10-K 1 behringerreiti_12312014-10k.htm OP I 2014 10-K BehringerReitI_12.31.2014 - 10K

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2014
Commission File Number: 000-51961
Behringer Harvard Opportunity REIT I, Inc.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
 
20-1862323
(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
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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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 (Do not check if a smaller reporting company)    o    Smaller reporting company ý
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 Registrant has adopted an Amended and Restated Policy for Estimation of Common Stock Value pursuant to which it has estimated the per share value of its common stock.  As of November 11, 2013, the board established an estimated per share value of $3.08 based on financial information as of September 30, 2013.  As of November 10, 2014, the board established an estimated per share value of $3.58 based on financial information as of October 31, 2014. For a full description of the methodologies used to estimate the value of the Registrant's common stock as of November 11, 2013 and November 10, 2014, see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Market Information" included in the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 and this Annual Report on Form 10-K, respectively. There were approximately 56,500,472 shares of common stock held by non-affiliates of the Registrant as of June 30, 2014, the last business day of the Registrant's most recently completed second fiscal quarter. As of February 28, 2015, the Registrant had 56,500,472 shares of common stock outstanding.
 



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 Opportunity REIT I, Inc. and our subsidiaries (which may be referred to herein as the "Company," "REIT," "we," "us," or "our"), including our ability to rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, to sell our assets when we believe advantageous to achieve our investment objectives, our anticipated capital expenditures, the amount and timing of anticipated cash distributions to our stockholders, the estimated per share value of our common stock and other matters. Words such as "may," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "would," "could," "should" and variations of these words and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under Item 1A, "Risk Factors" in this Annual Report on Form 10-K and the factors described below:
market and economic challenges experienced by the U.S. and global economies or real estate industry as a whole and the local economic conditions in the markets in which our properties are located;
the availability of cash flow from operating activities for capital expenditures;
conflicts of interest arising out of our relationships with our advisor and its affiliates;
our ability to retain our executive officers and other key personnel of our advisor, our property manager and their affiliates;
our level of debt and the terms and limitations imposed on us by our debt agreements;
the availability of credit generally, and any failure to refinance or extend our debt as it comes due or a failure to satisfy the conditions and requirements of that debt;
the need to invest additional equity in connection with debt financings as a result of reduced asset values and requirements to reduce overall leverage;
future increases in interest rates;
our ability to raise capital in the future by issuing additional equity or debt securities, selling our assets or otherwise;
impairment charges;
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. 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.
Cautionary Note
The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this Annual Report on Form 10-K are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties, or covenants to or with any other parties. Moreover, these representations, warranties, or covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.

2


BEHRINGER HARVARD OPPORTUNITY REIT I, INC.
FORM 10-K
Year Ended December 31, 2014
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I
Item 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 and real estate-related assets located in and outside the United States. With our opportunistic and value-add investment strategy, we have focused generally on acquiring properties with significant possibilities for 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, retail, hospitality, recreation and leisure, multifamily, industrial, and other properties.  We have purchased existing and newly constructed properties and properties under development or construction.  As of December 31, 2014, we wholly owned four properties and consolidated three properties through investments in joint ventures on our consolidated balance sheet. We are the mezzanine lender for one multifamily property. In addition, we have a noncontrolling, unconsolidated ownership interest in a joint venture consisting of 21 properties as of December 31, 2014, that is 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 its subsidiaries. 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 our wholly owned subsidiary, BHO Business Trust, a Maryland business trust. We have entered our disposition phase and are currently considering liquidity options for our stockholders. Therefore, we are not actively seeking to purchase additional properties. We will seek stockholder approval prior to liquidating our entire portfolio. Our investment properties are located in Colorado, Missouri, Nevada, Texas, The Commonwealth of The Bahamas, the Czech Republic, Poland, Hungary, and Slovakia.
We are externally managed and advised by Behringer Harvard Opportunity Advisors I, LLC ("Behringer Harvard Opportunity Advisors I" or the "Advisor"), a Texas limited liability company. Behringer Harvard Opportunity Advisors I is responsible for managing our day-to-day affairs and for identifying and making acquisitions, dispositions and investments on our behalf.
Public Offering of Common Stock; Use of Proceeds
In September 2005, we commenced a public offering (the "Offering") of shares of our common stock pursuant to which we offered 53,270,000 shares at a price of $10 per share in our primary offering and 965,331 shares of common stock at a price of $9.50 per share in our distribution reinvestment plan (the "DRP").
On December 28, 2007, we terminated the primary component of the Offering. We had earlier terminated the DRP on November 16, 2007. Aggregate gross offering proceeds from the Offering totaled approximately $538.7 million and net offering proceeds after selling commissions, dealer manager fees, and organization and offering expenses totaled approximately $481.8 million. We used the net proceeds from the Offering primarily to acquire real estate and real estate-related assets consistent with our investment objectives. As of December 31, 2014, we have invested all of the net offering proceeds.
On November 16, 2007, we commenced a second distribution reinvestment plan offering (the "Second DRP") of up to 6,315,790 shares of common stock at an initial price of $9.50 per share. Shares in the Second DRP were sold at $8.17 from July 26, 2009 through January 14, 2010; at $8.03 from January 15, 2010 through January 13, 2011; and $7.66 from January 14, 2011 through April 15, 2011 as a result of our board of directors announcing estimated per share values pursuant to our amended and restated policy for estimation of common stock value (the "Estimated Valuation Policy") of $8.17, $8.03, and $7.66 on June 22, 2009, January 8, 2010 and January 10, 2011, respectively. We terminated the Second DRP effective April 15, 2011. As of the termination of the Second DRP, we had issued 3,374,198 shares under the Second DRP resulting in gross and net proceeds of $29.8 million. The proceeds raised in the Second DRP were used for general corporate purposes, including, but not limited to, investment in real estate and real estate-related securities, payment of fees and other costs, repayment of debt, and funding for our share redemption program.
As of December 31, 2014, we had issued 56,500,472 shares of our common stock, including 21,739 shares indirectly owned by Behringer Harvard Holdings, LLC ("Behringer"), 940,387 shares issued pursuant to the DRP, 3,374,198 shares issued pursuant to the Second DRP, and redeemed 984,267 shares. In addition, we had 1,000 shares of non-participating, non-voting convertible stock outstanding and no shares of preferred stock issued and outstanding.
Our common stock is not listed on a national exchange.

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Investment Objectives
On November 19, 2012, our board of directors determined to extend our liquidity deadline to June 30, 2020, subject to the ability to further defer this deadline and we can make no assurances as to when we will complete our liquidation.
We have however, entered our disposition phase and are currently considering liquidity options for our stockholders. We are not actively seeking to purchase additional properties. The primary objective of our business plan is to continue to sustain and enhance the property values through additional leasing or capital expenditures, where necessary, while identifying and implementing disposition strategies for the remaining properties in our portfolio. Properties may be sold individually or as a portfolio. There can be no assurance that future dispositions will occur as planned, or if they occur, that they will help us to meet our liquidity demands.  Once we anticipate selling all or substantially all of our assets, we will seek stockholder approval prior to liquidating our entire portfolio.
Our investment policies were designed in order that we could make investments that were consistent with our focus on acquiring properties with significant possibilities for capital appreciation. When making investment decisions, we followed rigorous acquisition criteria and closing conditions and reviewed other required documentation. These criteria were designed to assess and manage investment risks and support our basis for making investment decisions in the best interests of our stockholders.
Our investment objectives were:
to realize growth in the value of our investments to enhance the value received upon our ultimate sale of such investments;
to preserve, protect, and return stockholders' capital contribution through our ultimate sale of our investments;
to grow net cash from operations such that cash is available for distributions to stockholders; and
to provide stockholders with a return of their investment by liquidating and distributing net sales proceeds.
Investment Policies
We have invested in commercial properties, such as office, retail, multifamily, industrial, hospitality, and recreation and leisure properties that were initially identified as opportunistic and value-add investments with significant possibilities for capital appreciation due to their property specific characteristics or their market characteristics. We have disposed of 14 of our original portfolio assets through December 31, 2014. We are in our disposition phase and expect to sell our remaining properties in an orderly manner. Economic or market conditions may cause us to hold our investments for longer periods of time or sell an investment at a lower than anticipated price.
Our real estate investments are held in fee title or a long-term leasehold estate through Behringer Harvard OP I or indirectly through limited liability companies or through investments in joint ventures, partnerships, co-tenancies or other co-ownership arrangements with the developers of the properties, affiliates of Behringer Opportunity Advisors I or other persons.
Borrowing Policies
There is no limitation on the amount we may invest in or borrow related to any single property or other investment. Under our charter, the maximum amount of our indebtedness shall not exceed 300% of the Company's "net assets" (as defined in our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our board of directors. In addition to our charter limitation and indebtedness target, our board has adopted a policy to limit our aggregate borrowings to approximately 75% of the aggregate value of our assets, unless substantial justification exists that borrowing a greater amount is in our best interests. Our policy limitation, however, does not apply to individual real estate assets. Our board of directors reviews the Company's aggregate borrowings at least quarterly. We believe that these borrowing limitations reduce risk of loss and are in the best interests of the Company's stockholders.
Disposition Policies
We are in our disposition phase and are focused on selling our assets in an orderly manner. We originally anticipated that any such dispositions typically would occur during the period from three to six years after termination of our initial public primary offering. Economic or market conditions for opportunistic assets such as ours have, however, resulted in longer holding periods for some assets.

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Tax Status
We elected to be taxed as a REIT for federal income tax purposes and believe that we have qualified as a REIT since the year ended December 31, 2006. As long as we qualify 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), to the extent that we distribute at least 90% of our REIT taxable income to our stockholders on an annual basis. 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 for taxation 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.
Competition
We are subject to significant competition in seeking tenants for the leasing of our properties. In addition, as we seek to dispose of properties, we suffer from a lack of demand for opportunistic asset types such as land and development properties. We compete with many third parties engaged in real estate investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, hedge funds, governmental bodies, and other entities. We also face competition from other real estate investment programs, including other Behringer-sponsored programs, for buyers and tenants that may be suitable for us. Many of our competitors have substantially greater financial and other resources than we have and may have substantially more operating experience than either us or Behringer Harvard Opportunity Advisors I.
Regulations
Our investments are subject to various federal, state, and local laws, ordinances, and regulations (including those of foreign jurisdictions), 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 financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies, new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future.
Distribution Policies
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 decision will be influenced, in substantial part, by its obligation to ensure that we maintain our status as a REIT. In connection with entering our disposition phase, on March 28, 2011, our board of directors discontinued regular quarterly distributions. Any future distributions will be based on available cash from asset sales after weighing operational needs.
Historically, distributions paid to stockholders have been funded through various sources, including cash flow from operating activities, proceeds raised as part of our initial public offering, reinvestment through our distribution reinvestment plan and/or additional borrowings. We had no distributions during the years ended December 31, 2014 and 2013.

6


Significant Tenants
As of December 31, 2014 we had two leases that accounted for 10% or more of our aggregate annual rental revenues from our consolidated office properties. Northborough Tower, a single-tenant office building, accounted for $5.8 million (or 33%) of our aggregate annual rental revenue from office buildings and 11% of our total revenues. The lease expires April 30, 2018. A tenant at our Las Colinas Commons office building accounted for $2 million (or 12%) of our aggregate annual rental revenue from office buildings and 4% of our total revenues. The lease expires May 31, 2019. See Item 2, Properties for additional information on our office building leases.
The following table presents information about our significant tenant leases at our consolidated office properties as of December 31, 2014:
 
 
 
 
 
 
 
% of Rentable
Office
Sq. Ft. Leased
 
Annualized Base Rent Statistics(1)
 
 
Tenant
Property
 
Tenant
Industry
 
Square
Feet
 
Annualized
Base Rent
(in 000s)
 
% of
Office
Annualized
Base Rent
 
Annualized
Base Rent per
Square Foot
 
Lease
Expiration
Noble Energy, Inc.(2)
Northborough Tower
 
Crude Petroleum and Natural Gas Extraction
 
204,779
 
27%
 
$5,836
 
33%
 
$28.50
 
4/30/2018
Green Tree Servicing, LLC(2)
Las Colinas Commons
 
Mortgage Bankers & Brokers
 
119,116
 
16%
 
$2,038
 
12%
 
$17.11
 
5/31/2019
_______________________________________________________________________________

(1)
Annualized Base Rent Statistics reflect contractual base rental income from our consolidated office properties 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.
(2)
In January 2015, we became aware that the sole tenant of the Northborough building, Noble Energy, may vacate the building during 2015. However, their lease runs until April 2018 and we expect them to continue to make their lease payments until then. The Green Tree Servicing lease has two 5-year renewal options available under the respective lease. Neither of the leases have an early termination provision.
Employees
We have no employees. The Advisor and other affiliates of Behringer perform a full range of real estate services for us, including acquisitions, dispositions, property management, accounting, legal, asset management and investor relations services.
We are dependent on affiliates of Behringer for services that are essential to us, including asset acquisition and disposition decisions, property management, and other general administrative responsibilities. In the event that these companies were unable to provide these services to us, we would be required to provide such services ourselves or obtain such services from other sources.
Financial Information About Industry Segments
Our current business consists of owning, managing, operating, leasing, acquiring, developing, investing in, and disposing of real estate assets. We internally evaluate all of our real estate assets as one industry segment, and, accordingly, we do not report segment information.
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 registration statements in connection with the offerings of our common stock. Copies of our filings with the SEC may be obtained from our website at www.behringerinvestments.com or at the SEC's website at www.sec.gov. Access to these filings is free of charge. We are not incorporating our website or any information from the website into this Form 10-K.


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Item 1A.    Risk Factors.
The factors described below represent the principal risks that could cause our actual results to differ materially from those presented in our forward-looking statements. 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. Our stockholders may be referred to as "you" or "your" in this Item 1A, "Risk Factors" section.
Risks Related to an Investment in Us
Because no public trading market for your shares exists and because we have delayed the liquidation or the listing of our shares of common stock on a national securities exchange beyond December 2013; you may not realize the cash value of your investment in us for an extended period.
There is no public market for your shares and we currently have no plans to list our shares on a national securities exchange. On January 10, 2011, 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. You may not be able to sell your shares in the event of an emergency. If you are able to sell your shares, the price you receive for the shares of our common stock is likely to be less than the proportionate value of our investments. It is also likely that your shares would not be accepted as primary collateral for a loan.
Our charter requires that we seek stockholder approval of our liquidation if our shares are not listed for trading on a national securities exchange by December 2013, the sixth anniversary of the termination of our initial public offering unless a majority of our board of directors, including a majority of our independent directors, vote to extend the deadline. Following our 2012 annual meeting of stockholders, our board of directors met and voted to extend the deadline by which we must list or liquidate to June 30, 2020, subject to the ability to further defer this deadline upon the approval of the majority of the board of directors, including a majority of the independent directors.
We may not successfully implement our exit strategy, in which case you may have to hold your investment for an indefinite period.
We are in the process of liquidating our portfolio. However, we are under no obligation to complete our liquidation within a specified time period and market conditions and other factors could delay our ability to liquidate our portfolio. If we are not successful in implementing our exit strategy, your shares may continue to be illiquid and you may, for an indefinite period of time, be unable to convert your investment into cash easily and could suffer losses on your investment.
The estimated value per share of our common stock may not reflect the value that stockholders will receive for their investment.
On November 10, 2014, our board of directors approved an estimated value per share of our common stock of $3.58 based on the estimated value of our assets less the estimated value of our liabilities, divided by the number of shares outstanding, all as of October 31, 2014, as described under “Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities-Market Information” included in Part II, Item 5. We provided this estimated value per share to assist broker-dealers in connection with their obligations under applicable Financial Industry Regulatory Authority (“FINRA”) rules with respect to customer account statements.
The estimated value per share was based upon consultation with the Advisor and an independent, third party valuation and advisory firm engaged by us, using what the board of directors deems to be appropriate valuation methodologies and assumptions under current circumstances in accordance with the Amended and Restated Policy for Estimation of Common Stock Value (the “Valuation Policy”).
FINRA rules provide no guidance on the methodology an issuer must use to determine its estimated value per share. As with any valuation methodology, our methodology is 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 generally accepted accounting principles in the United States (“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, the Company can give no assurance that:
a stockholder would be able to resell his or her shares at this estimated value;
a stockholder would ultimately realize distributions per share equal to the Company’s estimated value per share upon liquidation of the Company’s assets and settlement of its liabilities or a sale of the Company;

