition of properties included in discontinued operations and a decrease of approximately $9.0 million due to a reduction in occupancy and lower rental rates on leasing activity, including significant free rent concessions, at the properties included in continuing operations.  The decrease is partially offset by approximately $7.3 million in lower interest incurred in continuing operations as a result of principal paydowns on debt and lower interest rates obtained in debt refinancings.

Liquidity and Capital Resources
 
General
 
Our business requires continued access to capital to fund our needs. Our principal demands for funds on a short-term and long-term basis have been and will continue to be to fund property operating expenses, general and administrative expenses, payment of principal and interest on our outstanding indebtedness, capital improvements to our properties, including commitments for future tenant improvements and repaying or refinancing our outstanding indebtedness. Our foremost priorities for the near term are preserving and generating cash sufficient to fund our liquidity needs. Given the uncertainty in the economy, as well as property specific issues, such as vacancies and lease terminations, management believes that access to any additional outside source of cash other than our credit facility will be challenging and is planning accordingly. We anticipate that becoming self-managed, effective August 31, 2012, will result in substantial cost savings. In particular, we anticipate annual savings in the range of approximately $10.0 million to $12.0 million beginning in 2013. The anticipated cost savings result primarily from the fact that we will no longer be required to pay asset management fees to Behringer Advisors. There is no assurance, however, that these savings will be realized. On December 19, 2012, our board of directors made a determination to suspend all distributions and redemptions until further notice. This is expected to result in annual cash savings in excess of $20.0 million.
 
Current Liquidity
 
As of December 31, 2012, we had cash and cash equivalents of $9.7 million and restricted cash of approximately $78.2 million.  We have deposits in certain financial institutions in excess of federally insured levels.  We have diversified our cash accounts with numerous banking institutions in an attempt to minimize exposure to any one of these institutions.  We regularly monitor the financial stability of these financial institutions, and we believe that we have placed our deposits with creditworthy financial institutions.
 
We anticipate our 2013 liquidity requirements to be approximately $433.8 million. At current operating levels, we anticipate that revenue from our properties over the same period will generate approximately $390.6 million and the remainder of our 2013 liquidity requirements will be funded by cash and cash equivalents, restricted cash, borrowings and proceeds from the sale of properties. We will also need to generate additional funds for long-term liquidity requirements.
 
Liquidity Strategies
 
Our expected actual and potential liquidity sources are, among others, cash and cash equivalents, restricted cash, revenue from our properties, proceeds from our available borrowings under our credit facility and additional secured or unsecured debt financings and refinancings, proceeds from asset dispositions, proceeds received from contributing existing assets to joint ventures and proceeds from public or private issuances of debt or equity securities.

One of our liquidity strategies is to sell or otherwise dispose of certain properties. We believe that selling or otherwise disposing of certain properties located in non-core markets and certain other non-strategic properties can help us to either (1) generate cash when we believe the property being disposed has equity value above the mortgage debt, or (2) preserve cash through the sale or other disposition of properties with negative cash flow or other potential near-term cash outlay requirements. In 2012, we sold three consolidated properties and a TIC investment property resulting in combined net proceeds of approximately $132.4 million, net of any loan assumptions. In addition, in 2012 we disposed of three additional properties (each of which was troubled) pursuant to foreclosures. There can be no assurance that future dispositions will occur, or, if they occur, that they will help us to achieve these objectives.
We may seek to generate capital by contributing one or more of our existing assets to a joint venture with a third party. For example, we completed a joint venture arrangement with a third party for our Paces West property in January 2013 that provided the necessary capital to restructure the property’s debt. Investments in joint ventures may, under certain circumstances, involve

45



risks not present when a third party is not involved. Our ability to successfully identify, negotiate and complete joint venture transactions on acceptable terms or at all is highly uncertain in the current economic environment.
We are exploring opportunities and working with various entities to generate both property level and company level capital. There is, however, no assurance that we will be able to realize any capital from these initiatives.
 
Notes Payable
 
Our notes payable was approximately $2.1 billion and $2.4 billion in principal amount at December 31, 2012 and 2011, respectively. As of December 31, 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 December 31, 2012, the stated annual interest rates on our notes payable ranged from 3.10% to 9.80%, with an effective weighted average interest rate of approximately 5.53%.  For each of our loans that are in default, as detailed below, we incur default interest rates that are 400 to 500 basis points higher than the 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 December 31, 2012, we were in default on four non-recourse property loans with a combined outstanding balance of approximately $110.2 million secured by seven of our properties, including two properties for which receivers have been appointed.  We believe each of these loans may be resolved by marketing the property for sale on behalf of the lender or negotiating agreements conveying these properties to the lenders.  As of December 31, 2012, we were also in default on the approximate $16.4 million non-recourse property loan secured by 600 & 619 Alexander Road. The property and related debt are classified as assets and obligations associated with real estate held for sale, respectively, at December 31, 2012. On February 15, 2013, this property was sold to an unaffiliated third party, and the proceeds were used to fully satisfy the related debt at a discount. At December 31, 2012, other than the defaults discussed above, we believe we were in compliance with the debt covenants under each of our other loan agreements. 
 
At December 31, 2012, our notes payable had maturity dates that range from August 2013 to August 2021.  We have approximately $110.2 million of non-recourse loans secured by seven of our properties in default with scheduled maturity dates after 2013, but we have received notification from the lenders demanding immediate payment. 

