10-Q 1 a10-17526_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2010

 

Commission File Number: 000-51961

 

Behringer Harvard Opportunity REIT I, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland

 

20-1862323

(State or other Jurisdiction of Incorporation or
Organization)

 

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

 

15601 Dallas Parkway, Suite 600, Addison, Texas 75001

(Address of Principal Executive Offices) (ZIP Code)

 

Registrant’s Telephone Number, Including Area Code:  (866) 655-3600

 

None

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

 

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

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of October 29, 2010, the Registrant had 56,264,133 shares of common stock outstanding.

 

 

 



Table of Contents

 

BEHRINGER HARVARD OPPORTUNITY REIT I, INC.

FORM 10-Q

Quarter Ended September 30, 2010

 

 

 

Page

 

 

 

PART I

 

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009

3

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2010 and 2009

5

 

 

 

 

Consolidated Statements of Equity for the Nine Months Ended September 30, 2010 and 2009

6

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

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

34

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

52

 

 

 

Item 4.

Controls and Procedures

52

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

53

 

 

 

Item 1A.

Risk Factors

53

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

Item 3.

Defaults Upon Senior Securities

54

 

 

 

Item 4.

(Removed and Reserved)

54

 

 

 

Item 5.

Other Information

54

 

 

 

Item 6.

Exhibits

54

 

 

 

Signature

 

55

 

2



Table of Contents

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Behringer Harvard Opportunity REIT I, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2010 (1)

 

2009 (1)

 

Assets

 

 

 

 

 

Real estate

 

 

 

 

 

Land and improvements, net

 

$

84,210

 

$

130,254

 

Buildings and improvements, net

 

335,246

 

408,786

 

Real estate under development

 

37,373

 

20,701

 

Total real estate

 

456,829

 

559,741

 

 

 

 

 

 

 

Condominium inventory

 

61,638

 

86,485

 

Cash and cash equivalents

 

3,531

 

9,511

 

Restricted cash

 

3,118

 

8,585

 

Accounts receivable, net

 

9,264

 

8,169

 

Prepaid expenses and other assets

 

2,996

 

2,138

 

Leasehold interests, net

 

16,167

 

16,406

 

Investments in unconsolidated joint ventures

 

66,938

 

63,552

 

Furniture, fixtures and equipment, net

 

8,319

 

11,836

 

Deferred financing fees, net

 

2,405

 

3,827

 

Notes receivable, net

 

47,403

 

42,557

 

Lease intangibles, net

 

18,279

 

21,228

 

Other intangibles, net

 

7,840

 

8,348

 

Receivables from related parties

 

1,578

 

1,548

 

Total assets

 

$

706,305

 

$

843,931

 

 


(1) As a result of the adoption of Accounting Standards Codification (“ASC”) Topic 810, (“ASC 810”), effective as of January 1, 2010, the Company is required to separately disclose on its consolidated balance sheets the assets of consolidated variable interest entities (“VIEs”) that are owned by the VIEs and non-recourse liabilities of consolidated VIEs.

 

As of December 31, 2009, total assets include $91.4 million related to Alexan Black Mountain and Tanglewood at Voss (“Consolidated VIEs”) of which $25.2 million is included in land and improvements, net; $62 million in buildings and improvements, net; $1 million in cash and cash equivalents; $0.5 million in restricted cash; less than $0.1 million in accounts receivable, net; $2.4 million in furniture, fixtures and equipment, net; and $0.3 million in deferred financing fees, net.

 

As of January 1, 2010, we deconsolidated the assets and liabilities associated with Alexan Black Mountain and Tanglewood at Voss (see Note 8 to the Consolidated Financial Statements).

 

See Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Consolidated Balance Sheets - Continued

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2010 (1)

 

2009 (1)

 

Liabilities and Equity

 

 

 

 

 

Notes payable

 

$

346,997

 

$

429,787

 

Accounts payable

 

3,660

 

1,885

 

Payables to related parties

 

2,939

 

1,790

 

Acquired below-market leases, net

 

10,421

 

12,726

 

Accrued and other liabilities

 

20,334

 

23,322

 

Total liabilities

 

384,351

 

469,510

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

Behringer Harvard Opportunity REIT I, Inc. Equity:

 

 

 

 

 

Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none outstanding

 

 

 

Convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 shares issued and outstanding

 

 

 

Common stock, $.0001 par value per share; 350,000,000 shares authorized, and 56,311,451 55,825,078 shares issued and outstanding at September 30, 2010, and December 31, 2009, respectively

 

6

 

6

 

Additional paid-in capital

 

501,554

 

497,648

 

Accumulated distributions and net loss

 

(180,086

)

(115,496

)

Accumulated other comprehensive loss

 

(3,572

)

(3,412

)

Total Behringer Harvard Opportunity REIT I, Inc. equity

 

317,902

 

378,746

 

Noncontrolling interest

 

4,052

 

(4,325

)

Total equity

 

321,954

 

374,421

 

Total liabilities and equity

 

$

706,305

 

$

843,931

 

 


(1) As a result of the adoption of ASC 810, effective as of January 1, 2010, the Company is required to separately disclose on its consolidated balance sheets the assets of consolidated VIEs that are owned by the VIEs and non-recourse liabilities of consolidated VIEs.

 

As of December 31, 2009, total liabilities include $102 million related to Consolidated VIEs of which $68.5 million is included in notes payable; less than $0.1 million in accounts payable; $32.2 million in payables to related parties; and $1.3 million in accrued and other liabilities.    .

 

As of January 1, 2010, we deconsolidated the assets and liabilities associated with Alexan Black Mountain and Tanglewood at Voss (see Note 8 to the Consolidated Financial Statements).

 

See Notes to Consolidated Financial Statements.

 

4



Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended
 September 30,

 

Nine Months Ended
 September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue

 

$

11,468

 

$

14,400

 

$

34,325

 

$

42,828

 

Hotel revenue

 

1,720

 

1,513

 

3,769

 

3,011

 

Condominium sales

 

664

 

1,964

 

26,228

 

13,893

 

Interest income from notes receivable

 

 

 

6,434

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

13,852

 

17,877

 

70,756

 

59,732

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Property operating expenses

 

4,909

 

6,223

 

14,398

 

18,266

 

Bad debt expense

 

89

 

10,146

 

366

 

10,489

 

Cost of condominium sales

 

773

 

1,983

 

26,710

 

14,003

 

Interest expense

 

3,932

 

4,112

 

10,570

 

11,708

 

Real estate taxes

 

1,588

 

1,609

 

5,174

 

5,871

 

Impairment charge

 

21,033

 

7,109

 

21,033

 

9,841

 

Provision for loan losses

 

 

 

7,136

 

 

Property management fees

 

589

 

553

 

1,587

 

1,615

 

Asset management fees

 

1,448

 

1,336

 

4,450

 

4,014

 

General and administrative

 

1,605

 