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the Company’s shares would trade at the estimated value per share on a national securities exchange; or
the methodologies used to estimate the Company’s value per share would be acceptable to FINRA or under ERISA for compliance with their respective reporting requirements.
Further, the value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to the real estate and finance markets. For a full description of the methodologies used to value our assets and liabilities in connection with the calculation of the estimated value per share, see Part II, Item 5, “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Market Information.”
We currently expect to engage our Advisor and/or an independent valuation firm to update the estimated value per share annually, but we are not required to update the estimated value per share more frequently than every 18 months.
We rely on affiliates of Behringer, including our Advisor, to manage our operations and our portfolio of real estate assets and any adverse changes in the financial health of Behringer could hinder our Advisor’s ability to provide these services to us and consequently impair our operating results and negatively affect the return on your investment.
Behringer, through one or more of its subsidiaries, owns and controls our Advisor and our property manager. The operations of our Advisor and our property manager rely substantially on Behringer. Behringer is largely dependent upon the fees and other compensation that it receives from the public programs it sponsors or sponsored (including us) to conduct its operations. In August 2012, TIER REIT, Inc. (“TIER REIT”) (f/k/a Behringer Harvard REIT I, Inc.), a mature program sponsored by Behringer, completed a transition to self-management. As a result, TIER REIT no longer relies on Behringer acquisition or asset management services but continues to utilize Behringer for certain other administrative services such as human resources, shareholder services, and information technology as well as property management for which they pay Behringer certain fees. TIER REIT may terminate its administrative services agreement with Behringer and/or exercise a buy-out option with respect to its property management agreement on or after June 30, 2015. Monogram Residential Trust, Inc. (f/k/a Behringer Harvard Multifamily REIT I, Inc.) (“Monogram”), another public program sponsored by Behringer, completed a transition to a self-managed structure in June 2014. Monogram no longer relies on Behringer other than for shareholder services, although Behringer will continue to receive other fees after transition through June 2015.
Going forward, Behringer expects to rely on revenue from those service relationships, its current resources, including amounts received by Behringer as a result of and in connection with the self-management transactions described above, its balance sheet, and fee income from us and Behringer Harvard Opportunity REIT II, Inc., a mature program sponsored by Behringer that reported $384.3 million of assets as of September 30, 2014, and other newly sponsored programs that have not yet raised substantial capital for their capital needs. If Behringer’s income and other resources are inadequate to cover its operating expenses, Behringer may need to secure additional capital or it may become unable to meet its obligations or may not be able to continue to provide the same level of service that we have received to date. If this occurs, we might be required to find alternative service providers, which could result in a significant disruption of our business and may adversely affect the value of your investment in us. Further, given the confidentiality and non-solicitation agreements in place with Behringer’s employees and the non-solicitation agreements we have with our Advisor and property manager, it would be difficult for us to utilize any current employees that provide services to us.
If we lose or are unable to obtain key personnel, our ability to implement our investment strategies could be delayed or hindered.
Our success depends to a significant degree upon the continued contributions of certain executive officers and other key personnel, of us, our Advisor and its affiliates, including Michael D. Cohen, Lisa Ross and Terri Warren Reynolds, each of whom would be difficult to replace. We do not have employment agreements with our executive officers and other key personnel, and we cannot guarantee that they will remain affiliated with us. Also, our executive officers and key personnel do not have employment agreements with our Advisor, and we cannot guarantee that such persons will remain affiliated with our Advisor. In October 2014 and January 2015, our Chief Financial Officer and Chief Executive Officer, respectively, resigned their positions with us and our Advisor. The departure of these executive officers, as well as the departure of any of our current executive officers or key personnel, could cause our operating results to suffer. We do not intend to separately maintain key person life insurance on any of our key personnel.
Further, we believe that our future success depends, in large part, upon our Advisor’s and its affiliates’ ability to hire and retain highly skilled managerial and operational personnel and we have replaced our Chief Financial Officer with Lisa Ross and appointed Michael D. Cohen as interim President. Competition for persons with these skills is intense, and we cannot assure you that our Advisor will be successful in attracting and retaining such skilled personnel.

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In addition, we have established, and intend in the future to establish, strategic relationships with firms that have special expertise in certain services or as to assets both nationally and in certain geographic regions. Maintaining these relationships will be important for us to manage and liquidate our assets. We cannot assure you that we will be successful in attracting and retaining such strategic relationships. If we lose or are unable to obtain the services of key personnel or do not establish or maintain appropriate strategic relationships, our ability to implement our investment strategies could be delayed or hindered.
We may be restricted in our ability to replace our property manager, an affiliate of our Advisor, under certain circumstances.
Under the terms of our property management agreement, we may terminate the agreement upon 30 days’ notice in the event of, and only in the event of, a showing of willful misconduct, gross negligence, or deliberate malfeasance by the property manager in performing its duties. Our board of directors may find the performance of our property manager to be unsatisfactory. However, unsatisfactory performance by the property manager may not constitute “willful misconduct, gross negligence, or deliberate malfeasance.” As a result, we may be unable to terminate the property management agreement at the desired time, which may have an adverse effect on the management and profitability of our properties.
Payment of fees to our Advisor and its affiliates will reduce cash available for funding our operating activities.
Our Advisor and its affiliates perform services for us in connection with, among other things, the management and leasing of our properties, the servicing of our mortgage, bridge, mezzanine or other loans, the administration of our other investments and the disposition of our assets. They are paid substantial fees for these services. These fees reduce the amount of cash available for funding our operating activities.
Your percentage interest in Behringer Harvard Opportunity REIT I will be reduced if we issue additional shares.
Stockholders do not have preemptive rights to any shares issued by us in the future. Our charter currently has authorized 400,001,000 shares of capital stock, of which 350,000,000 shares are designated as common stock, 1,000 shares are designated as convertible stock and 50,000,000 are designated as preferred stock. Subject to any limitations set forth under Maryland law, our board of directors may increase the number of authorized shares of capital stock, increase or decrease the number of shares of any class or series of stock designated, or reclassify any unissued shares without the necessity of obtaining stockholder approval. All of such shares may be issued in the discretion of our board of directors. Stockholders will likely experience dilution of their equity investment in us in the event that we (1) sell additional shares in the future, including those issued pursuant to the distribution reinvestment plan, (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 to institutional investors, (4) issue shares of common stock upon the conversion of our convertible stock, (5) issue shares of our common stock upon the exercise of any options granted to our independent directors or employees of Behringer Opportunity Advisors I and HPT Management or their affiliates, (6) issue shares to Behringer Opportunity Advisors I, its successors or assigns, in payment of an outstanding fee obligation as set forth under our advisory management agreement, or (7) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of Behringer Harvard OP I. In addition, the partnership agreement for Behringer Harvard OP I contains provisions which would allow, under certain circumstances, other entities, including other Behringer-sponsored programs, to merge into or cause the exchange or conversion of their interest for interests of Behringer Harvard OP I. Because the limited partnership interests of Behringer Harvard OP I may be exchanged for shares of our common stock, any merger, exchange or conversion between Behringer Harvard OP I and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders. You should not expect to be able to own a significant percentage of our shares.
Risks Related to Our Business
If we set aside insufficient working capital reserves, we may be required to defer necessary property improvements.
If we do not estimate sufficient reserves for working capital to supply needed funds for capital improvements throughout the life of the investment in a property, and there is insufficient cash available from our operations, we may be required to defer necessary improvements to the property that may cause the property to suffer from a greater risk of obsolescence or a decline in value, or a greater risk of decreased cash flow as a result of fewer potential tenants being attracted to the property. If this happens, we may not be able to maintain projected rental rates for affected properties, and our results of operations may be negatively impacted.

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Disruptions in the financial markets and uncertain economic conditions may continue to adversely impact aspects of our operating results and operating condition.
Our business may continue to be affected by market and economic challenges experienced by the U.S. and global economies. These conditions may materially affect the value and performance of our properties, and may affect the availability or the terms of financing that we have or may anticipate utilizing, and our ability to make principal and interest payments on, or refinance, any outstanding debt when due. These challenging economic conditions may also impact the ability of certain of our tenants to enter into new leasing transactions or satisfy rental payments under existing leases. Specifically, global market disruptions may have many consequences including, but not limited to, these listed below:
the financial condition of our tenants may be adversely affected, which may result in us having to increase concessions, reduce rental rates or make capital improvements beyond those contemplated at the time we acquired the properties in order to maintain occupancy levels or to negotiate for reduced space needs, which may result in a decrease in our occupancy levels;
significant job losses may occur, which may decrease demand for our office space, our multifamily communities and our hospitality properties and result in lower occupancy levels, which will result in decreased revenues and which could diminish the value of our properties, which depend, in part, upon the cash flow generated by our properties;
an increase in the number of bankruptcies or insolvency proceedings of our tenants and lease guarantors, which could delay our efforts to collect rent and any past due balances under the relevant leases and ultimately could preclude collection of these sums;
credit spreads for major sources of capital may widen as investors demand higher risk premiums, resulting in lenders increasing the cost for debt financing;
our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could result in our investment operations generating lower overall economic returns and a reduced level of cash flow;
a reduction in the amount of capital that is available to finance real estate, which, in turn, could lead to a decline in real estate values generally, slow real estate transaction activity, reduce the loan to value ratio upon which lenders are willing to lend, and result in difficulty refinancing our debt;
the value of certain of our properties may have decreased below the amounts we paid for them, which may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans;
one or more counterparties to our derivative financial instruments could default on their obligations to us, or could fail, increasing the risk that we may not realize the benefits of these instruments; and
the value and liquidity of our short-term investments could be reduced as a result of the dislocation of the markets for our short-term investments and increased volatility in market rates for such investments or other factors.
Disruptions in the financial markets and adverse economic conditions could adversely affect the value of our investments.
Market volatility will likely make the valuation of our investment properties more difficult. There may be significant uncertainty in the valuation, or in the stability of the value, of our properties that could result in a substantial decrease in the value of our properties. As a result, we may not be able to recover the carrying amount of our properties, and we may be required to recognize impairment charges, which will reduce our reported earnings.
We are uncertain of our sources for funding of future capital needs, which could adversely affect the value of our investments.
Our ability to fund future property capital needs, such as tenant improvements, leasing commissions and capital expenditures, will depend on our ability to borrow, sell assets or interests in assets, or generate additional cash flows from operations. We will establish capital reserves on a property-by-property basis, as we deem appropriate. In addition to any reserves we establish, a lender may require escrow of capital reserves in excess of our established reserves. If these reserves are insufficient to meet our cash needs, we may have to obtain financing from either affiliated or unaffiliated sources to fund our cash requirements. Accordingly, in the event that we develop a need for additional capital in the future for the improvement of our properties or for any other reason, we have not identified any sources for such funding, and we cannot assure you that such sources of funding will be available to us for future potential capital needs.

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We are subject to additional risks due to our international investments.
We have purchased real estate assets located outside the United States and have made mortgage, bridge, mezzanine or other loans or participations in mortgage, bridge, mezzanine or other loans made by a borrower located outside the United States or secured by property located outside the United States. These investments may be affected by factors peculiar to the laws of the jurisdiction in which the borrower or the property is located. These laws may expose us to risks that are different from and in addition to those commonly found in the United States.
Foreign investments could be subject to the following risks:
governmental laws, rules and policies, including laws relating to the foreign ownership of real property or mortgages and laws relating to the ability of foreign persons or corporations to remove profits earned from activities within the country to the person's or corporation's country of origin;
variations in currency exchange rates;
adverse market conditions caused by inflation or other changes in national or local economic conditions;
changes in relative interest rates;
changes in the availability, cost and terms of mortgage funds resulting from varying national economic policies;
changes in real estate and other tax rates, the tax treatment of transaction structures and other changes in operating expenses in a particular country where we invest;
our REIT tax status not being respected under foreign laws, in which case income or gains from foreign sources would likely be subject to foreign taxes, withholding taxes, transfer taxes, and value added taxes;
lack of uniform accounting standards (including availability of information in accordance with GAAP);
changes in land use and zoning laws;
more stringent environmental laws or changes in such laws;
changes in the social stability or other political, economic or diplomatic developments in or affecting a country where we have an investment;
we, our sponsor, and its affiliates have relatively less experience with respect to investing in real property or other investments outside the United States as compared to domestic investments; and
legal and logistical barriers to enforcing our contractual rights.
Any of these risks could have an adverse effect on our business, results of operations and the return to our stockholders.
Our revenue and net income may vary significantly from one period to another due to investments in opportunity-oriented properties, which could reduce the funds available to return to our stockholders.
Our opportunistic and value-add property-acquisition strategy included investments in properties in various phases of development, redevelopment or repositioning, which may cause our revenues and net income to fluctuate significantly from one period to another. Projects do not produce revenue while in development or redevelopment. During any period when our projects in development or redevelopment or those with significant capital requirements increase without a corresponding increase in stable revenue-producing properties, our revenues and net income will likely decrease. Many factors may have a negative impact on the level of revenues or net income produced by our portfolio of properties and projects, including higher than expected construction costs, failure to complete projects on a timely basis, failure of the properties to perform at expected levels upon completion of development or redevelopment, and increased borrowings necessary to fund higher than expected construction or other costs related to the project.
Development projects in which we have invested may not be completed successfully, and guarantors of the projects may not have the financial resources to perform their obligations under the guaranties they provide.
We have made equity investments in, acquired options to purchase interests in, or made mezzanine loans to the owners of real estate development projects. Our return on these investments is dependent upon the projects being completed successfully. To help ensure performance by the developers of properties that are under construction, completion of these properties is generally guaranteed either by a completion bond or performance bond. Our Advisor may rely upon the substantial net worth of the contractor or developer or a personal guarantee accompanied by financial statements showing a substantial net worth

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provided by an affiliate of the entity entering into the construction or development contract as an alternative to a completion bond or performance bond. For a particular investment, we may obtain guaranties that the project will be completed on time, on budget and in accordance with the plans and specifications and that the mezzanine loan will be repaid. However, we may not obtain such guaranties and cannot ensure that the guarantors will have the financial resources to perform their obligations under the guaranties they provide. If we are unable to manage these risks effectively, our results of operations and financial condition will be adversely affected.
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure you that we will realize growth in the value of our real estate properties.
Our operating results will be subject to risks generally incident to the ownership of real estate, including:
changes in general economic or local conditions;
changes in supply of or demand for similar or competing properties in an area;
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
the illiquidity of real estate investments generally;
changes in tax, real estate, environmental and zoning laws; and
periods of high interest rates and tight money supply.
For these and other reasons, we cannot assure you that we will realize growth in the value of our real estate properties.
Risks Related to Conflicts of Interest
We are subject to conflicts of interest arising out of our relationships with our Advisor and its affiliates, including the material conflicts discussed below.
Because other Behringer- sponsored real estate programs use investment strategies that are similar to ours, our executive officers, our Advisor and its executive officers face conflicts of interest relating to the leasing and disposition of properties, and such conflicts may not be resolved in our favor.
There may be periods during which one or more Behringer-sponsored programs are seeking to dispose of similar properties and other real estate-related investments. As a result, we may be trying to sell our properties and other real estate-related investments at the same time as one or more of the other Behringer-sponsored programs managed by officers and employees of our Advisor and/or its affiliates, and these other Behringer-sponsored programs may use disposition strategies that are similar to ours. Our executive officers and the executive officers of our Advisor are also the executive officers of other Behringer-sponsored REITs and their advisors, the general partners of Behringer-sponsored partnerships and/or the advisors or fiduciaries of other Behringer-sponsored programs, and these entities are and will be under common control. In the event these conflicts arise, we cannot assure you that our best interests will be met when officers and employees acting on behalf of our Advisor and on behalf of advisors and managers of other Behringer-sponsored programs decide whether to pursue a specific buyer of real estate on our behalf or on behalf of another Behringer-sponsored program or affiliate of our Advisor, which may have a disposition strategy that is similar to ours. In addition, we have acquired properties in geographic areas where other Behringer-sponsored programs own properties. If one of the other Behringer-sponsored programs attracts a tenant for which we are competing, we could suffer a loss of revenue due to delays in locating another suitable tenant. You will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved.
Our Advisor and its affiliates, including all of our executive officers and some of our directors, face conflicts of interest caused by their compensation arrangements with us, which could result in actions that are not in the long-term best interests of our stockholders.
Our Advisor and its affiliates, including our property manager, are entitled to substantial fees from us under the terms of our advisory management agreement and property management agreement. These fees could influence our Advisor’s advice to us, as well as the judgment of affiliates of our Advisor performing services for us. Among other matters, these compensation arrangements could affect their judgment with respect to:
continuing, renewing, or enforcing our agreements with our Advisor and its affiliates, including the advisory management agreement and the property management agreement;
property sales, which reduce the asset management fees payable to our Advisor;