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 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 December 31, 2012, the term loan was fully funded and approximately $8.3 million was outstanding under the revolving line of credit. As of December 31, 2012, we had approximately $127.9 million of available borrowings under our revolving line of credit of which approximately $18.1 million may only be used for leasing and capital expenditures at the Collateral Properties. As of December 31, 2012, the weighted average annual interest rate for draws under the credit agreement, inclusive of the swap, was approximately 3.63%.

Troubled Debt Restructuring
 
In 2010, pursuant to deeds-in-lieu of foreclosure, we transferred ownership of KeyBank Center and One Financial Plaza to the associated lenders. These transactions were each accounted for as a full settlement of debt. We also sold 222 Bloomingdale, and the associated lender agreed to accept a discounted payoff as full settlement of the debt. Finally, we completed a discounted purchase through a wholly-owned subsidiary of the note associated with our 1650 Arch Street property.


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In 2011, pursuant to foreclosures or deeds-in-lieu of foreclosure, we transferred ownership of Executive Park, Grandview II and Resurgens Plaza to the associated lenders.  These transactions were each accounted for as a full settlement of debt. We also sold 1300 Main which was held in receivership at the date of sale, and the proceeds were used to fully settle the related debt at a discount.
 
In 2012, pursuant to foreclosures, we transferred ownership of Minnesota Center and 17655 Waterview and our ownership interest in St. Louis Place to the associated lenders. These transactions were each accounted for as a full settlement of debt.

For the years ended December 31, 2012, 2011 and 2010, the above transactions resulted in gain on troubled debt restructuring of approximately $35.6 million, $38.9 million and $23.5 million, respectively, which was equal to approximately $0.12, $0.13 and $0.08 in earnings 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.
 
Share Redemption Program
 
Our board of directors has authorized a share redemption program to provide limited interim liquidity to stockholders.  In 2009, the board made a determination to suspend 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”).  The board set funding limits for exceptional redemptions considered in 2011 and 2012, and on December 19, 2012, the board of directors made a determination to suspend all redemptions until further notice.
 
During the quarter ended December 31, 2012, we redeemed 219,949 shares, which represents a pro rata portion of the 1,179 exceptional redemption requests received as of the November 30, 2012 redemption date.  The price of the shares redeemed during the quarter was $4.64 per share.  Requests to redeem a total of 2,978,664 shares of common stock for the period were received.  Because the total shares requested for redemption exceeded the limit set by our board for the period, we fulfilled the requests pro rata, and accordingly requests to redeem 2,758,715 shares were not fulfilled.  We have not kept a record of ordinary redemption requests received since March 2009 and have not kept, and will not keep going forward, a record of redemption requests received since the December 2012 suspension of redemptions.  If the board of directors determines at a later time that circumstances permit the share redemption program to resume, we will communicate the pertinent information regarding the share redemption program to all stockholders at that time.  Cash amounts paid to stockholders for redemption requests during the year ended December 31, 2012 were approximately $4.1 million for redemption of 879,877 shares and were funded from cash on hand.  Our board maintains its right to reinstate the share redemption program, subject to the limits set forth in the program, if it deems it to be in the best interest of the Company and its stockholders.  Our board also reserves the right in its sole discretion at any time and from time to time to (1) reject any request for redemption; (2) change the purchase price for redemptions; (3) limit the funds to be used for redemptions or otherwise change the limitations on redemption; or (4) amend, suspend (in whole or in part) or terminate the program.

Distributions

Distributions are authorized at the discretion of our board of directors based on its analysis of our forthcoming cash needs, earnings, cash flow, anticipated cash flow, capital expenditure requirements, cash on hand, general financial condition and other factors that our board deems relevant. The board’s decisions are also influenced, in substantial part, by the requirements necessary to maintain our REIT status. From May 2010 to November 2012 the declared distribution rate was 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 2.5% based on the December 2012 estimated valuation of $4.01 per share. On December 19, 2012, the board of directors approved the suspension of monthly distribution payments to stockholders. Given the costs resulting from our recent leasing efforts, the anticipated cost of increasing our occupancy and the upcoming refinancing of our One Financial Place property in Chicago, Illinois, that will likely require additional equity, the board of directors believed it was prudent to preserve capital and protect the Company’s financial position by eliminating distributions.
 
The total distributions paid to common stockholders for the years ended December 31, 2012 and 2011 were approximately $29.8 million and $29.6 million, respectively.  Of the distributions paid to common stockholders for the years ended December 31, 2012 and 2011, approximately $13.1 million and $13.3 million, respectively, were reinvested in shares of our common stock pursuant to our DRP.  We thus used net cash of approximately $16.7 million and $16.3 million to fund the distributions for these periods.  For the years ended December 31, 2012 and 2011, cash provided by operating activities was approximately $48.5 million and $2.4 million, respectively.  For the year ended December 31, 2012, cash flows provided by operating activities exceeded net cash distributions paid to common stockholders by approximately $31.8 million.  For the year ended December 31, 2011 net cash distributions paid to common stockholders exceeded cash flows provided by operating activities by approximately $13.9 million.

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The following are the distributions paid and declared to our common stockholders, and the net loss, FFO, and MFFO attributable to common stockholders during the years ended December 31, 2012 and 2011 (amounts in thousands, except per share amounts):
 
 
Distributions Paid to Common Stockholders
 
Distributions
Declared
to Common Stockholders per Share (1)
 
Total
Distributions
Declared to Common Stockholders
 
Net Loss
attributable to Common Stockholders
 
FFO attributable to Common Stockholders (2)
 
MFFO
attributable to Common Stockholders (2)