1,406

 

4,206

 

4,389

 

Depreciation and amortization

 

5,588

 

6,274

 

16,576

 

19,470

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

41,554

 

40,751

 

112,206

 

99,666

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

20

 

40

 

89

 

119

 

Other income (expense), net

 

(72

)

 

(31

)

 

Loss on troubled debt restructuring

 

(5,036

)

 

(5,036

)

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before income taxes and equity in losses of unconsolidated joint ventures

 

(32,790

)

(22,834

)

(46,428

)

(39,815

)

 

 

 

 

 

 

 

 

 

 

Benefit (provision) for income taxes

 

(390

)

(54

)

(211

)

(152

)

Equity in losses of unconsolidated joint ventures

 

(2,491

)

(1,059

)

(4,074

)

(2,640

)

Loss from continuing operations

 

(35,671

)

(23,947

)

(50,713

)

(42,607

)

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

(2,601

)

(293

)

(7,926

)

(1,136

)

 

 

 

 

 

 

 

 

 

 

Gain on sale of real estate

 

3,935

 

 

3,935

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(34,337

)

(24,240

)

(54,704

)

(43,743

)

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest in continuing operations

 

499

 

3,791

 

1,104

 

8,868

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common shareholders

 

$

(33,838

)

$

(20,449

)

$

(53,600

)

$

(34,875

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

56,261

 

55,431

 

56,127

 

55,226

 

 

 

 

 

 

 

 

 

 

 

Loss per share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.55

)

$

(0.36

)

$

(0.81

)

$

(0.61

)

Discontinued operations

 

(0.05

)

(0.01

)

(0.14

)

(0.02

)

Basic and diluted loss per share

 

$

(0.60

)

$

(0.37

)

$

(0.95

)

$

(0.63

)

 

 

 

 

 

 

 

 

 

 

Amounts attributable to common shareholders:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(31,237

)

$

(20,156

)

$

(45,674

)

$

(33,739

)

Discontinued operations

 

(2,601

)

(293

)

(7,926

)

(1,136

)

 

 

$

(33,838

)

$

(20,449

)

$

(53,600

)

$

(34,875

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Net loss

 

$

(34,337

)

$

(24,240

)

$

(54,704

)

$

(43,743

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

2,306

 

(669

)

(1,171

)

879

 

Unrealized gain (loss) on interest rate derivatives

 

(336

)

450

 

383

 

1,033

 

Reclassifications due to hedging activities

 

617

 

24

 

662

 

240

 

Total other comprehensive income (loss)

 

2,587

 

(195

)

(126

)

2,152

 

Comprehensive loss

 

(31,750

)

(24,435

)

(54,830

)

(41,591

)

Comprehensive income (loss) attributable to the noncontrolling interest

 

515

 

2,234

 

1,070

 

8,336

 

Comprehensive loss attributable to common shareholders

 

$

(31,235

)

$

(22,201

)

$

(53,760

)

$

(33,255

)

 

See Notes to Consolidated Financial Statements.

 

5



Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Consolidated Statements of Equity

(in thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Accumulated

 

 

 

 

 

 

 

Convertible Stock

 

Common Stock

 

Additional

 

Distributions

 

Other

 

 

 

 

 

 

 

Number of

 

Par

 

Number of

 

Par

 

Paid-In

 

and

 

Comprehensive

 

Noncontrolling

 

Total

 

 

 

Shares

 

Value

 

Shares

 

Value

 

Capital

 

Net Loss

 

Income (Loss)

 

Interest

 

Equity

 

Balance at January 1, 2009

 

1,000

 

$

 

54,836,985

 

$

5

 

$

489,139

 

$

(66,085

)

$

(5,194

)

$

5,502

 

$

423,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redemption of common stock

 

 

 

 

 

(105,381

)

 

 

(992

)

 

 

 

 

 

 

(992

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared on common stock

 

 

 

 

 

 

 

 

 

 

 

(8,210

)

 

 

 

 

(8,210

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions from non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

215

 

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued pursuant to Distribution Reinvestment Plan, net

 

 

 

 

 

786,813

 

1

 

6,996

 

 

 

 

 

 

 

6,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(34,875

)

 

 

(8,868

)

(43,743

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

465

 

414

 

879

 

Unrealized gains (losses) on interest rate derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

915

 

118

 

1,033

 

Reclassifications due to hedging activities

 

 

 

 

 

 

 

 

 

 

 

 

 

240

 

 

240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,336

)

(41,591

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2009

 

1,000

 

$

 

55,518,417

 

$

6

 

$

495,143

 

$

(109,170

)

$

(3,574

)

$

(2,619

)

$

379,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2010

 

1,000

 

$

 

55,825,078

 

$

6

 

$

497,648

 

$

(115,496

)

$

(3,412

)

$

(4,325

)

$

374,421

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of adoption of accounting standard

 

 

 

 

 

 

 

 

 

 

 

(3,995

)

 

 

9,412

 

5,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redemption of common stock

 

 

 

 

 

(104,557

)

 

 

(839

)

 

 

 

 

 

 

(839

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared on common stock

 

 

 

 

 

 

 

 

 

 

 

(6,995

)

 

 

(43

)

(7,038

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions from noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

78

 

78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued pursuant to Distribution Reinvestment Plan, net

 

 

 

 

 

590,930

 

 

 

4,745

 

 

 

 

 

 

 

4,745

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(53,600

)

 

 

(1,104

)

(54,704

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,206

)

35

 

(1,171

)

Unrealized gains (losses) on interest rate derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

351

 

32

 

383

 

Reclassifications due to hedging activities

 

 

 

 

 

 

 

 

 

 

 

 

 

695

 

(33

)

662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,070

)

(54,830

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2010

 

1,000

 

$

 

56,311,451

 

$

6

 

$

501,554

 

$

(180,086

)

$

(3,572

)

$

4,052

 

$

321,954

 

 

See Notes to Consolidated Financial Statements.