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property acquisitions, which entitle our Advisor to acquisition and advisory fees and asset-management fees;
borrowings to acquire properties, which increase the acquisition, debt financing, and asset management fees payable to our Advisor;
borrowings to refinance our existing indebtedness, which increases the debt financing fees payable to our Advisor
determining the compensation paid to employees for services provided to us, which could be influenced in part by whether or not the Advisor is reimbursed by us for the related salaries and benefits; and
whether and when we seek to sell the company or its assets, which sale could entitle our Advisor to real estate commissions and to the issuance of shares of our common stock through the conversion of our convertible stock.
The fees our Advisor receives in connection with transactions involving the purchase and management of an asset are based on the cost of the investment, including the amount expended for the development, construction, and improvement of each asset, and not based on the quality of the investment or the quality of the services rendered to us. This may influence our Advisor to recommend riskier transactions to us.
Our Advisor's executive officers and key personnel and the executive officers and key personnel of Behringer-affiliated entities that conduct our day-to-day operations face competing demands on their time, and this may cause our investment returns to suffer.
We rely upon the executive officers of our Advisor and the executive officers and employees of Behringer-affiliated entities to conduct our day-to-day operations. These persons also conduct the day-to-day operations of other Behringer-sponsored programs and may have other business interests as well. Because these persons have competing interests on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and resources to our business than is necessary or appropriate. If this occurs, the returns on our investments may suffer.
Our officers face conflicts of interest related to the positions they hold with entities affiliated with our Advisor, which could diminish the value of the services they provide to us.
Certain of our executive officers are also officers of our sponsor Behringer, our Advisor, our property manager, and other entities affiliated with our Advisor, including the advisors and fiduciaries to other Behringer-sponsored programs. As a result, these individuals owe fiduciary duties to these other entities and their investors, which may conflict with the fiduciary duties that they owe to us and our stockholders. Their loyalties to these other entities and investors could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to (1) management of time and services between us and the other entities, (2) the timing and terms of the investment in or sale of an asset, (3) development of our properties by affiliates of our Advisor, (4) investments with affiliates of our Advisor, (5) compensation to our Advisor, and (6) our relationship with our property manager. If we do not successfully implement our business strategy, we may be unable to maintain or increase the value of our assets.
Risks Related to Debt Financing
We incur mortgage indebtedness and other borrowings, which increases our business risks.
We have incurred mortgage indebtedness and other borrowings in connection with our acquisition of real properties. In addition, we may incur or increase our mortgage debt by obtaining loans secured by some or all of our real properties to obtain funds for funding our ongoing operations. There is no limitation on the amount we may invest in any single improved property or other asset or on the amount we can borrow for the purchase of any individual property or other investment. Under our charter, the maximum amount of our indebtedness shall not exceed 300% of our net assets as of the date of any borrowing. We may incur indebtedness in excess of the limit if the excess is approved by a majority of our independent directors.
Our board of directors has adopted a policy that we will generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets, which is defined as 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, unless substantial justification exists that borrowing a greater amount is in our best interests and a majority of our independent directors approve the greater borrowing. Our policy limitation, however, does not apply to individual real estate assets.

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Generally, we do not borrow money secured by a particular real property unless we believe the property's projected cash flow is sufficient to service the mortgage debt. However, if there is a shortfall in cash flow, then the amount available to fund our ongoing operations may be affected. In addition, incurring mortgage debt increases the risk of (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. For tax purposes, a foreclosure of any of our properties would be 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. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. 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. If any of our properties are foreclosed upon due to a default, the return on your investment in us will be adversely affected.
If mortgage debt is unavailable at reasonable rates, we may not be able to refinance our properties, which could reduce the amount of cash distributions we can make.
When we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the properties are refinanced, we may not be able to finance the properties at reasonable rates and our income could be reduced. If this occurs, it would reduce cash available for distribution from asset sales to our stockholders, and it may prevent us from borrowing more money.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
In connection with obtaining financing, a lender could impose restrictions on us that affect our ability to incur additional debt and our distribution and operating policies. Loan documents we enter into may contain customary negative covenants that may limit our ability to further mortgage the property, discontinue insurance coverage or replace our Advisor or may impose other limitations. Any such restriction or limitation may have an adverse effect on our operations.
Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds available to return to our stockholders.
We have financed some of our property acquisitions using interest-only mortgage indebtedness. During the interest-only period, the amount of each scheduled payment will be less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan will not be 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 amortized 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. If the mortgage loan has an adjustable interest rate, the amount of our scheduled payments also may increase at a time of rising interest rates. Increased payments and substantial principal or balloon maturity payments will reduce the funds available to return to our stockholders because cash otherwise available for distribution will be required to pay principal and interest associated with these mortgage loans.
Increases in interest rates could increase the amount of our debt payments and adversely affect funds available to return to our stockholders.
We have borrowed money that bears interest at a variable rate. In addition, from time to time we may pay mortgage loans or refinance our properties in a rising interest rate environment. Accordingly, increases in interest rates could increase our interest costs, which could have a material adverse effect on our operating cash flow and our ability to make distributions to you. In addition, if rising interest rates cause us to need additional capital to repay indebtedness in accordance with its terms or otherwise, we may be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on the investments. Prolonged interest rate increases also negatively impact our ability to make investments with positive economic returns.
Financing arrangements involving balloon payment obligations may adversely affect funds available to return to our stockholders.
Some of our financing arrangements will require us to make a lump-sum or balloon payment at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the property. At the time the balloon payment is due, we may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. The effect of a refinancing

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or sale could affect the rate of return to stockholders and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT and/or avoid federal income tax. Any of these results would have a significant, negative impact on your investment.
From time to time, we may rely on financial institutions for debt financing and, as a result, may be adversely affected by the failure of a financial institution to honor its lending obligations.
From time to time, we may rely on financial institutions for financing development projects in which we invest, for funding credit facilities used for general corporate purposes or for other funding needs. Some of these financial institutions may become insolvent, enter into receivership or otherwise become unable to fulfill or be prevented from fulfilling their respective financial obligations to their borrowers. Should a financial institution on which we rely fail to meet its funding obligations to us or to an entity in which we have invested, our liquidity or the liquidity of the entity in which we have invested could be materially adversely affected and we could suffer losses on development projects or other investments that require additional capital. Furthermore, if the loan is made to an entity in which we have invested, such as a development project, and we and our affiliates are not parties to the loan, we will be unable to take direct action against the financial institution to compel it to honor its financial obligations. In addition, if a financial institution on which we rely becomes insolvent or enters into receivership, or if other regulatory action is taken against it, we may not be able to enforce any contractual rights we would otherwise have against it.
General Risks Related to Investments in Real Estate
Properties that have significant vacancies could be difficult to sell, which could diminish the return of your investment.
A property may incur vacancies either by the continued default of tenants under their leases or the expiration of tenant leases. In January 2015, we became aware that the sole tenant of the Northborough building, Noble Energy, which accounts for 11% of our total revenues in 2014, may vacate the building during 2015. However, their lease runs until April 2018 and we expect them to continue to make their lease payments until then.
If vacancies continue for a long period of time, we may suffer reduced revenues resulting in decreased distributions to stockholders. In addition, the value of the property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.
Many of our investments are dependent on tenants for revenue, and lease terminations could reduce our ability to fund our ongoing operations.
The success of our real property investments often will be materially dependent on the financial stability of our tenants. A default by a significant tenant on its lease payments to us would cause us to lose the revenue associated with such lease and cause us to have to find an alternative source of revenue to meet mortgage payments and prevent a foreclosure if the property is subject to a mortgage. In the event of a tenant default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting our property. If significant leases are terminated, we cannot assure you that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. Additionally, loans that we make generally will relate to real estate. As a result, the borrower's ability to repay the loan may be dependent on the financial stability of the tenants leasing the related real estate.
We may be unable to secure funds for future tenant improvements, which could adversely impact our ability to fund our ongoing operations.
When tenants do not renew their leases or otherwise vacate their space, in order to attract replacement tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. If we have insufficient capital reserves, we will have to obtain financing from other sources. We intend to establish capital reserves on a property-by-property basis, as we deem necessary. In addition to any reserves we establish, a lender may require escrow of capital reserves in excess of our established reserves. If these reserves or any reserves otherwise established are designated for other uses or are insufficient to meet our cash needs, we may have to obtain financing from either affiliated or unaffiliated sources to fund our cash requirements. We cannot assure you that sufficient financing will be available or, if available, will be available on economically feasible terms or on terms acceptable to us. Moreover, certain reserves required by lenders may be designated for specific uses and may not be available for capital purposes such as future tenant improvements. Additional borrowing for capital purposes will increase our interest expense, and therefore our financial condition and our ability to fund our ongoing operations may be adversely affected.

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We may be unable to sell a property if or when we decide to do so, which could adversely impact our ability to fund ongoing operations which could adversely affect the return of your investment in us.
We intend to hold the various real properties in which we invest until such time as our Advisor determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met. Our Advisor, subject to approval of our board of directors, may exercise its discretion as to whether and when to sell a property, and we will have no obligation to sell properties at any particular time, except upon our liquidation.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any asset for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of an asset. If we are unable to sell an asset when we determine to do so, it could have a significant adverse effect on our cash flow and results of operations.
Our co-venture partners could take actions that decrease the value of an investment to us and lower your overall return.
We enter into joint ventures with third parties having investment objectives similar to ours for the acquisition, development or improvement of properties, as well as the acquisition of real estate-related investments. Such investments may involve risks not otherwise present with other forms of real estate investment, including, for example:
the possibility that our co-venturer in an investment might become bankrupt;
the possibility that the investment requires additional capital that we do and/or our partner does not have; which lack of capital could affect the performance of the investment and/or dilute our interest if the partner were to contribute our share of the capital;
the possibility that a co-venturer in an investment might breach a loan agreement or other agreement or otherwise, by action or inaction, act in a way detrimental to us or the investment;
that such co-venturer may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals;
the possibility that we may incur liabilities as the result of the action taken by our partner or co-investor; or
that such co-venturer may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our policy with respect to qualifying and maintaining our qualification as a REIT; or
that such partner may exercise buy/sell rights that force us to either acquire the entire investment, or dispose of our share, at a time and price that may not be consistent with our investment objectives.
Any of the above might subject a property to liabilities in excess of those contemplated and thus reduce our returns on that investment.
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage may adversely affect your returns.
Our Advisor will attempt to ensure that all of our properties are adequately insured to cover casualty losses. The nature of the activities at certain properties we may acquire will expose us and our operators to potential liability for personal injuries and, in certain instances, such as with marinas, property damage claims. In addition, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, cyber-terrorism, earthquakes, pollution, environmental matters or extreme weather conditions such as hurricanes, floods and snowstorms that 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. It is uncertain whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our properties. In such instances, 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 such losses. In the event that any of our properties incur a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by the amount of any such uninsured loss. In addition, other than the capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property, and we cannot assure you that any such sources of funding will be available to us for such

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purposes in the future. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would adversely affect the return on your investment in us.
Our operating results may be negatively affected by potential development and construction delays and result in increased costs and risks, which could diminish the return of your investment.
We have invested in the acquisition, development and/or redevelopment of properties upon which we will develop and construct improvements. We could incur substantial capital obligations in connection with these types of investments. We will be subject to risks relating to uncertainties associated with rezoning for development and environmental concerns of governmental entities and/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 may also be affected or delayed by conditions beyond the builder's control. Delays in completion of construction could also 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 such builders prior to completion of construction. These and other such factors can result in increased costs of a project or loss of our investment. Substantial capital obligations could delay our ability to make distributions. In addition, we will be subject to normal lease-up risks relating to newly constructed 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 the return on our investment could suffer.
In addition, we have invested in unimproved real property. Returns from development of unimproved properties are also subject to risks and uncertainties associated with rezoning the land for development and environmental concerns of governmental entities and/or community groups. Your investment is subject to the risks associated with investments in unimproved real property.
A concentration of our investments in any one property class or geographic region may leave our profitability vulnerable to a downturn in such sector or geographic region.
At any one time, a significant portion of our consolidated investments could be in one property class or concentrated in one or several geographic regions. For the year ended December 31, 2014, excluding mineral rights we received in 2014 of $0.1 million on a parcel of land we sold in 2013, 56%, 36% and 8% of our total revenues were derived from properties in Missouri, Texas and Colorado, respectively. Additionally, excluding mineral rights we received in 2014 of $0.1 million on a parcel of land we sold in 2013, 64%, 31% and 5% of our total revenues for the year ended December 31, 2014 were from our three asset types, hotel, office building, and multifamily. To the extent that our portfolio is concentrated in limited geographic regions, types of assets, industries or business sectors, downturns relating generally to such region, type of asset, industry or business sector may result in defaults by our tenants within a short time period, which may reduce our net income and the value of our common stock and accordingly limit our ability to fund our operations.
The Eurozone crisis may have an adverse effect on investments in Europe and the break-up of the Eurozone, or the exit of any member state, would create uncertainty and could affect our investments directly.
We own a joint venture interest in a portfolio of Central European properties located in Czech Republic, Poland, Hungary, and Slovakia. The situation relating to the sovereign debt and weak financial health of several countries and the overall European financial system, including Ireland, Italy, Spain, Portugal and Cyprus, together with the risk of contagion to other, more financially stable countries, has eased. However, threats to stability remain - principally from the prospect of difficult negotiations over Greece's debt. The conflict in Ukraine may also continue to pose a risk to confidence.
We hold assets that are denominated in Euros (including loans secured on such assets). Further deterioration in the Eurozone economy could have a material adverse effect on the value of our investment in such assets and amplify the currency risks faced by us.
Short-term multifamily and apartment leases expose us to the effects of declining market rent, which could adversely impact our ability to make cash distributions to our stockholders.
We expect that substantially all of our apartment leases will be for a term of one year or less. Because these leases generally permit the residents to leave at the end of the lease term without penalty, our rental revenues may be impacted by declines in market rents more quickly than if our leases were for longer terms.

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Our investments in apartment communities face competition from other apartment communities and the increased affordability of single-family homes and condominiums, which may limit our profitability and returns to our stockholders.
Our investments in apartment communities compete with numerous housing alternatives in attracting residents, including other apartment communities, as well as single-family homes and condominiums available to rent or buy. The residential apartment community industry is highly competitive. This competition could reduce occupancy levels and revenues at our apartment communities, which would adversely affect our operations. We face competition from many sources, including from other apartment communities both in the immediate vicinity and the broader geographic market where our apartment communities are located. Overbuilding of apartment communities may occur. If so, this will increase the number of apartment units available and may decrease occupancy and apartment rental rates. In addition, increases in operating costs due to inflation may not be offset by increased apartment rental rates. We may be required to expend substantial sums to attract new residents.
Our apartment investments may face increased competition from single-family homes and condominiums for rent or purchase, which could limit our ability to retain residents, lease apartment units or increase or maintain rents.
Our apartment communities may compete with numerous housing alternatives in attracting residents, including single-family homes and condominiums available for rent or purchase. Such competitive housing alternatives may become more prevalent in a particular area because of the tightening of mortgage lending underwriting criteria, homeowner foreclosures, the decline in single-family home and condominium sales and the lack of available credit. The number of single-family homes and condominiums for rent in a particular area could limit our ability to retain residents, lease apartment units or increase or maintain rents.
In addition, reduced mortgage interest rates and government programs to promote home ownership could adversely affect our ability to retain our residents, lease apartment units and increase or maintain rental rates.
We are dependent on the third-party managers of our hotel properties.
In order to qualify as a REIT, we will not be able to operate our hotel properties or participate in the decisions affecting the daily operations of our hotels. We lease our hotels to a taxable REIT subsidiary ("TRS") in which we may own up to a 100% interest. Our TRS will enter into management agreements with eligible independent contractors that are not our subsidiaries or otherwise controlled by us to manage the hotels. Thus, independent hotel operators, under management agreements with our TRS, will control the daily operations of our hotels.
We will depend on these independent management companies to adequately operate our hotels as provided in the management agreements. We will not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel (for instance, setting room rates). Thus, even if we believe our hotels are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, revenue per available room and average daily rates, we may not be able to force the management company to change its method of operation of our hotels. We can only seek redress if a management company violates the terms of the applicable management agreement with the TRS, and then only to the extent of the remedies provided for under the terms of the management agreement. In the event that we need to replace any of our management companies, we may be required by the terms of the management agreement to pay substantial termination fees and may experience significant disruptions at the affected hotels.
We may have to make significant capital expenditures to maintain our lodging properties.
Hotels have an ongoing need for renovations and other capital improvements, including replacements of furniture, fixtures and equipment. Generally, we will be responsible for the costs of these capital improvements, which give rise to the following risks:
cost overruns and delays;
renovations can be disruptive to operations and can displace revenue at the hotels, including revenue lost while rooms under renovation are out of service;
the cost of funding renovations and the possibility that financing for these renovations may not be available on attractive terms; and
the risk that the return on our investment in these capital improvements will not be what we expect.
If we have insufficient cash flow from operations to fund needed capital expenditures, then we will need to borrow to fund future capital improvements.