 

6



Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(54,704

)

$

(43,743

)

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

 

 

 

 

 

Depreciation and amortization

 

15,347

 

18,452

 

Amortization of deferred financing fees

 

2,078

 

2,365

 

Loss on troubled debt restructuring

 

5,036

 

 

Loss on debt extinguishment

 

2,253

 

 

Gain on sale of real estate

 

(3,935

)

 

Impairment charge

 

25,263

 

9,841

 

Provision for loan losses

 

7,136

 

 

Bad debt expense

 

366

 

10,620

 

Equity in losses of unconsolidated joint ventures

 

4,074

 

2,640

 

Gain on derivatives

 

(2,432

)

(567

)

Change in accounts receivable

 

(2,383

)

(3,462

)

Change in condominium inventory

 

19,997

 

1,993

 

Change in prepaid expenses and other assets

 

(900

)

1,806

 

Change in accounts payable

 

1,004

 

(834

)

Change in accrued and other liabilities

 

(2,790

)

3,700

 

Change in payables to related parties

 

1,157

 

2,098

 

Addition of lease intangibles

 

(1,447

)

(1,402

)

Cash provided by operating activities

 

15,120

 

3,507

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sale of real estate

 

2,770

 

 

Investment in unconsolidated joint ventures

 

(2,850

)

(3,331

)

Capital expenditures for real estate under development

 

(6,990

)

(9,874

)

Capital expenditures for real estate under development of consolidated borrowers

 

 

(583

)

Additions of property and equipment

 

(3,727

)

(7,139

)

Change in restricted cash

 

1,811

 

(2,735

)

Cash assumed from conversion of mezzanine loan to equity

 

407

 

 

Investment in notes receivable

 

(3,841

)

(6,495

)

Proceeds from payments on note receivables

 

600

 

 

Cash used in investing activities

 

(11,820

)

(30,157

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Financing costs

 

(866

)

(480

)

Proceeds from notes payable

 

7,151

 

18,823

 

Proceeds from mortgages of consolidated borrowers

 

 

1,700

 

Deposits received under sales contracts

 

6,025

 

 

Net borrowings on senior secured revolving credit facility

 

7,482

 

15,400

 

Payments on notes payable

 

(26,624

)

(12,226

)

Redemptions of common stock

 

(840

)

(992

)

Distributions

 

(2,250

)

(2,611

)

Contributions from noncontrolling interest holders

 

78

 

2,525

 

Distributions to noncontrolling interest holders

 

(43

)

(254

)

Cash provided by (used in) financing activities

 

(9,887

)

21,885

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

1,618

 

(1,354

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(4,969

)

(6,119

)

Cash and cash equivalents at beginning of the period

 

9,511

 

25,260

 

 

 

 

 

 

 

Decrease in cash from deconsolidation due to adoption of accounting standard

 

(1,011

)

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

3,531

 

$

19,141

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1.         Business

 

Organization

 

Behringer Harvard Opportunity REIT I, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”) was incorporated in November 2004 as a Maryland corporation and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.

 

We operate commercial real estate or real estate-related assets located in and outside the United States on an opportunistic basis.  In particular, we have focused on acquiring properties with significant possibilities for short-term capital appreciation, such as those requiring development, redevelopment, or repositioning, or those located in markets and submarkets with higher volatility, lower barriers to entry, and high growth potential.  We have acquired a wide variety of properties, including office, industrial, retail, hospitality, recreation and leisure, multifamily, and other properties.  We have purchased existing and newly constructed properties and properties under development or construction, including multifamily properties.  We have also originated two mezzanine loans related to two multifamily properties.  We completed our first property acquisition in March 2006, and, as of September 30, 2010, we wholly owned ten properties and consolidated six properties through investments in joint ventures.  In addition, we are the mezzanine lender for one multifamily property.  We also have noncontrolling, unconsolidated ownership interests in four properties and one investment in a joint venture consisting of 22 properties that are accounted for using the equity method.

 

Substantially all of our business is conducted through Behringer Harvard Opportunity OP I, LP, a Texas limited partnership organized in November 2004 (“Behringer Harvard OP I”), or subsidiaries thereof.  Our wholly owned subsidiary, BHO, Inc., a Delaware corporation, owns less than a 0.1% interest in Behringer Harvard OP I as its sole general partner.  The remaining interest of Behringer Harvard OP I is held as a limited partnership interest by BHO Business Trust, a Maryland business trust, which is our wholly owned subsidiary.

 

We are externally managed and advised by Behringer Harvard Opportunity Advisors I, LLC (“Behringer Opportunity Advisors I”), a Texas limited liability company formed in June 2007.  Behringer Opportunity Advisors I is responsible for managing our day-to-day affairs and for identifying and making acquisitions and investments on our behalf.

 

Our office is located at 15601 Dallas Parkway, Suite 600, Addison, Texas 75001, and our toll-free telephone number is (866) 655-3600.  The name Behringer Harvard is the property of Behringer Harvard Holdings, LLC (“Behringer Harvard Holdings”) and is used by permission.

 

2.         Interim Unaudited Financial Information

 

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission (“SEC”) on March 19, 2010.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in this report on Form 10-Q pursuant to the rules and regulations of the SEC.

 

The results for the interim periods shown in this report are not necessarily indicative of future financial results.  The accompanying consolidated balance sheet and consolidated statement of equity as of September 30, 2010, the consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2010 and 2009, and the consolidated statements of cash flows and equity for the nine months ended September 30, 2010 and 2009 have not been audited by our independent registered public accounting firm.  In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to fairly present our consolidated financial position as of September 30, 2010 and our consolidated results of operations, equity, and cash flows for the periods ended September 30, 2010 and 2009.  Such adjustments are of a normal recurring nature.

 

3.         Summary of Significant Accounting Policies

 

Use of Estimates in the Preparation of Financial Statements

 

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

 

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Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

depreciation and amortization, allowance for doubtful accounts, and allowance for loan losses.  Actual results could differ from those estimates.

 

Principles of Consolidation and Basis of Presentation

 

Our consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control.  All inter-company transactions, balances, and profits have been eliminated in consolidation.  Interests in entities acquired will be evaluated based on applicable GAAP, which includes the requirement to consolidate entities deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary.  If the interest in the entity is determined not to be a VIE, then the entities will be evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.   In the Notes to Consolidated Financial Statements, except for per share amounts, all dollar and share amounts in tabulation are in thousands of dollars and shares, respectively, unless otherwise noted.

 

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

 

To conform to the current year presentation, which presents advertising expense as a component of property operating expense on our consolidated statements of operations and comprehensive income, we reclassified from advertising expense to property operating expense $0.2 million and $0.6 million for the three and nine months ended September 30, 2009, respectively.

 

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

 

Real Estate

 

Upon the acquisition of real estate properties, we recognize the assets acquired, the liabilities assumed, and any noncontrolling interest as of the acquisition date, measured at their fair values.  The acquisition date is the date on which we obtain control of the real estate property.  These assets acquired and liabilities assumed may consist of buildings, any assumed debt, identified intangible assets and asset retirement obligations.  Identified intangible assets generally consist of the above-market and below-market leases, in-place leases, in-place tenant improvements and tenant relationships.  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 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.

 

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.  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.

 

The fair value of any tangible assets acquired, consisting of land, land improvements, buildings, building improvements, tenant improvements, and furniture, fixtures and equipment, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets.  Land values are derived from appraisals and building values are calculated as replacement cost less depreciation or management’s estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods.  Furniture, fixtures, and equipment values are determined based on current reproduction or replacement cost less depreciation and other estimated allowances based on physical, functional, or economic factors.  The values of the buildings are depreciated over their respective estimated useful lives ranging from 25 years for commercial office property to 39 years for hotel/mixed-use property using the straight-line method.  Building improvements are depreciated over their estimated useful lives ranging from 7 to 25 years.  Tenant improvements are depreciated over the term of the respective leases.  Land improvements are depreciated over the

 

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Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

estimated useful life of 15 years, and furniture, fixtures, and equipment are depreciated over estimated useful lives ranging from five to seven years using the straight-line method.  Our leasehold interest is depreciated over its remaining contractual life, or approximately 99 years.

 

We determine the value of above-market and below-market in-place 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 fixed rate renewal options 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 for acquired properties is further allocated to in-place lease values 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 of in-place leases acquired and tenant relationships is determined by applying a fair value model.  The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease-up periods for the respective spaces considering current market conditions.  In estimating fair value of in-place leases, we consider items such as real estate taxes, insurance and other operating expenses as well as lost rental revenue during the expected lease-up period and carrying costs that would have otherwise been incurred had the leases not been in place, including tenant improvements and commissions.  The estimates of the fair value of tenant relationships also include costs to execute similar leases including leasing commissions, legal costs, 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 acquired in the future to expense over the term of the respective leases.  The value of tenant relationship intangibles is amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the in-place lease value and tenant relationship intangibles would be charged to expense.  As of September 30, 2010, the estimated remaining useful lives for acquired lease intangibles range from less than one year to approximately ten years.

 

Other intangible assets include the value of identified hotel trade names and in-place property tax abatements.  These fair values are based on management’s estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods.  The value of the trade names is amortized over its respective estimated useful life of 20 years using the straight-line method and the value of the in-place property tax abatement is amortized over its estimated term of ten years using the straight-line method.

 

Anticipated amortization expense associated with the acquired lease intangibles and acquired other intangible assets for each of the following five years as of September 30, 2010 is as follows:

 

 

 

Lease / Other
Intangibles

 

October 1, 2010 - December 31, 2010

 

$

313

 

2011

 

1,117

 

2012

 

848

 

2013

 

679

 

2014

 

705

 

 

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Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

 

 

 

 

 

 

 

 

Acquired

 

 

 

 

 

 

 

Buildings and

 

Land and

 

Lease

 

Below-Market

 

Leasehold

 

Other

 

As of September 30, 2010

 

Improvements

 

Improvements

 

Intangibles

 

Leases

 

Interest

 

Intangibles

 

Cost

 

$

375,407

 

$

84,688

 

$

32,698

 

$

(20,648

)

$

16,861

 

$

10,439

 

Less: depreciation and amortization

 

(40,161

)

(478

)

(14,419

)

10,227

 

(694

)

(2,599

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

$

335,246

 

$

84,210

 

$

18,279

 

$

(10,421

)

$

16,167

 

$

7,840

 

 

 

 

 

 

 

 

 

 

Acquired

 

 

 

 

 

 

 

Buildings and

 

Land and

 

Lease

 

Below-Market

 

Leasehold

 

Other

 

As of December 31, 2009

 

Improvements

 

Improvements

 

Intangibles

 

Leases

 

Interest

 

Intangibles

 

Cost

 

$

448,121

 

$

130,786

 

$

34,151

 

$

(21,392

)

$

16,981

 

$

10,439

 

Less: depreciation and amortization

 

(39,335

)

(532

)

(12,923

)

8,666

 

(575

)

(2,091

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

$

408,786

 

$

130,254

 

$

21,228

 

$

(12,726

)

$

16,406

 

$

8,348

 

 

Condominium Inventory

 

Condominium inventory is stated at the lower of cost or fair market value.  In addition to land acquisition costs, land development costs, and construction costs, costs include interest and real estate taxes, which are capitalized during the period beginning with the commencement of development and ending with the completion of construction.  At September 30, 2010, condominium inventory consisted of $29.8 million of finished units and $31.8 million of work in progress.  As of December 31, 2009, condominium inventory consisted of $31.5 million of finished units and $55 million of work in progress.

 

For condominium inventory, at each reporting date, management compares the estimated fair value less costs to sell to the carrying value.  An adjustment is recorded to the extent that the fair value less costs to sell is less than the carrying value.  We determine the estimated fair value of condominiums based on comparable sales in the normal course of business under existing and anticipated market conditions.  This evaluation takes into consideration estimated future selling prices, costs incurred to date, estimated additional future costs, and management’s plans for the property.

 

The nationwide downturn in the housing and related condominium market that began during 2007 and has continued through 2010 has resulted in lower than expected sales volume and reduced selling prices, among other effects.  As a result of our evaluations, we recognized a non-cash charge of $4.8 million during the nine months ended September 30, 2010 to reduce the carrying value of condominiums at The Private Residences — Chase Park Plaza, which is classified as an impairment charge in the accompanying consolidated statement of operations.  There were no impairment charges related to our condominium inventory for the nine months ended September 30, 2009.  In the event that market conditions continue to decline in the future or the current difficult market conditions extend beyond our expectations, additional adjustments may be necessary in the future.

 

Cash and Cash Equivalents

 

We consider investments in highly-liquid money market funds or investments with original maturities of three months or less to be cash equivalents.

 

Restricted Cash

 

As required by our lenders, restricted cash is held in escrow accounts for real estate taxes and other reserves for our consolidated properties.

 

Accounts Receivable

 

Accounts receivable primarily consist of straight-line rental revenue receivables of $6.8 million and $5.6 million as of September 30, 2010 and December 31, 2009, respectively, and receivables from our hotel operators and tenants related to our other consolidated properties of $3.1 million and $2.9 million as of September 30, 2010 and December 31, 2009, respectively.  The allowance for doubtful accounts was $0.6 million and $0.3 million as of September 30, 2010 and December 31, 2009, respectively.

 

Prepaid Expenses and Other Assets

 

Prepaid expenses and other assets include prepaid directors’ and officers’ insurance, prepaid advertising, the fair value of certain derivative instruments, as well as inventory, prepaid insurance, and real estate taxes of our consolidated

 

11



Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

properties.  Inventory consists of food, beverages, linens, glassware, china, and silverware and is carried at the lower of cost or market value.

 

Furniture, Fixtures, and Equipment

 

Furniture, fixtures, and equipment are recorded at cost and are depreciated using the straight-line method over their estimated useful lives of five to seven years.  Maintenance and repairs are charged to operations as incurred while renewals or improvements to such assets are capitalized.  Accumulated depreciation associated with our furniture, fixtures, and equipment was $7.3 million and $6.1 million as of September 30, 2010 and December 31, 2009, respectively.

 

Investment Impairment

 

For real estate we consolidate, 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 operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset.  In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value.  We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist.  While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

 

During the third quarter of 2010, we evaluated certain real estate properties for impairment as a result of changes in expected holding periods.   Accordingly, we recognized an impairment charge of $1.8 million related to our Regency Center property for the nine months ended September 30, 2010.  As a result of general weakness in market rental rates and vacancies at our Crossroads property, we recognized an $8.1 million impairment charge for the nine months ended September 30, 2010.