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General economic conditions and discretionary consumer spending may affect certain properties we acquire and lower the return on your investment.
The operations of certain properties in which we invest, such as hotels and recreation and leisure properties, will depend upon a number of factors relating to discretionary consumer spending. Unfavorable local, regional or national economic developments or uncertainties regarding future economic prospects as a result of terrorist attacks, military activity or natural disasters could reduce consumer spending in the markets in which we own properties and adversely affect the operation of those properties. Consumer spending on luxury goods, travel and other leisure activities such as boating, skiing and health and spa activities may decline as a result of lower consumer confidence levels, even if prevailing economic conditions are favorable. In an economic downturn, consumer discretionary spending levels generally decline, at times resulting in disproportionately large reductions in expenditures on luxury goods, travel and other leisure activities. Certain of the classes of properties that we acquire may be unable to maintain their profitability during periods of adverse economic conditions or low consumer confidence, which could in turn affect the ability of operators to make scheduled rent payments to us.
Seasonal revenue variations at our hotel properties require the operators of such assets to manage cash flow properly over time to meet their non-seasonal scheduled rent payments to us.
Certain of our hotel properties are generally seasonal in nature. As a result, these businesses will experience seasonal variations in revenues that may require our operators to supplement revenue at their properties in order to be able to make scheduled rent payments to us. The failure of our operators to manage their cash flow properly may result in such operator having insufficient cash on hand to make its scheduled payments to us during seasonally slow periods, which may adversely affect our cash available.
Adverse weather conditions may affect operations of certain of our properties or reduce our operators' ability to make scheduled rent payments to us, which could reduce our cash flow from such investments.
Adverse weather conditions may influence revenues at our hospitality properties. These adverse weather conditions include heavy snowfall (or lack thereof), hurricanes, tropical storms, high winds, heat waves, frosts, drought (or merely reduced rainfall levels), excessive rain and floods. For example, adverse weather could reduce the number of people that visit our properties. Certain properties may be susceptible to damage from weather conditions such as hurricanes, which damage (including but not limited to property damage and loss of revenue) is not generally insurable at commercially reasonable rates. Poor weather conditions could also disrupt operations at properties we own and may adversely affect both the value of our investment in a property and the ability of our tenants and operators to make their scheduled rent payments to us.
Resorts, recreation and leisure, and other types of properties in which we have invested may not be readily adaptable to other uses, and if these properties become unprofitable, we may not be able to recoup the value of our investment.
Resorts and related properties, and other types of recreation and leisure properties in which we have invested are specific-use properties that have limited alternative uses. Therefore, if the operations of any of our properties in these sectors become unprofitable due to industry competition, a general deterioration of the applicable industry or otherwise, we may have great difficulty selling the property or we may have to sell the property for substantially less than the amount we paid for it. Should any of these events occur, our income and the return on your investment in us could be reduced.
Security breaches through cyber-attacks, cyber-intrusions, or otherwise, could disrupt our IT networks and related systems. 
Risks associated with security breaches, whether through cyber-attacks or cyber-intrusions over the Internet, malware, computer viruses, attachments to e-mails, or otherwise, against persons inside our organization, persons with access to systems inside our organization, the U.S. government, financial markets or institutions, or major businesses, including tenants, could disrupt or disable networks and related systems, other critical infrastructures, and the normal operation of business.  The risk of a security breach or disruption, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments, and cyber-terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased.  Even though we may not be specifically targeted, cyber-attacks on the U.S. government, financial markets, financial institutions, or other major businesses, including tenants, could disrupt our normal business operations and networks, which may in turn have a material adverse impact on our financial condition and results of operations.
IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations.  They also may be critical to the operations of certain of our tenants.  Further, our Advisor provides our IT services, and although we believe they will be able to maintain the security and integrity of these types of networks and related systems, or implement various measures to manage the risk of a security breach or disruption, there can be no assurance that their security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging.  Even the most well protected information, networks, systems, and facilities remain potentially vulnerable because

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the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected.  While, to date, we have not experienced a cyber-attack or cyber-intrusion, neither our Advisor nor we may be able to anticipate or implement adequate security barriers or other preventive measures.  A security breach or other significant disruption involving our IT networks and related systems could:
disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our tenants;
result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting deadlines;
result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;
result in the unauthorized access to, and destruction, loss, theft, misappropriation, or release of proprietary, confidential, sensitive, or otherwise valuable information of ours or others, which others could use to compete against us or for disruptive, destructive, or otherwise harmful purposes and outcomes;
result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space;
require significant management attention and resources to remedy any damages that result;
subject us to claims for breach of contract, damages, credits, penalties, or termination of leases or other agreements; or
damage our reputation among our tenants and stockholders generally.
Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition, and cash flows.
The costs of compliance with environmental laws and other governmental laws and regulations may adversely affect our income and the cash available for any distributions.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations 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. Some of these laws and regulations may impose joint and several liability on tenants, owners, or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent such property or to use the property as collateral for future borrowing.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation 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 impositions 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.
Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.
Under various federal, state, and local environmental laws, ordinances and regulations (including those of foreign jurisdictions), a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under, or in such property. The costs of removal or remediation could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, the return on your investment in us.

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If we sell properties by providing financing to purchasers, we will bear the risk of default by the purchaser.
When we decide to sell any of our properties, we intend to use our reasonable best efforts to sell them for cash or property. However, in some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk of default by the purchaser and will be subject to remedies provided by law, which could negatively impact our distributions to stockholders. There are no limitations or restrictions on our ability to take purchase money obligations. We may, therefore, take a purchase money obligation secured by a mortgage as part payment for the purchase price. The terms of payment to us generally will be affected by custom in the area where the property being sold is located and the then-prevailing economic conditions. If we receive promissory notes or other property in lieu of cash from property sales, the distribution of the proceeds of sales to our stockholders will be delayed until the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price, and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact the return on your investment.
Risks Related to Real Estate-Related Investments
Our real estate-related investments are illiquid and we may not be able to adjust our portfolio in response to changes in economic and other conditions.
The mezzanine loans we made are particularly illiquid investments due to their short life, their unsuitability for securitization and the greater difficulty of recoupment in the event of a borrower's default. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited.
Our mortgage, bridge or mezzanine loans may be impacted by unfavorable real estate market conditions, which could decrease the value of our mortgage investments.
We will be at risk of defaults on our mortgage, bridge or mezzanine loans caused by many conditions beyond our control, including local and other economic conditions affecting real estate values and interest rate levels. We do not know whether the values of the property securing the loans will remain at the levels existing on the dates of origination of the loans. If the values of the underlying properties drop, our risk will increase and the values of our interests may decrease.
The mezzanine loans in which we have invested involve greater risks of loss than senior loans secured by income-producing real properties.
We have invested in mezzanine loans that take the form of subordinated loans secured by second mortgages on the underlying real property or loans secured by a pledge of the ownership interests of either the entity owning the real property or the entity that owns the interest in the entity owning the real property. These types of investments involve a higher degree of risk than long-term senior mortgage lending secured by income producing real property because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of the entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our loan or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through "standstill periods"), and control decisions made in bankruptcy proceedings relating to borrowers. As a result, we may not recover some or all of our investment, which could have a negative impact on the return on your investment.
Delays in liquidating defaulted mortgage, bridge or mezzanine loans could reduce our investment returns.
If there are defaults under our loans, we may not be able to repossess and sell quickly any properties securing such loans. The resulting time delay could reduce the value of our investment in the defaulted loans. An action to foreclose on a property securing a loan is regulated by state statutes and rules and is subject to many of the delays and expenses of other lawsuits if the defendant raises defenses or counterclaims. In the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the loan.
Foreclosures create additional ownership risks that could adversely impact our returns on mortgage investments.
If we acquire property by foreclosure following defaults under our mortgage, bridge, or mezzanine loans, we will have the economic and liability risks as the owner.

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The liquidation of our assets may be delayed, which could delay distributions to our stockholders.
Any intended liquidation of us may be delayed beyond the time of the sale of all of our properties until all mortgage, bridge or mezzanine loans expire or are sold, because we may enter into mortgage, bridge or mezzanine loans with terms that expire after the date we intend to have sold all of our properties.
Our due diligence may not reveal all of a borrower's liabilities and may not reveal other weaknesses in its business.
Before making a loan to a borrower, we assessed the strength and skills of such entity's management and other factors that we believe are material to the performance of the investment. In making the assessment and otherwise conducting customary due diligence, we relied on the resources available to us and, in some cases, an investigation by third parties. This process is particularly important and subjective with respect to newly organized or private entities because there may be little or no information publicly available about the entities. There can be no assurance that our due diligence processes uncovered all relevant facts or that any investment will be successful.
We will depend on debtors for our revenue, and, accordingly, our revenue and our ability to make distributions to you will be dependent upon the success and economic viability of such debtors.
The success of our investments in real estate-related loans will materially depend on the financial stability of the debtors underlying such investments. The inability of a single major debtor or a number of smaller debtors to meet their payment obligations could result in reduced revenue or losses.
Risks Related to Our Operations
We have invested in non-U.S. dollar denominated real property and real estate-related securities, exposing us to fluctuating currency rates.
We have purchased real estate and real estate-related securities denominated in foreign currencies. A change in foreign currency exchange rates may have an adverse impact on returns on our non-U.S. dollar denominated investments. Although we may hedge our foreign currency risk subject to the REIT income qualification tests, we may not be able to do so successfully and may incur losses on these investments as a result of exchange rate fluctuations.
To hedge against exchange rate and interest rate fluctuations, we may use derivative financial instruments that may be costly and ineffective and may reduce the overall returns on your investment and affect cash available for distributions to our stockholders.
We have used and may in the future use derivative financial instruments to hedge exposures to changes in exchange rates and interest rates on loans secured by our assets and investments in collateralized mortgage-backed securities. Derivative instruments may 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. Our hedging may fail to protect or could adversely affect us because, among other things:
interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;
the duration of the hedge may not match the duration of the related liability or asset;
the amount of income that a REIT may earn from hedging transactions to offset interest rate losses is limited by federal tax provisions governing REITs;
the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;
the party owing money in the hedging transaction may default on its obligation to pay; and
we may purchase a hedge that turns out to be unnecessary, i.e., a hedge that is out of the money.
Any hedging activity we engage in may adversely affect our earnings, which could adversely affect cash available for distribution to our stockholders. Therefore, while we may enter into such transactions to seek to reduce interest rate risks, unanticipated changes in interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio

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holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended accounting treatment and may expose us to risk of loss.
To the extent that we use derivative financial instruments to hedge against exchange rate and interest rate fluctuations, we will be 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. If we are unable to manage these risks effectively, our results of operations, financial condition and ability to pay distributions to you will be adversely affected.
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, certain swap transactions will be required to be submitted for clearing to a derivatives clearing organization, unless certain exemptions apply. The rulemaking implementing the clearing requirement is still in process, however, and the implementation of the clearing requirement may affect, among other things, our exposure to our swap counterparties, the margin or collateral required to be posted in connection with our swap transactions and the costs of entering into such transactions.
Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs which may result in us sustaining losses.
The cost of using hedging instruments increases as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising and hedging costs have increased. In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory, commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot be certain that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses to us and affect our ability to pay distributions to our stockholders.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate, inflation and/or currency risks will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges (1) interest rate risk on liabilities incurred to carry or acquire real estate or (2) risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the REIT 75% or 95% gross income tests, and such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income for purposes of both the REIT 75% and 95% gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.
There can be no assurance that the direct or indirect effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act will not have an adverse effect on our interest rate hedging activities.
Title VII of the Dodd-Frank Act ("Title VII") contains a sweeping overhaul of the regulation of privately negotiated derivatives. The provisions of Title VII became effective on July 16, 2011 or, with respect to particular provisions, on such other date specified in the Dodd-Frank Act or by subsequent rulemaking. While the full impact of the Dodd-Frank Act on our interest rate hedging activities cannot be fully assessed, the requirements of Title VII may affect our ability to enter into hedging or other risk management transactions, may increase our costs in entering into such transactions, and/or may result in us entering into such transactions on more unfavorable terms than prior to effectiveness of the Dodd-Frank Act. For example, subject to an exception for end-users of swaps upon which we may seek to rely, we may be required to clear certain interest rate hedging transactions by submitting them to a derivatives clearing organization. In addition, to the extent we are required to

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clear any such transactions, we will be required to, among other things, post margin in connection with such transactions. The occurrence of any of the foregoing events may have an adverse effect on our business and our stockholders' returns.
We could be negatively impacted by the elimination of Fannie Mae or Freddie Mac.
Fannie Mae and Freddie Mac are a major source of financing for secured multifamily real estate. Real estate companies invested in multifamily properties have utilized Fannie Mae and Freddie Mac to finance growth by purchasing or guaranteeing apartment loans. In May 2014, the U.S. Senate Banking Committee approved legislation to wind down Fannie Mae and Freddie Mac and redesign the U.S. mortgage finance system, which legislation has to date not been acted on in the broader Senate. A final decision by the government to eliminate Fannie Mae or Freddie Mac or reduce their role in the mortgage market, or otherwise restructure the U.S. mortgage finance system, may adversely affect interest rates, capital availability, and potential sales of multifamily communities, and in particular could adversely affect our ability to dispose of our multifamily assets upon our liquidation.
Risks Related to Our Corporate Structure
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 may own more than 9.8% of our outstanding shares of common or preferred stock. 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 the opportunity to receive a control premium for their shares.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of the holders of our current common stock or discourage a third-party from acquiring us.
Our charter permits our board of directors to issue up to 400,001,000 shares of capital stock. Our board of directors, without any action by our stockholders, may (1) increase or decrease the aggregate number of shares, (2) increase or decrease the number of shares of any class or series we have authority to issue or (3) classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, or terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of such stock with terms and conditions that could subordinate the rights of the holders of our current 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 premium price for holders of our common stock.
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 interested stockholder 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 corporation's shares; 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 he otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the five-year prohibition, any business combination between a 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 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.