 

During the first quarter of 2010, we evaluated Ferncroft Corporate Center for impairment, and, accordingly, recognized a $4.2 million impairment charge for the three months ended March 31, 2010, which is included in loss from discontinued operations on the accompanying statement of operations and other comprehensive loss for the nine months ended September 30, 2010.  On August 17, 2010, pursuant to a deed-in-lieu of foreclosure, we transferred ownership of Ferncroft Corporate Center to the lender associated with the property and, accordingly, recognized a loss on the extinguishment of debt of $2.3 million, which is included in the loss from discontinued operations in the accompanying consolidated statement of operations and other comprehensive loss for the three and nine months ended September 30, 2010.  See Note 18.

 

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

 

Due to uncertainties surrounding the timing of development activities at Royal Island, we recognized an impairment charge related to our unconsolidated 30.38% investment in Royal Island totaling $6.3 million for the three and nine months ended September 30, 2010.

 

We also evaluate our investments in notes receivable as of each reporting date.  If we believe that it is probable we will not collect all principal and interest in accordance with the terms of the loans, we consider the loan impaired.  When evaluating loans for potential impairment, we compare the carrying amount of the loans to the present value of future cash flows discounted at the loan’s effective interest rate, or, if a loan is collateral dependent, to the estimated fair value of the related collateral net of any senior loans.  For impaired loans, a provision is made for loan losses to adjust the reserve for loan losses.  The reserve for loan losses is a valuation allowance that reflects our current estimate of loan losses as of the balance sheet date.  The reserve is adjusted through the provision for loan losses account on our consolidated statement of operations.

 

In the first quarter of 2010, we recorded a reserve for loan losses totaling $11.1 million related to our mezzanine loan associated with Alexan Black Mountain, including $7.1 million recognized as a provision to loan losses on our consolidated statement of operations and other comprehensive loss for the nine months ended September 30, 2010, and the

 

12



Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

remaining $4 million as a cumulative effect adjustment to the opening balance of accumulated distributions and net loss in our consolidated statement of equity for the nine months ended September 30, 2010.

 

In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, and the projected sales price of each of the properties.  A change in these estimates and assumptions could result in understating or overstating the book value of our investments, which could be material to our financial statements.  The value of our properties held for development depends on market conditions, including estimates of the project start date as well as estimates of future demand for the property type under development.  We have analyzed trends and other information related to each potential development and incorporated this information as well as our current outlook into the assumptions we use in our impairment analyses.  Due to the judgment and assumptions applied in the estimation process with respect to impairments, including the fact that limited market information regarding the value of comparable land exists at this time, it is possible actual results could differ substantially from those estimated.

 

Other than the impairment charges discussed above, we believe the carrying value of our operating real estate assets, properties under development, investments in unconsolidated joint ventures, and notes receivable is currently recoverable.  However, if market conditions worsen beyond our current expectations, or if our assumptions regarding expected future cash flows from the use and eventual disposition of our assets decrease or our expected hold periods decrease, or if changes in our development strategy significantly affect any key assumptions used in our fair value calculations, we may need to take additional charges in future periods for impairments related to existing assets.  Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.

 

Deferred Financing Fees

 

Deferred financing fees are recorded at cost and are amortized to interest income for notes receivable and interest expense for notes payable using a straight-line method that approximates the effective interest method over the life of the related debt.  Accumulated amortization of deferred financing fees was $7.7 million and $7.4 million as of September 30, 2010 and December 31, 2009, respectively.

 

Derivative Financial Instruments

 

Our objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate movements or other identified risks and to minimize the variability caused by foreign currency translation risk related to our net investment in foreign real estate.  To accomplish these objectives, we use various types of derivative instruments to manage fluctuations in cash flows resulting from interest rate risk attributable to changes in the benchmark interest rate of LIBOR.  These instruments include LIBOR-based interest rate swaps and caps.  For our net investments in foreign real estate, we may use foreign exchange put/call options to eliminate the impact of foreign currency exchange movements on our financial position.

 

We measure our derivative instruments and hedging activities at fair value and record them as an asset or liability, depending on our rights or obligations under the applicable derivative contract.  For derivatives designated as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged items are recorded in earnings.  Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.  For derivatives designated as cash flow hedges, the effective portions of changes in fair value of the derivatives are reported in other comprehensive income (loss) and are subsequently reclassified into earnings when the hedged item affects earnings.  For derivatives designated as net investment hedges, changes in fair value are reported in other comprehensive income (loss) as part of the foreign currency translation gain or loss.  Changes in fair value of derivative instruments not designated as hedges and ineffective portions of hedges are recognized in earnings in the affected period.  We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction.

 

As of September 30, 2010, we do not have any derivatives designated as fair value hedges, nor are derivatives being used for trading or speculative purposes.  See Notes 5 and 13 for further information regarding our derivative financial instruments.

 

Foreign Currency Translation

 

For our international investments where the functional currency is other than the US dollar, assets and liabilities are translated using period-end exchange rates, while the statement of operations amounts are translated using the average exchange rates for the respective period.  Differences arising from the translation of assets and liabilities in comparison with

 

13



Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

the translation of the previous periods or from initial recognition during the period are included as a separate component of accumulated other comprehensive income (loss).

 

The British pound is the functional currency for our Becket House investment operating in London, England and the Euro is the functional currency for the operations of our Central Europe Joint Venture.  We also maintain Euro-denominated bank accounts that are translated into U.S. dollars at the current exchange rate at each reporting period.  The resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss) in our consolidated statements of equity.  The foreign currency translation adjustment was a loss of $1.2 million and a gain of $0.9 million for the nine months ended September 30, 2010 and 2009, respectively.

 

Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) (“AOCI”), which is reported in the accompanying consolidated statement of equity, consists of gains and losses affecting equity that are excluded from net income (loss) under GAAP.  The components of AOCI consist of foreign currency translation gains and losses and unrealized gains and losses on derivatives designated as hedges.

 

Revenue Recognition

 

We recognize rental income generated from leases on real estate assets on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any.  Straight-line rental revenue of $2 million and $1.6 million was recognized in rental revenues for the nine months ended September 30, 2010 and 2009, respectively.  Hotel revenue is derived from the operations of The Lodge & Spa at Cordillera and consists of guest room, food and beverage, and other revenue, and is recognized as the services are rendered.

 

Revenues from the sales of condominiums are recognized when sales are closed and title passes to the new owner, the new owner’s initial and continuing investment is adequate to demonstrate a commitment to pay for the condominium, the new owner’s receivable is not subject to future subordination, and we do not have a substantial continuing involvement with the new condominium.  Amounts received prior to closing on sales of condominiums are recorded as deposits in our financial statements.

 

We recognize interest income from notes receivable on an accrual basis over the life of the loan using the interest method.  Direct loan origination fees and origination or acquisition costs, as well as acquisition premiums or discounts, are amortized over the life of the loan as an adjustment to interest income.  We will stop accruing interest on loans when there is concern as to the ultimate collection of principal or interest of the loan.  In the event that we stop accruing interest on a loan, we will generally not recognize subsequent interest income until cash is received or we make the decision to restart interest accrual on the loan.

 

Income Taxes

 

We elected to be taxed, and qualified, as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with the year ended December 31, 2006.  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.  To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subject to federal income tax at the corporate level except for the operations of our wholly-owned taxable REIT subsidiaries.  We have three taxable REIT subsidiaries that own and/or provide management and development services to certain of our investments in real estate and real estate under development.

 

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

 

On May 18, 2006, the State of Texas enacted a law which replaced the existing state franchise tax with a “margin tax” effective January 1, 2007.  For both of the nine months ended September 30, 2010 and 2009, we recognized a current and deferred tax provision related to the Texas margin tax of approximately $0.2 million.

 

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Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Stock-Based Compensation

 

We have a stock-based incentive award plan for our directors and consultants and for employees, directors, and consultants of our affiliates.  Awards are granted at the fair market value on the date of grant with fair value estimated using the Black-Scholes-Merton option valuation model, which incorporates assumptions surrounding volatility, dividend yield, the risk-free interest rate, expected life, and the exercise price as compared to the underlying stock price on the grant date.  The tax benefits associated with these share-based payments are classified as financing activities in the consolidated statement of cash flows.  For the nine months ended September 30, 2010 and 2009, we had no significant compensation cost related to our incentive award plan.

 

Concentration of Credit Risk

 

At September 30, 2010 and December 31, 2009, we had cash and cash equivalents deposited in certain financial institutions in excess of federally insured levels.  We have diversified our cash and cash equivalents between several banking institutions in an attempt to minimize exposure to any one of these entities.  We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents or restricted cash.

 

Noncontrolling Interest

 

Noncontrolling interest represents the noncontrolling ownership interest’s proportionate share of the equity in our consolidated real estate investments, including the less than 1%, 5%, 6%, 9%, and 20% unaffiliated partners’ share of the equity in Rio Salado Business Center, Chase Park Plaza, The Lodge & Spa at Cordillera, Frisco Square, and Becket House, respectively.  Income and losses are allocated to noncontrolling interest holders based on their ownership percentage.

 

Reportable Segments

 

We have determined that we have one reportable segment, with activities related to the ownership, development and management of real estate assets.  Our income producing properties generated 100% of our consolidated revenues for the nine months ended September 30, 2010 and 2009.  Our chief operating decision maker evaluates operating performance on an individual property level.  Therefore, our properties are aggregated into one reportable segment.

 

Earnings per Share

 

Earnings (loss) per share is calculated based on the weighted average number of shares outstanding during each period.  As of each period ended September 30, 2010 and 2009, we had options to purchase 69,583 shares of common stock outstanding at a weighted average exercise price of $8.99.  These options are excluded from the calculation of earnings per share for the nine months ended September 30, 2010 and 2009 because the effect would be anti-dilutive.

 

Inflation

 

The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate.  However, we include provisions in the majority of our tenant leases that would protect us from the impact of inflation.  These provisions include reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance.

 

4.         New Accounting Pronouncements

 

In January 2010, the FASB updated the disclosure requirements for fair value measurements.  The updated guidance requires companies to disclose separately the investments that transfer in and out of Levels 1 and 2 and the reasons for those transfers.  Additionally, in the reconciliation for fair value measurements using significant observable inputs (Level 3), companies should present separately information about purchases, sales, issuances and settlements.  We adopted the guidance on January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements n the Level 3 reconciliation, which are effective for fiscal years beginning after December 15, 2010.  We will adopt the remaining guidance on January 1, 2011.  The adoption of the required guidance did not have a material impact on our financial statements or disclosures.  We do not expect that the adoption of the remaining guidance will have an impact on our financial statements or disclosures.

 

In July 2010, the FASB updated accounting guidance related to receivables which requires additional disclosures about the credit quality of a company’s financing receivables and allowances for credit losses.  These disclosures will provide financial statement users with additional information about the nature of credit risks inherent in our financing receivables, how we analyze and assess credit risk in determining our allowance for credit losses, and the reasons for any

 

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Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

changes we may make in our allowance for credit losses. This update is generally effective for interim and annual reporting periods ending on or after December 15, 2010; however, certain aspects of the update pertaining to activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  We expect that the adoption of this update will primarily result in increased notes receivable disclosures, but will not have any other impact on our financial statements.

 

5.         Assets and Liabilities Measured at Fair Value

 

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

 

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

 

Recurring Fair Value Measurements

 

Derivative financial instruments

 

Currently, we use interest rate swaps and caps to manage our interest rate risk and foreign exchange put/call options to manage the impact of foreign currency movements on our financial position for our net investments in foreign real estate joint ventures.  The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative.  This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, implied volatilities, and foreign currency exchange rates.

 

We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s performance risk in the fair value measurements.  Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties.  However, as of September 30, 2010 and December 31, 2009, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.  As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

 

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Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

The following fair value hierarchy table presents information about our assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009:

 

September 30, 2010

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

19

 

$

 

$

19

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

606

 

$

 

$

606

 

 

December 31, 2009

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

204

 

$

 

$

204

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

3,081

 

$

 

$

3,081

 

 

Derivative financial instruments classified as assets are included in other assets on the balance sheet while derivative financial instruments classified as liabilities are included in other liabilities.  See Notes 3 and 13 for further information regarding our use of hedging instruments.

 

Nonrecurring Fair Value Measurements

 

Impairments

 

For the nine months ended September 30, 2010, we recorded impairment charges totaling $14.7 million related to our Regency Center, Crossroads, and The Private Residences — Chase Park Plaza properties, and a $6.3 million impairment charge to our 30.38% unconsolidated interest in Royal Island.  In addition, we recognized a provision to the reserve for loan losses of $7.1 million related to our Alexan Black Mountain note receivable for the nine months ended September 30, 2010.

 

The inputs used to calculate the fair value of these assets included projected cash flows and a risk-adjusted rate of return that we estimated would be used by a market participant in valuing these assets.  This fair value estimate is considered Level 3 of the fair value hierarchy.

 

The following fair value hierarchy table presents information about our assets measured at fair value on a nonrecurring basis during the nine months ended September 30, 2010:

 

September 30, 2010

 

Level 1

 

Level 2

 

Level 3

 

Total Fair Value

 

Gain /
(Loss)(1)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Note receivable, net

 

$

 

$

 

$

2,540

 

$

2,540

 

$

(7,136

)

Land

 

 

 

 

 

11,625

 

11,625

 

(2,805

)

Buildings and improvements, net

 

 

 

29,978

 

29,978

 

(6,772

)

Real estate intangibles, net

 

 

 

 

 

2,210

 

2,210

 

(339

)

Condominium inventory

 

 

 

44,717

 

44,717

 

(4,775

)

Investment in unconsolidated joint venture

 

 

 

 

 

15,392

 

15,392

 

(6,342

)

Total

 

$

 

$

 

$

106,462

 

$

106,462

 

$

(28,169

)

 


(1)  Excludes $4.2 million in impairment loss of our discontinued operations that was disposed of as of September 30, 2010.