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These super-majority vote 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 also limits the ability of a third party to buy a large stake in us and exercise voting power in electing directors.
Maryland law provides a second anti-takeover statute, its Control Share Acquisition Act, which provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by the corporation's disinterested stockholders by a vote of two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by interested stockholders, that is, by the acquirer, by officers or by directors who are employees of the corporation, are excluded from shares entitled to vote on the matter. "Control shares" are voting shares of stock that would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of control shares. The control share acquisition statute does not apply to (a) shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) acquisitions approved or exempted by the articles of incorporation or bylaws of the corporation. Our bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions by any person of shares of our stock. We can offer no assurance that this provision will not be amended or eliminated at any time in the future. This statute could have the effect of discouraging offers from third parties to acquire us and increasing the difficulty of successfully completing this type of offer by anyone other than our affiliates or any of their affiliates.
Our rights, and the rights of our stockholders, to recover claims against our officers, directors, and our Advisor are limited.
Maryland law provides that a director has no liability in such capacity if he performs his duties in good faith, in a manner he reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter provides that, subject to the applicable limitations set forth therein or under Maryland law, no director or officer will be liable to us or our stockholders for monetary damages. Our charter also provides that we will generally indemnify our directors, our officers, our employees, our agents, our Advisor and its affiliates for losses they may incur by reason of their service in those capacities to the maximum extent permitted under Maryland law. As a result, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our Advisor and its affiliates, than might otherwise exist under common law, which could reduce your and our recovery from these persons. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our Advisor in some cases.
Stockholders have limited control over changes in our policies and operations.
Our board of directors determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Our charter sets forth the stockholder voting rights. Under our charter and the Maryland General Corporation Law, our stockholders currently have a right to vote only on the following matters:
the election or removal of directors;
any amendment of our charter, except that our board of directors may amend our charter without stockholder approval to:
change our name;
increase or decrease the aggregate number of our shares;
increase or decrease the number of our shares of any class or series that we have the authority to issue;
classify or reclassify any unissued shares by setting or changing the preferences, conversion or other rights, restrictions, limitations as to distributions, qualifications or terms and conditions of redemption of such shares;
effect reverse stock splits;
after the listing of our shares of common stock on a national securities exchange, opting into any of the provisions of Subtitle 8 of Title 3 of the Maryland General Corporation Law;
our liquidation and dissolution; and

26


our being a party to any merger, consolidation, sale or other disposition of substantially all of our assets (notwithstanding that Maryland law may not require stockholder approval).
All other matters are subject to the discretion of our board of directors.
Our board of directors may change our investment policies and objectives generally and at the individual investment level without stockholder approval, which could alter the nature of your investment.
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interests of the stockholders. In addition to our investment policies and objectives, we may also change our stated strategy for any investment in an individual property. These policies may change over time. The methods of implementing our investment policies may also vary, as new investment techniques are developed. Our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our board of directors without the approval of our stockholders. As a result, the nature of your investment could change without your consent.
Federal Income Tax Risks
Failure to maintain our qualification as a REIT would adversely affect our operations and our ability to make distributions.
We elected, and qualified, to be taxed as a REIT, beginning with our taxable year ended December 31, 2006. In order for us to remain qualified as a REIT, we must satisfy certain requirements set forth in the Code and Treasury Regulations and various factual matters 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 continue 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.
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.
If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the distributions paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Qualification as a REIT is subject to the satisfaction of tax requirements and various factual matters and circumstances that are not entirely within our control. New legislation, regulations, administrative interpretations or court decisions could change the tax laws with respect to qualification as a REIT or the federal income tax consequences of being a REIT. Our failure to continue to qualify as a REIT would adversely affect your return on your investment.
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.
In light of our opportunistic and value-add investment strategy, it is possible that one or more sales of our properties may be "prohibited transactions" under provisions of the Code. Any subdivision of property, such as the sale of condominiums, would almost certainly be considered such a prohibited transaction. 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 income that we derive from such sale would be subject to a 100% tax. The Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% tax. A principal requirement of the safe harbor is that the REIT must hold the applicable property for not less than two years prior to its sale. Given our opportunistic and value-add investment strategy, it is entirely possible, if not likely, that the sale of one or more of our properties will not fall within the prohibited transaction safe harbor.
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 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 forego the use of a TRS in a transaction that does not meet the

27


safe harbor based on our own internal analysis, the opinion of counsel or the opinion of other tax advisors that the disposition will not be subject to the 100% penalty tax. In cases where a property disposition is not effected through a TRS, the Internal Revenue Service could 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 proceeds from such sale will be distributable by us to our stockholders.
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 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 net proceeds from such sale to us, 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 potentially at the state and local levels, 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 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.
If we own too many properties through one or more of our TRSs, then we may lose our status as a REIT. If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the distributions paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax. As a REIT, the value of the stock we hold in all of our TRSs may not exceed 25% of the value of all of our assets at the end of any calendar quarter. If the Internal Revenue Service were to determine that the value of our interests in all of our TRSs exceeded 25% of the value of total assets 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 Internal Revenue Service may conclude that the value of our interests in our TRSs exceeds 25% 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 be from sources other than real estate. Distributions paid to us from a TRS are considered to be non-real estate income. Therefore, we may fail to qualify as a REIT if distributions from all of our 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. Our failure to continue to qualify as a REIT would adversely affect your 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 Internal Revenue Service as non-qualifying income for purposes of satisfying the "income tests" required for REIT qualification. If this income were, in fact, treated as non-qualifying, and if the aggregate of such income and any other non-qualifying income in any taxable year ever exceeded 5% of our gross revenues for such year, we could lose our REIT status for that taxable year and the four ensuing taxable years. Our failure to continue to qualify as a REIT would adversely affect your return on your investment.
If our operating partnership fails to maintain its status as a partnership, its income may be subject to taxation, which would reduce our cash available for distribution to our stockholders.
We intend to maintain the status of the operating partnership as a partnership for federal income tax purposes. However, if the Internal Revenue Service were to successfully challenge the status of the operating partnership as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that the operating partnership could make to us. This would also result in our losing REIT status, and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to make distributions and the return on your investment. 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, it would be subject to taxation as a corporation,

28


thereby reducing distributions to the operating partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain REIT status.
In certain circumstances, we may be subject to federal and state taxes, which would reduce our cash available for distribution to our stockholders.
Even if we qualify and maintain our status as a REIT, we may become subject to federal and state taxes. For example, if we have net income from a "prohibited transaction," such income will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes, including potentially the "margin tax" in the State of Texas, on our income or property, either directly or at the level of the operating partnership or at the level of the other companies through which we indirectly own our assets. Any federal or state taxes paid by us will reduce our cash available for distribution to our stockholders.
Non-U.S. income or other taxes, and a requirement to withhold any non-U.S. taxes, may apply, and, if so, the amount of net cash from operations payable to you will be reduced.
We have made investments in real estate located outside of the United States and may invest in stock or other securities of entities owning real property located outside the U.S. As a result, we may be subject to foreign (i.e., non-U.S.) income taxes, stamp taxes, real property conveyance taxes, withholding taxes, and other foreign taxes or similar impositions in connection with our ownership of foreign real property or foreign securities. The country in which the real property is located may impose such taxes regardless of whether we are profitable and in addition to any U.S. income tax or other U.S. taxes imposed on profits from our investments in such real property or securities. If a foreign country imposes income taxes on profits from our investment in foreign real property or foreign securities, you will not be eligible to claim a tax credit on your U.S. federal income tax returns to offset the income taxes paid to the foreign country, and the imposition of any foreign taxes in connection with our ownership and operation of foreign real property or our investment in securities of foreign entities will reduce the amounts distributable to you. Similarly, the imposition of withholding taxes by a foreign country will reduce the amounts distributable to you. We expect the organizational costs associated with non-U.S. investments, including costs to structure the investments so as to minimize the impact of foreign taxes, will be higher than those associated with U.S. investments. Moreover, we may be required to file income tax or other information returns in foreign jurisdictions as a result of our investments made outside of the U.S. Any organizational costs and reporting requirements will increase our administrative expenses and reduce the amount of cash available for distribution to you. You are urged to consult with your own tax advisors with respect to the impact of applicable non-U.S. taxes and tax withholding requirements on an investment in our common stock.
Our foreign investments will be subject to changes in foreign tax or other laws, as well as to changes in U.S. tax laws, and such changes could negatively impact our returns from any particular investment.
We have made investments in real estate located outside of the United States. Such investments are typically structured to minimize non-U.S. taxes, and generally include the use of holding companies. Our ownership, operation and disposition strategy with respect to non-U.S. investments will take into account foreign tax considerations. For example, it is typically advantageous from a tax perspective in non-U.S. jurisdictions to sell interests in a holding company that owns real estate rather than the real estate itself. Buyers of such entities, however, will often discount their purchase price by any inherent or expected tax in such entity. Additionally, the pool of buyers for interests in such holding companies is typically more limited than buyers of direct interests in real estate, and we may be forced to dispose of real estate directly, thus potentially incurring higher foreign taxes and negatively affecting the return on the investment.
We will also capitalize our holding companies with debt and equity to reduce foreign income and withholding taxes as appropriate and with consultation with local counsel in each jurisdiction. Such capitalization structures are complex and potentially subject to challenge by foreign and domestic taxing authorities.
We may use certain holding structures for our non-U.S. investments to accommodate the needs of one class of investors which reduce the after-tax returns to other classes of investors. For example, if we interpose an entity treated as a corporation for United States tax purposes in our chain of ownership with respect to any particular investment, U.S. tax-exempt investors will generally benefit as such investment will no longer generate unrelated business taxable income. However, if a corporate entity is interposed in a non-U.S. investment holding structure, this would prevent individual investors from claiming a foreign tax credit for any non-U.S. income taxes incurred by the corporate entity or its subsidiaries.

29


Foreign investments are subject to changes in foreign tax or other laws. Any such law changes may require us to modify or abandon a particular holding structure. Such changes may also lead to higher tax rates on our foreign investments than we anticipated, regardless of structuring modifications. Additionally, U.S. tax laws with respect to foreign investments are subject to change, and such changes could negatively impact our returns from any particular investment.
Legislative or regulatory action could adversely affect the returns to our investors.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not 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. You are urged to consult with your own tax advisor with respect to the impact of recent legislation on your investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. You also should note that our counsel's tax opinion is based upon existing law and Treasury Regulations, applicable as of the date of its opinion, all of which are subject to change, either prospectively or retroactively.
For taxable years beginning January 1, 2014, the tax rate on certain "qualified dividend income" is 20% for certain individuals, trusts and estates. REIT distributions generally do not qualify for "qualified dividend income" tax rate, therefore individuals, trusts and estates may be subject to a maximum tax rate of 39.6% on ordinary REIT dividends. For corporate stockholders, the maximum corporate tax rate for such distributions is 35%. 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 to our stockholders, and we thus expect to avoid the "double taxation" to which other corporations are typically subject.
Although REITs continue to receive substantially better tax treatment than entities taxed as corporations, 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 interests of our stockholders.
Equity participation in mortgage, bridge, mezzanine or other loans may result in taxable income and gains from these properties that could adversely impact our REIT status.
If we participate under a loan in any appreciation of the properties securing the mortgage loan or its cash flow and the Internal Revenue Service 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.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order for federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code.
From time to time, we may generate taxable income greater than our taxable income for financial reporting purposes, or our taxable income may be greater than our cash flow available for distribution to stockholders (for example, where a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise). If we do not have other funds available in these situations we could be required to borrow funds, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Item 1B.    Unresolved Staff Comments.
None.


30


Item 2.    Properties.
General
As of December 31, 2014, we wholly owned four properties and consolidated three properties through investments in joint ventures on our consolidated balance sheet. We are the mezzanine lender for one multifamily property. In addition, we have a noncontrolling, unconsolidated ownership interest in a joint venture consisting of 21 properties that is 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.
 The following table presents certain information about our consolidated properties as of December 31, 2014:
Property Name
Location
 
Approximate
Rentable
Square Footage
 
Description
 
Ownership
Interest
 
Year
Acquired
 
Occupancy at
December 31,
2014
 
Occupancy at
December 31,
2013
 
Effective
Annual
Rent per
Square
Foot/Unit
as of
December 31,
2014(1)
 
Effective
Annual
Rent per
Square
Foot/Unit
as of
December 31,
2013(1)
Chase Park Plaza
St. Louis, Missouri
 

 
hotel and condominium development property
 
100%(2)
 
2006
 
69%(3)
 
63%(3)
 
n/a

 
n/a

Las Colinas Commons
Irving, Texas
 
239,000

 
3-building office complex
 
100%
 
2006
 
74%
 
74%
 
15.46

 
4.92

Frisco Square
Frisco, Texas
 
(4)
 
mixed-use development
(multifamily, retail, office, restaurant and land)
 
(4)
 
2007
 
(5)
 
(5)
 
(6
)
 
(6
)
Northpoint Central
Houston, Texas
 
180,000

 
9-story office building
 
100%
 
2007
 
97%
 
89%
 
22.07

 
18.71

The Lodge & Spa at Cordillera
Edwards, Colorado
 

 
land, hotel and development property
 
94%
 
2007
 
56%(3)
 
54%(3)
 
n/a

 
n/a

Northborough Tower
Houston, Texas
 
207,000

 
14-story office building
 
100%
 
2008
 
100%
 
100%
 
26.68

 
26.68

Royal Island(7)
Commonwealth of Bahamas
 

 
land
 
87%
 
2012
 
n/a
 
n/a
 
n/a

 
n/a

_______________________________________________________________________________
(1)
Effective Annual Rent is calculated using leases in place as of December 31 and takes into account any rent concessions.
(2)
On August 5, 2014, we received the 5% interests of Chase Park Plaza Hotel and Chase — The Private Residences held by Kingsdell, L.P. and now own 100% of the entities.
(3)
Hospitality property occupancy is a 12-month average occupancy.
(4)
Our Frisco Square mixed-use development consists of 101,000 square feet of office space, 71,000 square feet of retail, a 41,500 square foot movie theater, 114 multifamily units, approximately 27 acres of land which we own 100% and a 3.4 acre multifamily project in development in which we own a 90% interest.
(5)
Occupancy for retail, office, and restaurant was 92% and 87% at December 31, 2014 and 2013, respectively. Occupancy for multifamily was 91% and 93% at December 31, 2014 and 2013, respectively.
(6)
Effective annual rent per square foot for retail, office, and restaurant was $21.58 and $20.34 at December 31, 2014 and December 31, 2013, respectively. Effective annual rent per unit for multifamily was $14,132 and $13,625 at December 31, 2014 and December 31, 2013, respectively.
(7)
Our initial investment in Royal Island was made in May 2007. We consolidated Royal Island as of June 6, 2012 when we obtained all of the outstanding shares of Royal Island (Australia) Pty Limited. A third party indirectly owns 12.71% of Royal Island.
Three of our consolidated properties represented more than 10% of our 2014 total revenue: Chase Park Plaza at 56%; Frisco Square at 12%; and Northborough Tower at 11%.
The following information generally applies to all of our investments in real estate properties:
we believe all of our investment properties are adequately covered by insurance and suitable for their intended purposes;
we have plans to make repairs and/or improvements or upgrades at some of our investment properties for which we do not currently have bids from which to estimate the costs, and, at some other properties, we have plans for redevelopment or development in accordance with planned budgets;
our investment properties are located in markets where we are subject to competition in attracting new tenants and retaining current tenants; and

31


depreciation is provided on a straight-line basis over the estimated useful lives of the buildings.
Portfolio Diversification
As an opportunistic and value-add fund, we utilize a business model driven by investment strategy and expected performance characteristics. Accordingly, we have investments in several types of real estate, including office, hotel, multifamily, condominium, and land held for development.
The following table shows the total revenue of our real estate portfolio for the properties we consolidate in our financial
statements as of December 31, 2014, including revenues generated from tenant reimbursements:
Property
 
Description
 
2014
Revenue (in 000s)
 
Percentage of
2014
Revenue
Chase Park Plaza
 
Hotel and condominium development property
 
$
30,817

 
56
%
Las Colinas Commons
 
3-building office complex
 
2,959

 
5
%
Frisco Square
 
Mixed-use development (multifamily, retail, office, restaurant and land)
 
6,616

 
12
%
Northpoint Central
 
9-story office building
 
4,234

 
8
%
The Lodge & Spa at Cordillera
 
Land, hotel and development property
 
4,485

 
8
%
Northborough Tower
 
14-story office building
 
6,233

 
11
%
 
 
 
 
$
55,344

(1)
100
%
____________________________________________________
(1)
We retained the mineral rights on 4950 S. Bowen Road, an investment in land, which we sold in 2013. The total 2014 revenue excludes miscellaneous income of $0.1 million we received for mineral rights in 2014.
Geographic Diversification
The following table shows the geographic diversification of our real estate portfolio for those properties we consolidate in our financial statements as of December 31, 2014. This table does not include revenues generated from tenant reimbursements. See footnote (1) below:
Location
2014 Revenue(1) (in 000s)
 
Percentage of
2014
Revenue
Missouri
$
30,815

 
59
%
Texas
16,619

 
32
%
Colorado
4,481

 
9
%
 
$
51,915

 
100
%
____________________________________________________________________
(1)
2014 revenue represents contractual base rental income of our office properties, as well as revenue from our multifamily and hotel properties, 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.


32


Future Lease Payments Table
The following table presents the future minimum base rental payments of our office properties due to us over the next ten years from our consolidated office properties as of December 31, 2014 (in thousands):
Year
Future
Minimum
Base Rental
Payments
2015
$
16,001

2016
14,815

2017
13,431

2018
6,573

2019
3,625

2020
2,128

2021
2,021

2022
1,409

2023
1,130

2024
703

Thereafter
651

Total
$
62,487


Portfolio Lease Expirations
The following table presents lease expirations at our consolidated office properties as of December 31, 2014:
Year of Expiration
Number of
Leases
Expiring
 
Annualized
Base Rent(1)          (in 000s)
 
Percent of
Portfolio
Annualized
Base Rent
Expiring
 
Leased
Rentable
Sq. Ft.
 
Percent of
Portfolio
Rentable
Sq. Ft.
Expiring
2015
8

 
$
1,285

 
7
%
 
68,110

 
9
%
2016
11

 
1,792

 
10
%
 
74,752

 
10
%
2017
9

 
1,953

 
11
%
 
85,547

 
11
%
2018
13

 
7,153

 
41
%
 
257,335

 
34
%
2019
10

 
3,054

 
17
%
 
158,285

 
21
%
2020
2

 
128

 
1
%
 
4,312

 
1
%
2021
2

 
539

 
3
%
 
19,796

 
3
%
2022
1

 
267

 
2
%
 
14,608

 
2
%
2023
4

 
621

 
4
%
 
20,465

 
3
%
2024
1

 
76

 
%
 
2,819

 
%
Thereafter
1

 
684

 
4
%
 
41,464

 
6
%
Total
62

 
$
17,552

 
100
%
 
747,493

 
100
%
_______________________________________________________________________________
(1)
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.