 

6.             Fair Value Disclosure of Financial Instruments

 

We determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies.  However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

As of September 30, 2010 and December 31, 2009, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses, other liabilities, payables/receivables

 

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Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

from related parties, and distributions payable were at amounts that reasonably approximated their fair value based on their highly-liquid nature and/or short-term maturities and the carrying value of notes receivable reasonably approximated fair value based on expected interest rates for notes to similar borrowers with similar terms and remaining maturities.

 

The notes payable totaling $347 million and $429.8 million as of September 30, 2010 and December 31, 2009, respectively, have a fair value of approximately $351.2 million and $435.3 million, respectively, based upon interest rates for mortgages with similar terms and remaining maturities that management believes we could obtain.  Interest rate swaps and caps along with our foreign currency exchange forward contract are recorded at their respective fair values in prepaid expenses and other assets for those derivative instruments that have an asset balance and in other liabilities for those derivative instruments that are liabilities.  See Note 5.

 

The fair value estimates presented herein are based on information available to our management as of September 30, 2010 and December 31, 2009.  Although our management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein.

 

7.             Real Estate Investments

 

As of September 30, 2010, we wholly owned ten properties and consolidated six properties through investments in joint ventures.  We are the mezzanine lender for one multifamily property which, prior to January 1, 2010, we consolidated as the primary beneficiary of the VIE (see Note 8).  In addition, we have noncontrolling, unconsolidated ownership interests in four properties and one investment in a joint venture consisting of 22 properties that are accounted for using the equity method.  Capital contributions, distributions, and profits and losses of these properties are allocated in accordance with the terms of the applicable partnership agreement.

 

Santa Clara Tech Center

 

The Santa Clara Tech Center property consists of three buildings:  the 700, 750, and 800 buildings.  The mortgage and mezzanine loans (collectively, the “Original Loans”) associated with the Santa Clara Tech Center matured on June 9, 2010.  As of the maturity date, due to ongoing negotiations with an unaffiliated third party (the “Santa Clara JV Partner”) to create the joint ventures discussed below, we had not yet reached an agreement with the lender to extend the terms of the Original Loans and accordingly, we were granted a forbearance by the lender through August 5, 2010.

 

On August 5, 2010, we reached agreements to sell a 50% interest in the Santa Clara Tech Center to the Santa Clara JV Partner, to create two joint ventures with the Santa Clara JV Partner to own the Santa Clara Tech Center, and to sever and replace the Original Loans with new loans from the Santa Clara lender as describe below.

 

Further, on August 5, 2010, we entered into the following arrangements:

 

·                  We entered into an agreement with the Santa Clara JV Partner to sell a 50% interest in the Santa Clara Tech Center property for $8.8 million in cash;

 

·                  We entered into two joint ventures with the Santa Clara JV Partner so that one joint venture holds the 700 and 750 buildings (the “700/750 Joint Venture”) separately from the joint venture that holds the 800 building (the “800 Joint Venture”).  We contributed our remaining 50% interest in the Santa Clara Tech Center along with an aggregate $8.8 million of cash in exchange for 50% interests in each of the two new joint ventures.  The Santa Clara JV Partner also contributed an aggregate $8.8 million of cash and their 50% interest in the Santa Clara Tech Center in exchange for their respective 50% interests.   In addition, the Santa Clara JV Partner acquired preferred equity interests in the joint ventures for an aggregate $7.5 million in cash, which was used to pay down the Original Loans’ outstanding balance discussed below;

 

·                  The agreements associated with the Original Loans were severed and replaced by new loan agreements with the same lender by bifurcating the Original Loans into two new loans (the “Replacement Loans”) such that specific debt is associated with the 700 & 750 buildings separate from debt associated with the 800 building;

 

·                  The new joint ventures paid down the Original Loans’ balance by an aggregate $7 million, such that the balances of the Replacement Loans at inception were an aggregate of $45.5 million; and

 

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Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

·                  The capital contributed to the 700/750 Joint Venture and 800 Joint Venture will be used to construct and develop the vacant space in the 800 building as data center pods.  Accordingly, cash contributions received into the 700/750 Joint Venture were subsequently contributed to the 800 Joint Venture.

 

The 700/750 Joint Venture agreement provides the Santa Clara JV Partner with a put option that could require us to re-acquire the Santa Clara JV Partners’ 50% interest in the 700/750 Joint Venture at a fixed price upon satisfaction of certain conditions.  Under GAAP, the condition of retaining the substantial risk or rewards of ownership such as a put option precludes us from recognizing the sale of the 700 and 750 buildings to the Santa Clara JV Partner.  Accordingly, we will continue to reflect the assets and liabilities of the 700 and 750 buildings in our consolidated balance sheet as if a sale had not occurred.  Further, we have recognized the $6 million cash contribution received from the Santa Clara JV Partner for their respective 50% interest in the 700/750 Joint Venture as a deposit in accrued and other liabilities in our consolidated balance sheet at September 30, 2010 pending termination or cancellation of the put option or until the sale is considered consummated under GAAP.  The 800 Joint Venture agreement does not contain a put option provision.

 

Our interest in the 800 Joint Venture is a noncontrolling, unconsolidated interest, for which we account using the equity method of accounting.  Accordingly, effective August 5, 2010, we deconsolidated the assets and liabilities of the 800 building on our consolidated financial statements.  Further, we recognized a $3.9 million gain on deconsolidation to the equity method, of which $2.8 million relates to the remeasurement of our retained 50% interest to its fair value.

 

Tanglewood at Voss

 

In 2006, we provided secured mezzanine financing totaling $13 million to an unaffiliated third-party entity that owned and developed Tanglewood at Voss (the “Voss Developer”).  The Voss Developer also had a secured construction loan with a third-party lender, with an aggregate principal amount of up to $39.5 million.  Our mezzanine loan to the Voss Developer was subordinate to the senior construction loan.

 

On September 30, 2010, we reached an agreement with the Voss Developer and the third-party lender to obtain 100% fee simple interest in Tanglewood at Voss, including assumption of the senior construction loan, in exchange for the full satisfaction of our mezzanine loan balance plus accrued interest (the “Voss Transaction”).  Following the Voss Transaction, the Voss Developer does not have any continuing involvement with Tanglewood at Voss.  The receipt of Tanglewood at Voss in full satisfaction of our mezzanine loan receivable represents a troubled debt restructuring.  The carrying amount of our mezzanine loan receivable plus accrued interest at the time of the Voss Transaction was $18.3 million.