33



Item 3.    Legal Proceedings
We are not party to, and none of our properties are subject to, any material pending legal proceedings.
Item 4.    Mine Safety Disclosures
None.



34




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. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder. Unless and until our shares are listed on a national securities exchange, it is not expected that a public market for the shares will develop.
Determination of Estimated Per Share Value
On November 10, 2014, pursuant to the 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 as of October 31, 2014 of $3.58. The value per share was based on the estimated value of our assets less the estimated value of our liabilities, divided by the number of shares outstanding, all as of September 30, 2014. This estimate is being provided to assist broker-dealers in connection with their obligations under applicable Financial Industry Regulatory Authority rules with respect to customer account statements and to assist fiduciaries in discharging their obligations under Employee Retirement Income Security Act reporting requirements.
 Process and Methodology
Our board of directors’ objective in determining an estimated value per share was to arrive at an estimated value that it believes is reasonable after consultation with our Advisor and with an independent, third-party valuation and advisory firm engaged by the Company, using what the board of directors deems to be appropriate valuation methodologies and assumptions under current circumstances.
In arriving at an estimated value per share for the board’s consideration, the Advisor utilized valuation methodologies that it believes are standard and acceptable in the real estate industry for the types of assets held by the Company. As a part of the Company’s valuation process, the Company obtained the opinion of Capright Property Advisors, LLC (“Capright”), an independent third party, to estimate the “as is” market value of the Company’s real estate investments and to render an opinion as to the reasonableness of the valuation methodology and valuation conclusions of the Advisor for the Company’s other assets and liabilities. 
Our board of directors met on November 10, 2014 to review and consider the valuation analyses prepared by the Advisor and Capright.  The Advisor presented a report to the board of directors with an estimated per share value, and the board of directors conferred with the Advisor and a representative from Capright regarding the methodologies and assumptions used. The board of directors, which is responsible for determining the estimated per share valuation, considered all information provided in light of its own familiarity with our assets and unanimously approved an estimated value of $3.58 per share.
In forming their conclusion of the value of the real estate investments held by the Company as of September 30, 2014, Capright’s conclusion was subject to various limitations, and the scope of their work included:
Review of the Company’s real estate investments’ historical performance and business plans related to operations of the investments;
Review of the applicable markets by means of publications and other resources to measure current market conditions, supply and demand factors, and growth patterns;
Review of key market assumptions for mortgage liabilities, including but not limited to, interest rates and collateral;
Review of the data models prepared by the Advisor supporting the valuation for each investment;
Review of key assumptions utilized by the Advisor in the valuation models, including but not limited to, terminal capitalization rates, discount rates, and growth rates;
Review of the Advisor's calculations related to value allocations to non-controlling interests and joint venture interests, based on contractual terms and market assessments; and
Review of valuation methodology used by the Advisor for other assets and liabilities.
In forming their opinion of the value of the nine investments held by the Company as of October 31, 2014, Capright performed appraisals on six of our investment properties for which we did not have a recent appraisal.  For the remaining three investments not appraised by Capright, they reviewed the reasonableness of and relied upon third-party appraisals for one of our investments. The Company's remaining investments were valued based on sales contracts, purchase offers, and valuation information provided by the Advisor.

35


Capright provided an opinion that the resulting “as is” market value for the Company’s properties as calculated by the Advisor, and the other assets and liabilities as valued by the Advisor, along with the corresponding net asset value (NAV) valuation methodologies and assumptions used by the Advisor to arrive at a recommended value of $3.58 per share as of October 31, 2014, were appropriate and reasonable.
Capright has acted as a valuation advisor to the Company in connection with this assignment. The compensation paid to Capright in connection with this assignment was not contingent upon the successful completion of any transaction or conclusion reached by Capright. Capright has rendered valuation advisory services to another Behringer-sponsored investment programs during this year for which it received usual and customary compensation. Capright may be engaged to provide financial advisory services to the Company, its Advisor or other Behringer-sponsored investment programs or their affiliates in the future.
The estimated valuation of $3.58 per share as of October 31, 2014, reflects an increase from the estimated valuation of $3.08 per share as of November 11, 2013. The investment that was most significant to the increase in our real estate asset value related to Chase Park Plaza Hotel. As a result of improved hotel operations and improving market conditions the valuation of the asset increased. A redevelopment plan for the asset is under consideration. Additionally, on August 5, 2014, we received the 5% interests of Chase Park Plaza Hotel and Chase — The Private Residences held by Kingsdell, L.P. and now own 100% of the entities. The real estate valuation for The Lodge & Spa at Cordillera also increased based upon a then current sale contract. Our office and mixed-use properties were all increases to the estimated share valuation. These increases were offset by a decrease related to our unconsolidated joint venture investment in Central Europe. A decline in real estate values as well as a weakened currency led to the decrease.
The following is a summary of the valuation methodologies used for each type of asset:
Investments in Real Estate.  The Company has focused on acquiring commercial real estate properties in different asset classes.  Due to the opportunistic or value-added nature of the Company’s real estate investments, both Capright and our Advisor utilized a variety of valuation methodologies, each as appropriate for the asset type under consideration to assign an estimated value to each real estate asset. 
Our Advisor estimated the value of our investments in real estate utilizing multiple valuation methods, including an income approach using discounted cash flow analysis and a sales comparable analysis. The key assumptions used in the discounted cash flow approach were specific to each property type, market location, and quality of each property, and were based on similar investors’ return expectations and market assessments and are reflected in the table included under “Allocation of Estimated Value” below. In calculating values for our assets, our Advisor used balance sheet and cash flow estimates as of September 30, 2014. In addition, for one of our assets our Advisor used a sales comparable analysis based on a sales contract.
Capright prepared appraisals on seven of our properties in connection with the valuation. The appraisals estimated values by using discounted cash flow, sale comparable, or a weighting of these approaches in determining each property’s value. The appraisals employed a range of terminal capitalization rates, discount rates, growth rates, and other variables that fell within ranges that Capright and the Advisor believed would be used by similar investors to value the properties we own. The assumptions used in developing these estimates were specific to each property (including holding periods) and were determined based upon a number of factors including the market in which the property is located, the specific location of the property within the market, property and market vacancy, tenant demand for space and investor demand and return requirements.
The value of our unconsolidated joint venture investment in a portfolio of retail and industrial properties located in Central Europe was calculated using bank valuations prepared for the European lenders using the September 30, 2014 exchange rate. Capright reviewed each of these independent valuations to confirm the reasonableness of their assumptions and methodologies.
We calculated the value of the one remaining residential condominium unit from the Chase Park Plaza asset using recent comparable sales data, listing price information, and offers to date.
While our Advisor believes that the approaches used by appraisers in valuing our real estate assets, including an income approach using discounted cash flow analysis and sales comparable analysis, is standard in the real estate industry, 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 financial statements, subject to any adjustments applicable under GAAP.
Investment in Mezzanine Loan. To calculate the value of our mezzanine loan, we estimated the underlying collateral value of the multifamily project and compared that estimated value to the amount of the senior indebtedness, which has priority of payment to our mezzanine loan.

36


Construction in Progress. The Company has one multifamily development currently under construction. As the construction on this project commenced on September 2, 2014, we estimated the value of the project as the land value of the parcel per the Capright appraisal plus construction costs as of September 30, 2014.
Mortgage Loans. Values for mortgage loans were estimated by the Advisor using a discounted cash flow analysis, which used inputs based on the remaining loan terms and estimated current market interest rates for mortgage loans with similar characteristics, including remaining loan term and loan-to-value ratios. The current market interest rate was generally determined based on market rates for available comparable debt. The estimated current market interest rates for mortgage loans ranged from 1.93% to 11.10%.
Other Assets and Liabilities. For a majority of our other assets and liabilities, consisting of cash and cash equivalents, short-term investments, accounts payable and other liabilities, the carrying values as of September 30, 2014 were considered equal to fair value by the Advisor due to their cost-based characteristics or short maturities. In connection with our estimated valuation of operating properties and mortgage loans payable, certain GAAP balances related to accumulated depreciation and amortization, straight-lining of rents, deferred revenues and expenses, and debt and notes receivable premiums and discounts have been eliminated as the accounts were already considered in the estimated values.
Noncontrolling Interests. In those situations where our consolidated assets and liabilities are held in joint venture structures in which other equity holders have an interest, the Advisor has valued those noncontrolling interests based on the terms of the joint venture agreement applied in the liquidation of the joint venture.  The resulting noncontrolling interests are a deduction to the estimated value.
Common Stock Outstanding. In deriving an estimated per share value, the total estimated value was divided by 56.5 million, the total number of common shares outstanding as of October 31, 2014, on a fully diluted basis, which includes financial instruments that can be converted into a known or determinable number of common shares. As of the valuation date, none of the financial instruments that could be converted into common shares are currently convertible into a known or determinable number of common shares. The determination of the number of common shares outstanding used in the estimated value per share is the same as used in GAAP computations for per share amounts.
Our estimated value per share was calculated by aggregating the value of our assets, subtracting the value of our liabilities, and dividing the net total by the fully-diluted common stock outstanding. Our estimated value per share is effective as of October 31, 2014.
The estimated per share value does not reflect a liquidity discount for the fact that the shares are not traded on a national securities exchange, a discount for the non-assumability or prepayment obligations associated with certain of the Company’s debt, or a discount for our corporate level overhead and other costs that may be incurred, including any costs related to the sale of the Company’s assets. Different parties using different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The markets for real estate can fluctuate and values are expected to change in the future.
This value does not reflect “enterprise value,” which could include premiums or discounts for:
The size of our portfolio: although some buyers may pay more for a portfolio compared to prices for individual properties;
Characteristics of our working capital, leverage, credit facility and other financial structures where some buyers may ascribe different values based on synergies, cost savings or other attributes;
Disposition and other expenses that would be necessary to realize the value;
The provisions under our advisory agreement and our potential ability to secure the services of a management team on a long-term basis; or
The potential difference in our share value if we were to list our shares on a national securities exchange.

37


Allocation of Estimated Value
As of October 31, 2014, we were invested in nine assets. As of November 11, 2013, we were invested in ten assets. We excluded Royal Island from the allocations in 2014 and 2013 as it is valued at less than the amount of its nonrecourse debt and liabilities. Therefore, we have not attributed any value to this property in the Company’s estimate of value. The following is our estimated per share value allocated among our asset types:
 
 
October 31, 2014
 
November 11, 2013
 
 
Estimated
 
Estimated
 
 
Value per Share
 
Value per Share
Consolidated real estate properties (1)
 
$
5.14

 
 
$
4.60

 
Unconsolidated joint venture (2)
 
0.21

 
 
0.28

 
Construction in Progress
 
0.12

 
 

 
Mezzanine loan investment
 

 
 

 
Mortgage debt (3)
 
(2.49
)
 
 
(2.25
)
 
Other assets and liabilities
 
0.61

 
 
0.49

 
Noncontrolling interests
 
(0.01
)
 
 
(0.04
)
 
Estimated net asset value per share
 
3.58

 
 
3.08

 
Estimated enterprise value premium
 

 
 

 
Total estimated value per share (4)
 
$
3.58

 
 
$
3.08

 

(1)
The following are the key assumptions (shown on a weighted average basis) which are used in the discounted cash flow models to estimate the value of the real estate assets.
 
 
Office Buildings
 
Hotels
 
Mixed-Use
Exit capitalization rate
 
8.29%
 
8.00%
 
7.31%
Discount rate
 
9.05%
 
10.00%
 
8.14%
Annual market rent growth rate
 
3.00%
 
4.12%
 
3.00%
Average holding period
 
10.28 years
 
10.00 years
 
10.27 years

(2)
The following is the key assumption (shown on a weighted average basis) which is used in the direct capitalization method in order to estimate the value of our unconsolidated joint venture investment:
Direct capitalization rate
 
8.56
%

(3)
Notes payable net of $(906,000) mark-to-market adjustment.

(4)
As of October 31, 2014 we had 56,500,472 shares outstanding. The potential dilutive effect of our common stock equivalents does not impact our estimated per share value as there were no potentially dilutive securities outstanding at September 30, 2014.

The consolidated real estate assets (excluding Royal Island) we owned as of September 30, 2014 reflect an overall decrease of 13% from the original purchase price (excluding acquisition costs and operating deficits) plus post-acquisition capital investments.

38


While we believe that our assumptions utilized are reasonable, a change in these assumptions would affect the calculation of value of our real estate assets. The table below presents the estimated increase or decrease to our estimated value per share for a 25 basis point increase and decrease in the discount rates and capitalization rates. The table is only hypothetical to illustrate possible results if only one change in assumptions was made, with all other factors held constant. Further, each of these assumptions could change by more than 25 basis points or not change at all. We have also invested in non-U.S. dollar denominated real property and real estate-related securities exposing us to fluctuating currency rates. A change in the foreign exchange currency rates may have an adverse impact on our value.
 
 
Change in Estimated Value per Share
 
 
Increase of
25 basis points
 
Decrease of
25 basis points
Capitalization rate
 
$
(0.18
)
 
 
$
0.20
 
 
Discount rate*
 
$
(0.07
)
 
 
$
0.08
 
 
* Discount rate calculation does not include Central Europe properties 

Historical Estimated Values per Share

The historical reported estimated values per share of the Company's common stock approved by the board of directors are set forth below:
Estimated Value per Share
 
Effective Date of Valuation
 
Filing with the Securities and Exchange Commission
 
 
 
 
 
$3.08
 
November 11, 2013
 
Quarterly Report on Form 10-Q, filed November 14, 2013
$3.58
 
December 14, 2012
 
Current Report on Form 8-K, filed December 20, 2012
$4.12
 
December 20, 2011
 
Current Report on Form 8-K, filed December 28, 2011
$7.66
 
January 10, 2011
 
Current Report on Form 8-K, filed January 14, 2011
$8.03
 
January 8, 2010
 
Current Report on Form 8-K, filed January 15, 2010
$8.17
 
June 22, 2009
 
Current Report on Form 8-K, filed June 22, 2009

Limitations of Estimated Value Per Share

As with any valuation methodology, our methodology is 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, the Company can give no assurance that:
a stockholder would be able to resell his or her shares at this estimated value;
a stockholder would ultimately realize distributions per share equal to the Company’s estimated value per share upon liquidation of the Company’s assets and settlement of its liabilities or a sale of the Company;
the Company’s shares would trade at the estimated value per share on a national securities exchange; or
the methodologies used to estimate the Company’s value per share would be acceptable to FINRA or under ERISA for compliance with their respective reporting requirements.
For further information regarding the limitations of the estimated value per share, see the Estimated Valuation Policy filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 22, 2009. 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.

39


The estimated value of our shares was calculated as of a particular point in time. The value of the Company’s shares will fluctuate over time in response to developments related to individual assets in the portfolio and the management of those assets and in response to the real estate and finance markets.  There is no assurance of the extent to which the current estimated valuation should be relied upon for any purpose after its effective date regardless that it may be published on any statement issued by the Company or otherwise.
The Company is diligently working to secure new leases with quality tenants to: increase net operating income and the ultimate value of our assets; complete, market, and sell development assets; execute on other value creation strategies; and minimize expenses when possible.

 Holders
As of February 28, 2015, we had 56,500,472 shares of common stock outstanding held by a total of approximately 21,000 stockholders.
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 decision will be influenced, in substantial part, by its obligation to ensure that we maintain our status as a REIT.  In connection with entering our disposition phase, on March 28, 2011, our board of directors discontinued regular quarterly distributions. Any future distributions will be based on available cash after weighing operational needs.
Historically, distributions paid to stockholders have been funded through various sources, including cash flow from operating activities, proceeds raised as part of our initial public offering, reinvestment through our distribution reinvestment plan and/or additional borrowings. We had no distributions during the years ended December 31, 2014 and 2013.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information regarding our equity compensation plans as of December 31, 2014:
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
75,000

 
$
7.50

 
10,925,000

*
Equity compensation plans not approved by security holders

 

 

 
Total
75,000

 
$
7.50

 
10,925,000

*
_______________________________________________________________________________
*
All shares authorized for issuance pursuant to awards not yet granted under the Incentive Plan.
Share Redemption Program
In February 2006, our board of directors authorized a share redemption program for stockholders who held their shares for more than one year.  Under the program, our board reserved the right in its sole discretion at any time, and from time to time, to (1) waive the one-year holding period in the event of the death, disability or bankruptcy of a stockholder or other exigent circumstances, (2) reject any request for redemption, (3) change the purchase price for redemptions, or (4) terminate, suspend or amend the share redemption program.
Our board of directors has not considered requests for redemptions ("Ordinary Redemptions") for reasons other than in the event of death, disability or need for long-term care since March 2009 when the board determined not to accept, and to suspend until further notice, Ordinary Redemptions.
In January 2011, the board completely suspended the redemption program and has not considered any redemption requests since 2010.  Therefore, we did not redeem any shares of our common stock during the year ended December 31, 2014.

40


We have not presented information regarding submitted and unfulfilled redemptions as our share redemption program has been completely suspended since the first quarter of 2011 and we believe many stockholders who may otherwise desire to have their shares redeemed have not submitted a request due to the program’s suspension.
 Any redemption requests submitted while the program is suspended will be returned to investors and must be resubmitted upon resumption of the share redemption program.  As we have entered our disposition phase, we do not expect to resume our share redemption program; however, if the share redemption program is resumed, we will give all stockholders notice that we are resuming redemptions, so that all stockholders will have an equal opportunity to submit shares for redemption.  Upon resumption of the program, any redemption requests will be honored pro rata among all requests received based on funds available and will not be honored on a first come, first served basis.
Item 6.    Selected Financial Data.
We were formed on November 23, 2004, and commenced operations on November 9, 2005 when we accepted the minimum amount of subscriptions pursuant to the Offering.
As of December 31, 2010, we were invested in 21 assets, eight of which were consolidated in our continuing operations, including two hotels and development properties and a mixed use office, retail and multifamily property. We were the mezzanine lender for one multifamily property. We had noncontrolling, unconsolidated ownership interests in three properties and one investment in a joint venture consisting of 22 properties that were accounted for using the equity method. In August 2010, pursuant to a deed-in-lieu of foreclosure, we transferred ownership of our property, Ferncroft Corporate Center, to the lender associated with the property. The results of this property are classified as discontinued operations in the accompanying consolidated statements of operations and other comprehensive loss.
As of December 31, 2011, we were invested in 17 assets, eight of which were consolidated in our continuing operations. We were the mezzanine lender for one multifamily property which, prior to January 1, 2010, we consolidated as the primary beneficiary of the variable interest entity. In addition, we had noncontrolling, unconsolidated ownership interests in two properties and one investment in a joint venture consisting of 22 properties that were accounted for using the equity method. During the year ended December 31, 2011, we sold four of our wholly owned properties. The property in one of our unconsolidated joint ventures was sold in December 2011.
As of December 31, 2012, we were invested in 12 assets, nine of which were consolidated in our continuing operations. We were the mezzanine lender for one multifamily property. In addition, we had a noncontrolling, unconsolidated ownership interest in a joint venture consisting of 22 properties that were accounted for using the equity method. During the year ended December 31, 2012, we sold four of our consolidated properties and our noncontrolling, unconsolidated ownership interest in one joint venture.
As of December 31, 2013, we were invested in nine assets, seven of which were consolidated in our continuing operations. We were the mezzanine lender for one multifamily property. In addition, we had a noncontrolling, unconsolidated ownership interest in a joint venture consisting of 22 properties that were accounted for using the equity method. During the year ended December 31, 2013, we sold two of our wholly owned properties and our interest in one joint venture.
As of December 31, 2014, we were invested in nine assets, seven of which were consolidated in our continuing operations. We were the mezzanine lender for one multifamily property. In addition, we had a noncontrolling, unconsolidated ownership interest in a joint venture consisting of 21 properties that is accounted for using the equity method. During the year ended December 31, 2014, we did not have any dispositions of our real estate investments. In August 2014, we sold one property in our unconsolidated joint venture.

41


Accordingly, the following selected financial data may not be comparable. The following data should be read in conjunction with our consolidated financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing in Item 7 in this Annual Report on Form 10-K.
The selected data below has been derived from our audited consolidated financial statements (in thousands, except per share amounts):
 
As of December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Total assets
$
314,492

 
$
322,120

 
$
366,452

 
$
531,179

 
$
697,624

Long-term debt obligations
$
153,556

 
$
138,085

 
$
138,863

 
$
265,857

 
$
347,825

Other liabilities
26,898

 
24,665

 
53,997

 
35,379

 
33,529

Noncontrolling interest (1)
617

 
2,372

 
1,364

 
7,593

 
3,609

Total Behringer Harvard Opportunity REIT I, Inc. equity
133,421

 
156,998

 
172,228

 
222,350

 
312,661

Total liabilities and equity
$
314,492

 
$
322,120

 
$
366,452

 
$
531,179

 
$
697,624


 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Revenues
$
55,487

 
$
55,068

 
$
42,004

 
$
37,311

 
$
61,954

Loss from continuing operations(1)
(24,420
)
 
(23,445
)
 
(62,286
)
 
(85,540
)
 
(41,040
)
Income (loss) from discontinued operations(2)

 
3,985

 
5,728

 
(9,920
)
 
(25,643
)
Gain on sale of real estate
476

 
86

 

 
1,334

 
3,901

Net loss
(23,944
)
 
(19,374
)
 
(56,558
)
 
(94,126
)
 
(62,782
)
Add: Net loss (income) attributable to the noncontrolling interest(3)
414

 
(882
)
 
3,782

 
5,518

 
1,549

Net loss attributable to common stockholders
(23,530
)
 
(20,256
)
 
(52,776
)
 
(88,608
)
 
(61,233
)
Basic and diluted loss per share
$
(0.42
)
 
$
(0.36
)
 
$
(0.93
)
 
$
(1.57
)
 
$
(1.09
)
Distributions declared per share
$

 
$

 
$

 
$
(0.17
)
 
$
0.10

_______________________________________________________________________________
(1)
Loss from continuing operations includes impairments of $9.4 million, $0.4 million, $7.3 million, $12.7 million and $7.6 million in the years ended December 31, 2014, 2013, 2012, 2011 and 2010, respectively. In addition, we recorded impairments on our condominium inventory of $0.3 million, $12.2 million, $5.9 million and $5.7 million in 2013, 2012, 2011 and 2010, respectively.
(2)
Income (loss) from discontinued operations includes impairments of $0.3 million, $1.3 million, $5.2 million and $18.3 million for the years ended December 31, 2013, 2012, 2011 and 2010, respectively. Income (loss) from discontinued operations includes gain on sales of $12 million and $0.8 million in the years ended December 31, 2012 and 2011, respectively.
(3)
As of December 31, 2014, noncontrolling interest consists of the noncontrolling ownership interests in real estate properties that we consolidate; The Lodge & Spa at Cordillera, Royal Island and The Ablon at Frisco Square. Effective August 5, 2014, we have a 100% ownership interest in Chase Park Plaza Hotel. Prior to August 5, 2014, we owned a 95% interest in the property.
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.
Executive Overview
We are a Maryland corporation that was formed in November 2004 to invest in and operate commercial real estate or real-estate related assets located in or outside the United States on an opportunistic and value-add basis. We conduct substantially all of our business through our operating partnership and its subsidiaries. We are organized and qualify as a REIT for federal income tax purposes.
We are externally managed and advised by Behringer Harvard Opportunity Advisors I, a Texas limited liability company formed in June 2007. Behringer Harvard Opportunity Advisors I is responsible for managing our day-to-day affairs and for identifying and making acquisitions, dispositions and investments on our behalf.

42


As of December 31, 2014, we wholly owned four properties and consolidated three properties through investments in joint ventures, all of which were consolidated in our financial statements. We are the mezzanine lender for one multifamily property. In addition, we have a noncontrolling, unconsolidated ownership interest in an investment in a joint venture consisting of 21 properties that is accounted for using the equity method. Our investment properties are located in Colorado, Missouri, Nevada, Texas, the Commonwealth of The Bahamas, the Czech Republic, Poland, Hungary, and Slovakia.

Liquidity and Capital Resources
Liquidity Demands
Our primary objectives are to focus on the disposition of the properties remaining in our portfolio, while continuing to preserve capital and sustain and enhance property values. Our ability to continue to execute this plan is contingent on our ability to dispose of our properties in an orderly fashion, thus providing needed liquidity to fund our remaining development activities, capital needs at certain properties and the Company's operations. Our cash balance at December 31, 2014 was $35 million. 
Our financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business as we proceed through our disposition phase.  As is usual for opportunity-style real estate investment programs, we are structured as a finite-life entity, and have entered the final phase of operations.  This phase includes the selling of our assets, retiring our liabilities, and distributing net proceeds to stockholders.  It is possible that we will invest additional capital in some of our assets in order to position these assets for sale in the normal course of business. We have experienced significant losses and may generate negative cash flows as mortgage note obligations and expenses exceed revenues.  If we are unable to sell a property when we determine to do so as contemplated in our business plan, it could have a significant adverse effect on our cash flows that are necessary to meet our mortgage obligations and to satisfy our other liabilities in the normal course of business.
Our ability to continue as a going concern is, therefore, dependent upon our ability to sell real estate investments, to pay or retire debt as it matures if extensions or new financings are unavailable, and to fund certain ongoing costs of our Company, including our development and operating properties. Our principal demands for funds for the next twelve months and beyond will be for the payment of costs associated with the lease-up of available space at our operating properties (including commissions, tenant improvements, and capital improvements), certain ongoing costs at our development properties, Company operating expenses, and interest and principal on our outstanding indebtedness.  We expect to fund a portion of these demands by using cash flow from operations of our current investments and borrowings.  Additionally, we will use proceeds from our strategic asset sales.
 We continually evaluate our liquidity and ability to fund future operations and debt obligations (See Note 9, Notes Payable in the Notes to Consolidated Financial Statements for more details).  As part of those analyses, we consider lease expirations at our consolidated office properties and other factors.  Operating leases for our office buildings representing 7% of our annualized base rent and 9% of our rentable square footage (effective annual rent per square foot of $18.87) will expire by the end of 2015.  In the normal course of business, we are pursuing renewals, extensions and new leases.  If we are unable to renew or extend the expiring leases under similar terms or are unable to negotiate new leases, it would negatively impact our liquidity and consequently adversely affect our ability to fund our ongoing operations.  In addition, our portfolio is concentrated in certain geographic regions and industries, and downturns relating generally to such regions or industries may result in defaults on a number of our investments within a short time period.  Such defaults would negatively affect our liquidity and adversely affect our ability to fund our ongoing operations.  As of December 31, 2014, 59% and 32% of our 2014 contractual base rental income from our office properties, as well as revenue from our multifamily and hotel properties, without consideration of tenant contraction or termination rights, was derived from tenants in Missouri and Texas, respectively.
Strategic Asset Sales
As previously discussed, we are in our disposition phase. We anticipate conducting orderly sales of our assets over the next two to three years. We may pursue a portfolio sale for some or all of our remaining assets. The tepid economic environment and limited availability of credit to buyers for opportunistic asset classes such as ours could delay or inhibit our ability to dispose of our properties in an orderly manner, or cause us to have to dispose of our properties for lower than anticipated sales prices. Two of our office buildings are located in the Greenspoint submarket in Houston, Texas. Demand for commercial properties in this submarket is primarily weak due to several large blocks of space becoming available in the next 24 to 48 months as large scale users have announced their intention to vacate the submarket. With the uncertainty created from these relocations as well as the current volatility within the energy sector, and the limited number of office building transactions, it is difficult to underwrite commercial assets in this submarket. We are currently marketing The Lodge & Spa at Cordillera and Royal Island. Buyers for incomplete development projects continue to be scarce. The Central Europe commercial real estate market, where we have 20 remaining properties, after the sale of one property in the first quarter of

43


2015, showed some improvement in transaction volume during 2014 with continued improvement expected in 2015 by some market analysts. However, there are lingering doubts about the strength and uneven nature of Europe’s economic recovery and the Ukraine crisis with Russia may negatively impact growth. These market conditions may impact our ability to sell our assets within our expected disposition timeline.
On June 13, 2014, we sold 1.62 acres of land at our Frisco Square development to an unrelated third party for $1.8 million. On August 7, 2014, one of the properties owned by Central Europe Joint Venture, our unconsolidated investment, was sold for €3.6 million. On February 1, 2015, an additional property owned by our Central Europe Joint Venture was sold for €0.7 million. There can be no assurance that future dispositions will occur as planned, or if they occur, that they will help us to meet our liquidity demands.  Once we anticipate selling all or substantially all of our assets, we will seek stockholder approval prior to liquidating our entire portfolio.
Debt Financings
One of our principal short-term and long-term liquidity requirements includes the repayment of maturing debt. The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of December 31, 2014. The table does not represent any extension options (in thousands):
 
Payments Due by Period(1)
 
2015
 
2016
 
2017
 
2018
 
2019
 
After
2019
 
Total
Principal payments—fixed rate debt
$
1,648

 
$
35,324

 
$
85,341

 
$

 
$

 
$

 
$
122,313

Interest payments—fixed rate debt
7,719

 
6,270

 
2,516

 

 

 

 
16,505

Principal payments—variable rate debt
520

 
547

 
575

 
29,413

 

 

 
31,055

Interest payments—variable rate debt (based on rates in effect as of December 31, 2013)
988

 
963

 
954

 
160

 

 

 
3,065

Total
$
10,875

 
$
43,104

 
$
89,386

 
$
29,573

 
$

 
$

 
$
172,938

_______________________________________________________________________________
(1)
Does not include approximately $0.2 million of unamortized premium related to debt we assumed on our acquisition of Northborough.
 Our nonrecourse debt secured by Northborough Tower with a balance of $18.9 million at December 31, 2014, matures on January 11, 2016. In January 2015, we became aware that the sole tenant of the Northborough building may vacate the building during 2015. We expect the tenant to continue to make the lease payments under the terms of its lease through lease expiration in April 2018. We are working with the tenant to obtain a sub-lessor. Under the terms of our debt, the excess cash flow from the rental payments will be swept to the lender to pay down the debt if the building is vacant. We intend to market the asset for sale prior to the debt maturity; however, there are no assurances that we can sell the asset prior to the debt maturity or that we can sell the asset for an amount greater than the debt balance. If we are unable to sell Northborough Tower prior to the debt maturity we would have to consider all available alternatives, including transferring legal possession of the property to the lender.
Our loan agreements stipulate that we comply with certain reporting and financial covenants.  These covenants include, among other things, maintaining minimum debt service coverage ratios, loan to value ratios and liquidity.  As of December 31, 2014, we believe we were in compliance with the debt covenants under our loan agreements.
We currently expect to use funds generated by our operating properties, additional borrowings, and proceeds from the disposition of properties to continue making our scheduled debt service payments until the maturity dates of the loans are extended, the loans are refinanced, or the loans are completely paid off.  However, there is no guarantee that we will be able to refinance our borrowings with more or less favorable terms or extend the maturity dates of such loans.  To the extent we are unable to reach agreeable terms with respect to extensions or refinancings, we may not have the cash necessary to repay our debt as it matures, which could result in an event of default that could allow lenders to foreclose on the property in satisfaction of the debt, seek repayment of the full amount of the debt outstanding from us or pursue other remedies.
Each of our loans is secured by one or more of our properties. At December 31, 2014, interest rates on our notes payable ranged from 3.2% to 15%, with a weighted average interest rate of approximately 5.6%. Generally, our notes payable mature at approximately two to nine years from origination and require payments of interest-only for approximately two to five years, with all principal and interest due at maturity. Notes payable associated with our Northborough Tower, Frisco Square, Las

44


Colinas Commons, and Northpoint Central investments require monthly payments of principal and interest. At December 31, 2014, our notes payable had maturity dates that ranged from January 2016 to February 2018.
Our ability to fund our liquidity requirements is expected to come from cash and cash equivalents (which total $35 million on our consolidated balance sheet as of December 31, 2014), operating cash flow from properties, new borrowings, additional borrowings that may become available under our existing loan agreements by satisfying certain terms, and proceeds from the disposition of our properties. As necessary, we may seek alternative sources of financing, including using the proceeds from the sale of our properties to achieve our investment objectives.
As of December 31, 2014, restricted cash on the consolidated balance sheet of $8.1 million included amounts set aside related to certain operating properties for tenant improvements and commission reserves, tax reserves, maintenance and capital expenditures reserves, and other amounts as may be required by our lenders.
As the overall cost of borrowing increases, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our property developments. This may result in our investment operations generating lower overall economic returns and a reduced level of cash flow. In addition, the dislocations in the debt markets have reduced the amount of capital that is available to finance real estate, which, in turn: (i) leads to a decline in real estate values generally; (ii) slows real estate transaction activity; (iii) reduces the loan to value upon which lenders are willing to extend debt; and (iv) results in difficulty in refinancing debt as it becomes due. Any of these events may have a material adverse impact on the value of real estate investments and the revenues, income, or cash flow from the acquisition and operation of real properties and mortgage loans.
New Financings and Modification
The debt related to Chase Park Plaza Hotel was scheduled to mature in December 2014. The loan opened to prepayment without penalty in December 2013. On August 11, 2014, we refinanced the Chase Park Plaza Hotel debt with a new lender for $62.5 million in proceeds. A fee of $590,000 was paid and recorded to interest expense at the time of payment. The loan bears interest at 4.95% and matures in three years with two one-year extensions available. The new loan requires interest-only payments in the first year and principal payments based upon a 25-year amortization during the remaining term, including extension periods. The loan is not prepayable in the first year and requires a prepayment penalty for months 13 through 30 of the original term. A portion of the proceeds from the new loan were used to repay the current debt and closing costs. We have guaranteed that $6.5 million of the proceeds will be utilized for a room and retail renovation program at the Chase Park Plaza Hotel. The outstanding balance on this loan as of December 31, 2014 was $62.5 million.
On August 26, 2014 The Ablon at Frisco Square venture obtained a $26.3 million construction loan. The loan incurs interest at 30-day LIBOR plus 2.5% and has a 3-year term with two 12-month extensions available. Payments of interest-only are required during the initial 3-year term. Equity of $15.8 million must be contributed to the project before any draws are made under the loan. As of December 31, 2014, the partners have funded $8.2 million of equity (which includes land) towards the construction. We have not drawn any funds under the construction loan to date. Our joint venture partner, or one of its affiliates, has provided the completion guaranty and any other carve-out guaranties for the construction loan.
In February 2011, Behringer Harvard Royal Island Debt, L.P. secured a $10.4 million loan (the "Debt LP Loan") for the purpose of preserving and protecting the collateral securing the bridge loan. The operating costs of our Royal Island property were funded through the Debt LP Loan through June 2014. In February 2013, the lender agreed to increase the amount available to draw on the Debt LP Loan to $11.6 million. In June 2013, the lenders further increased the amount available to draw to $12.4 million. Beginning in October 2013, the lender increased the availability each month by the amount of the monthly operating costs. The lender ceased funding the monthly operating costs in July 2014. As of December 31, 2014, the balance of the Debt LP Loan was $13.9 million.