 

The valuation basis for the troubled debt restructuring of our mezzanine loan receivable is based on the fair value of Tanglewood at Voss, which secures the senior construction loan, less the fair value of the senior construction loan.  Accordingly, the fair value of consideration transferred in the Voss Transaction was $13.3 million resulting in a loss on troubled debt restructuring of $5 million in the accompanying consolidated statement of operations and other comprehensive loss for the three and nine months ended September 30, 2010.

 

In accordance with GAAP, we have accounted for the assets and liabilities of Tanglewood at Voss received in full satisfaction of our mezzanine loan receivable as if the assets had been acquired for cash.

 

Due to the timing of the Voss Transaction, Tanglewood at Voss did not contribute any meaningful rental revenue or earnings for the three and nine months ended September 30, 2010.  We had consolidated Tanglewood at Voss as the primary beneficiary of a VIE for the nine months ended September 30, 2009.  Consequently, the historical operations were already reported in revenue, net loss, and net loss per share for the respective period.  Therefore, we only present the following unaudited pro forma summary consolidated information as if the business combination had occurred on January 1, 2010.

 

 

 

Pro Forma for the
Nine Months
Ended
September 30,

 

 

 

2010

 

Revenue

 

$

73,003

 

Net income (loss)

 

$

(55,403

)

Net income (loss) per share

 

$

(0.99

)

 

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Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

These pro forma amounts have been calculated after applying our accounting policies and adjusting the results of Tanglewood at Voss to reflect additional depreciation and amortization that would have been charged assuming the fair value adjustments to the tangible and intangible assets had been applied from January 1, 2010.

 

As a result of obtaining the fee simple interest in Tanglewood at Voss, the identifiable assets acquired and liabilities assumed were measured at fair value.  In determining fair value, we obtained an appraisal and utilized assumptions including estimated cash flows, discount rates, and capitalization rates.  During the nine months ended September 30, 2010, we incurred $0.1 million of acquisition expenses related to the Tanglewood at Voss acquisition.  The following table summarizes the amounts of identified assets acquired and liabilities assumed at the acquisition date.

 

 

 

Tanglewood at
Voss

 

Land

 

$

8,403

 

Land improvements

 

1,006

 

Building

 

41,895

 

Furniture, fixtures and equipment

 

448

 

Lease intangibles, net

 

1,064

 

Acquired below-market leases, net

 

(116

)

Working capital (net)

 

68

 

Debt

 

(39,539

)

 

 

 

 

Total identifiable net assets

 

$

13,229

 

 

We are in the process of finalizing our acquisition allocations, which are subject to change until our information is finalized, no later than twelve months from the acquisition date.

 

Investments in Unconsolidated Joint Ventures

 

The following table presents certain information about our unconsolidated investments as of September 30, 2010 and December 31, 2009:

 

 

 

 

 

Carrying Value of Investment

 

Property Name

 

Ownership
Interest

 

September 30,
2010

 

December 31,
2009

 

Royal Island

 

30.38

%

$

15,392

 

$

22,594

 

GrandMarc at Westberry Place

 

50.00

%

6,485

 

7,348

 

GrandMarc at the Corner

 

50.00

%

6,037

 

6,559

 

Santa Clara 800 Joint Venture

 

50.00

%

15,001

 

 

Central Europe Joint Venture

 

47.27

%

24,023

 

27,051

 

Total

 

 

 

$

66,938

 

$

63,552

 

 

Due to uncertainties surrounding the timing of development activities at Royal Island, we recognized an impairment charge totaling $6.3 million related to our unconsolidated joint venture investment in Royal Island for the three and nine months ended September 30, 2010.

 

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Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Our investments in unconsolidated joint ventures as of September 30, 2010 and December 31, 2009 consisted of our proportionate share of the combined assets and liabilities of our investment properties as follows:

 

 

 

September 30, 2010

 

December 31, 2009

 

Real estate assets, net

 

$

400,930

 

$

382,061

 

Cash and cash equivalents

 

24,511

 

15,628

 

Other assets

 

3,452

 

3,528

 

Total assets

 

$

428,893

 

$

401,217

 

 

 

 

 

 

 

Notes payable

 

$

262,496

 

$

246,176

 

Other liabilities

 

23,149

 

19,846

 

Total liabilities

 

285,645

 

266,022

 

 

 

 

 

 

 

Equity

 

143,248

 

135,195

 

Total liabilities and equity

 

$

428,893

 

$

401,217

 

 

For the three and nine months ended September 30, 2010, we recognized $2.5 million and $4.1 million, respectively, of equity in losses.  Our equity in losses from these investments is our proportionate share of the combined losses of our unconsolidated joint ventures for the three and nine months ended September 30, 2010 and 2009 as follows:

 

 

 

Three Months Ended September 30,

 

NIne Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenue

 

$

5,975

 

$

6,208

 

$

18,386

 

$

17,580

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Operating expenses

 

2,793

 

1,816

 

5,569

 

4,888

 

Property taxes

 

199

 

205

 

610

 

612

 

Total operating expenses

 

2,992

 

2,021

 

6,179

 

5,500

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

2,983

 

4,187

 

12,207

 

12,080

 

 

 

 

 

 

 

 

 

 

 

Non-operating expenses:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

2,430

 

2,508

 

7,138

 

7,413

 

Interest and other, net

 

6,887

 

3,913

 

14,689

 

10,157

 

Total non-operating expenses

 

9,317

 

6,421

 

21,827

 

17,570

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(6,334

)

$

(2,234

)

$

(9,620

)

$

(5,490

)

 

 

 

 

 

 

 

 

 

 

Company’s share of net loss

 

$

(2,491

)

$

(1,059

)

$

(4,074

)

$

(2,640

)

 

8.         Variable Interest Entities

 

GAAP requires the consolidation of VIEs in which an enterprise has a controlling financial interest.  A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

 

Our variable interest in VIEs may be in the form of (1) equity ownership and/or (2) loans provided by us to a VIE, or other partner.  We examine specific criteria and use judgment when determining if we are the primary beneficiary of a VIE.  Factors considered in determining whether we are the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights or voting rights, level of economic disproportionality between us and the other partner(s), and contracts to purchase assets from VIEs.

 

Tanglewood at Voss and Alexan Black Mountain

 

In 2006, we agreed to provide secured mezzanine financing with an aggregate principal amount of up to $22.7 million to unaffiliated third-party entities that own multifamily communities under development, Tanglewood at Voss and Alexan Black Mountain.  These entities also obtained construction loans with third-party lenders, with an aggregate principal amount of up to $68.6 million.  Our mezzanine loans were subordinate to the construction loans.  In addition, we

 

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Table of Contents

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

entered into option agreements allowing us to purchase the ownership interests in Tanglewood at Voss and Alexan Black Mountain after each project’s substantial completion and upon not