45


Joint Venture Indebtedness
We have a noncontrolling, unconsolidated ownership investment in a joint venture consisting of 21 properties as of December 31, 2014. We exercise significant influence over, but do not control these entities, and therefore, the joint venture is accounted for using the equity method of accounting. As of December 31, 2014, the total amount of aggregate debt held by unrelated parties that was incurred by this joint venture was approximately $65.4 million (based upon the December 31, 2014 currency exchange).
The table below summarizes the outstanding debt of these properties as of December 31, 2014 ($ in thousands):
Property
Joint Venture Ownership %
 
Weighted Average Interest Rate (as of
December 31, 2014)
 
 
Carrying Amount
 
Maturity Date
Central Europe Joint Venture
 
47.01
%
 
 
3.27
%
(1)
 
$
65,373

 
(2)
_______________________________________________________________________________
(1)
Represents the weighted average interest rate of the various notes payable secured by the 21 properties in the Central Europe Joint Venture.
(2)
Approximately $22.1 million of the notes payable have matured and the joint venture partner is in negotiations for extensions until refinancings can be obtained. Approximately $2.4 million of the loans mature in 2015, $28.1 million of the loans mature in 2016, $10.4 million of the loans mature in 2017 and $2.4 million of the loans mature in 2018.
Market Outlook
Our financial and operating performance is dependent upon the demand for office, residential, retail, hotel and other commercial space in our markets. While domestically, the commercial real estate fundamentals such as vacancy, rent and absorption levels have improved in certain submarkets, demand has yet to increase enough to drive significant development activity, except for multifamily in certain markets. Frisco Square, our mixed-use development project, is located in the greater Dallas-Fort Worth market, and in an area where we have seen positive economic growth. In September 2014, we entered into a joint venture to construct a new multi-family project in Frisco Square to be completed in early 2016. We are actively negotiating land sales to developers for future multifamily and commercial development at Frisco Square. Our Las Colinas Commons office buildings are also in the Dallas-Fort Worth market. Office fundamentals, such as vacancy rates and lease rates in this submarket improved slightly in 2014. We expect to market this asset for sale during 2015.
We own two office buildings in the Greenspoint submarket, located just outside Houston, Texas. Valuations for these two assets have been adversely impacted by impending vacancy concerns resulting from the announced relocations of several major energy companies, which are major tenants in the submarket, to their new office complex in a different Houston submarket. The market's concern is that the departure of these companies will dampen rental rates and flood the submarket with supply. In addition, the Houston market, which was generally regarded as being among the nation’s strongest, has been negatively impacted by the fall in oil prices. Our Houston assets are currently well-leased, but as leases expire, it may be difficult to obtain new leases at our current rates. As previously discussed, if the Houston economy continues to be disrupted, we may not be able to dispose of these assets as planned.
Our Chase Park Plaza Hotel continues to improve with increases in occupancy, revenues, and net operating income in 2014 as compared to the prior year.  St. Louis remains a steady growth market and with the 2013 change in management we expect continued improvement in occupancy, revenues, and net operating income in 2015.
Capital remains tight for construction activity and non-prime assets. Tightened underwriting standards and risk adverse capital markets have resulted in few buyers for incomplete development assets. This may affect our strategy to dispose of The Lodge & Spa at Cordillera and Royal Island assets in the near term.
 We own a joint venture interest in a portfolio of Central European properties located in Czech Republic, Poland, Hungary, and Slovakia.  The portfolio originally consisted of 22 assets. Two assets from this portfolio have been sold, one in 2014 and one in the first quarter of 2015. The Central European economy continues to struggle to gain momentum from the recession.  New or renewed leases may be executed at reduced effective rents and vacancy rates may increase as the current economic climate continues to negatively impact tenants. There are very few real estate transactions within the markets where our assets are located.

46


Results of Operations
As of December 31, 2014 and 2013, we were invested in nine assets, seven of which were consolidated (four of those being wholly owned and three properties consolidated through investments in joint ventures). In addition, we are the mezzanine lender for one multifamily property. We also have a noncontrolling, unconsolidated ownership interest in a joint venture which held 21 properties as of December 31, 2014 and 22 properties as of December 31, 2013 that is accounted for using the equity method. Our investment properties are located in Colorado, Missouri, Nevada, Texas, the Commonwealth of The Bahamas, the Czech Republic, Poland, Hungary, and Slovakia.
Fiscal year ended December 31, 2014 as compared to the fiscal year ended December 31, 2013
The following table provides summary information about our results of operations for the years ended December 31, 2014 and 2013 ($ in thousands):
 
 
2014
 
2013
 
$ Amount Change Incr (Decr)
 
Percentage Change Incr/(Decr)
 Revenues
 
 
 
 
 
 
 
 
 Rental revenue
$
20,246

 
$
21,009

 
$
(763
)
 
(3.6
)%
 
 Hotel revenue
35,241

 
30,655

 
4,586

 
15.0
 %
 
 Condominium sales

 
3,404

 
(3,404
)
 
(100.0
)%
 Total revenues
55,487

 
55,068

 
419

 
0.8
 %
 
 
 
 
 
 
 
 
 
 Expenses
 
 
 
 
 
 
 
 
 Property operating expenses
8,202

 
11,127

 
(2,925
)
 
(26.3
)%
 
 Hotel operating expenses
26,253

 
23,091

 
3,162

 
13.7
 %
 
 Bad debt expense
(137
)
 
1,754

 
(1,891
)
 
(107.8
)%
 
 Cost of condominium sales

 
3,412

 
(3,412
)
 
(100.0
)%
 
 Condominium inventory impairment

 
264

 
(264
)
 
(100.0
)%
 
 Interest expense
10,005

 
9,780

 
225

 
2.3
 %
 
 Real estate taxes
4,075

 
4,100

 
(25
)
 
(0.6
)%
 
 Impairment charge
9,371

 
363

 
9,008

 
2,481.5
 %
 
 Property management fees
1,842

 
1,745

 
97

 
5.6
 %
 
 Asset management fees
2,263

 
2,290

 
(27
)
 
(1.2
)%
 
 General and administrative
5,964

 
5,657

 
307

 
5.4
 %
 
 Depreciation and amortization
12,701

 
13,037

 
(336
)
 
(2.6
)%
 Total expenses
$
80,539

 
$
76,620

 
$
3,919

 
5.1
 %
 
 
 
 
 
 
 
 
 
 
Other income (loss), net
$
759

 
$
(24
)
 
$
783

 
3,262.5
 %
 
Loss on early extinguishment of debt
$
(246
)
 
$

 
$
(246
)
 
(100.0
)%
 
Equity in earnings (losses) of unconsolidated joint ventures
$
170

 
$
(1,694
)
 
$
1,864

 
110.0
 %
 
Reorganization items, net
$

 
$
(171
)
 
$
171

 
100.0
 %
 
Gain on sale of real estate
$
476

 
$
86

 
$
390

 
453.5
 %




47


Continuing Operations
Revenues.    Our total revenues increased by $0.4 million to $55.5 million for the year ended December 31, 2014 as compared to $55.1 million for the year ended December 31, 2013. The change in revenues include the following:
Rental revenue decreased $0.8 million to $20.2 million for the year ended December 31, 2014 as compared to $21 million for 2013. In the first quarter of 2013, Chase Park Plaza Hotel was accounted for as a lease and recorded $1 million in rental revenue. As of February 19, 2013, we began consolidating the hotel operations. As a result, the lease payment was eliminated and we began reporting Chase Park Plaza Hotel's operations in hotel revenues and hotel operating expenses (see below). In addition, rental revenue decreased $0.3 million at Las Colinas Commons due to a decrease in tenant reimbursable income. These decreases in rental revenue were partially offset by an increase of $0.4 million at Frisco Square due to higher recovery income and $0.1 million of income we recorded in 2014 for mineral rights we retained on the Bowen Road land which we sold in 2013.
Hotel revenue increased $4.6 million to $35.2 million for the year ended December 31, 2014. The consolidation of the operations of Chase Park Plaza Hotel effective February 19, 2013 and an increase of 10% in occupancy at the Chase Park Plaza Hotel year-over-year, resulted in an approximate $5.1 million increase in hotel revenue. This increase was partially offset by a decrease in hotel revenue for Royal Island of $0.4 million due to the suspension of the rental program as we explore the disposition of this property and a decrease of $0.1 million in hotel revenue at The Lodge & Spa at Cordillera.
Income from condominium sales was zero for the year ended December 31, 2014 compared to $3.4 million for 2013. No condominium units were sold at Chase — The Private Residences during the year ended December 31, 2014 as compared to three units sold during the year ended December 31, 2013.  We have one unit remaining in inventory with a carrying value at December 31, 2014 of $3 million.
Property Operating Expenses.    Property operating expenses were approximately $8.2 million for the year ended December 31, 2014 as compared to $11.1 million for the year ended December 31, 2013, a decrease of approximately $2.9 million, and were comprised of operating expenses from our consolidated properties. Property operating expenses at Frisco Square decreased $1.6 million during the year ended December 31, 2014 as compared to the year ended December 31, 2013. During the year ended December 31, 2013, we incurred a one-time expense of $0.9 million in accordance with the development agreement. Additionally, the Frisco Square Property Owner's Association (the "POA") dues at Frisco Square decreased $0.2 million for the year ended December 31, 2014 compared to the same period in 2013. Royal Island operating expenses decreased $1 million as a result of lower operating expenditures as we explore the disposition of this property. Operating expenses at Las Colinas Commons, Northpoint and Northborough Tower combined accounted for a decrease in property operating expenses of approximately $0.4 million.
Hotel Operating Expenses. Hotel operating expenses were approximately $26.3 million for the year ended December 31, 2014 compared to $23.1 million for the year ended December 31, 2013, for an increase of $3.2 million.  The consolidation of the operations of Chase Park Plaza Hotel effective February 19, 2013 and a 10% increase in occupancy year-over-year contributed a $3.5 million increase in hotel operating expenses. This increase was partially offset by a $0.3 million decrease in expense at Royal Island due to the suspension of the rental program as we explore the disposition of this investment.
Bad debt expense (recovery).  Bad debt expense (recovery) for the year ended December 31, 2014 was a recovery of $0.1 million compared to a charge of $1.8 million for the year ended December 31, 2013 for a decrease of approximately $1.9 million. Chase Park Plaza Hotel's bad debt expense decreased $1.6 primarily due to a provision recorded in 2013 related to the termination of the hotel operating lease between Kingsdell, L.P. and Chase Park Plaza Hotel. Bad debt expense for Frisco Square decreased $0.3 million due to a recovery of funds in 2014 that were recognized as bad debt expense in 2013.
Cost of Condominium Sales.    Cost of condominium sales relating to the sale of condominium units at Chase — The Private Residences was zero for the year ended December 31, 2014 compared to $3.4 million for the year ended December 31, 2013.  During the year ended December 31, 2013, we sold three condominium units. We did not sell any units during the year ended December 31, 2014.
Condominium inventory impairment.    During the year ended December 31, 2013, we recognized non-cash charges of $0.3 million to reduce the carrying value of condominiums at Chase—The Private Residences to current market prices and an additional $0.2 million of impairment was recorded on a related intangible asset. We did not record any condominium inventory impairment charges during the year ended December 31, 2014. We currently have one condominium unit in inventory at Chase—The Private Residences.

48


Interest expense. Interest expense was approximately $10 million and $9.8 million for the years ended December 31, 2014 and 2013, respectively. The increase in interest expense was primarily due to amortization of $0.6 million of deferred borrowing costs during the year ended December 31, 2014, partially offset by a $0.2 million decrease in interest expense on our Chase Park Plaza Hotel debt due to a decrease in the interest rate on our new debt when we refinanced the loan in August 2014.
Real estate taxes. Real estate taxes were approximately $4.1 million for the years ended December 31, 2014 and 2013. During the year ended December 31, 2014, real estate tax expense at The Lodge & Spa at Cordillera decreased $0.2 million compared to the same period of 2013 due to a successful tax appeal in 2014. This is offset by an increase of $0.1 million in real estate tax expense at Frisco Square due to building improvements and an increase of less than $0.1 million at Northborough Tower due to a higher valuation by the taxing authorities. Real estate tax expense for the remaining of our properties were comparable year-over-year.
Impairment charge.    During the year ended December 31, 2014, we recorded a non-cash impairment charge of $9.4 million related to our Northborough office building based upon a shortened hold period and as a result of market conditions in the Greenspoint submarket of Houston, Texas, a significant energy hub, where Northborough Tower is located. The energy sector recently experienced a significant decline in oil prices which could have an adverse impact on the results at this office building. During the year ended December 31, 2013, we recorded a non-cash impairment charge of $0.1 million in continuing operations related to 4950 S. Bowen Road land based upon the sale price. The sale was completed on October 22, 2013. During 2013, we also recognized non-cash charges of $0.3 million to reduce the carrying value of condominiums at Chase—The Private Residences to current market prices (see Condominium Inventory Impairment above) and an additional $0.2 million of impairment was recorded on a related intangible asset.
Property management fees. Property management fees for the year ended December 31, 2014 were approximately $1.8 million compared to approximately $1.7 million for the year ended December 31, 2013. Property management fees, which are based upon revenue collections, increased $0.1 million at Chase Park Plaza Hotel due to increased revenues at the hotel. Property management fees for our other properties were comparable year-over-year.
Asset management fees. Asset management fees were $2.3 million for the years ended December 31, 2014 and 2013.
General and administrative. General and administrative expense increased $0.3 million to $6 million for the year ended December 31, 2014. Corporate overhead allocation increased $0.4 million during the year ended December 31, 2014 compared to the year ended December 31, 2013. In addition, we had a year-over-year increase of $0.2 million in board and board committee fees due to an increase in the number of board and board committee meetings and a substantial change in retainers. These increases were partially offset by a year-over-year decrease of $0.4 million in legal expense related to our Chase Park Plaza Hotel litigation and Frisco Square restructuring.
Depreciation and amortization. Depreciation and amortization were $12.7 million and $13 million for the years ended December 31, 2014 and 2013, respectively.
Other income (loss), net. Other income (loss) was $0.8 million for the year ended December 31, 2014 compared to a charge of less than $0.1 million for the year ended December 31, 2013. In May 2014, a lot option agreement at Royal Island expired. We recognized $0.8 million in other income related to the expiration of the lot option.
Loss on early extinguishment of debt. On August 11, 2014, we refinanced the Chase Park Plaza Hotel debt with a new lender for $62.5 million in proceeds. A portion of the proceeds from the new loan were used to repay the old debt, which had a balance of approximately $46.5 million, and closing costs. We recognized approximately $0.2 million loss on early extinguishment of debt in our consolidated statements of operations and comprehensive loss for the year ended December 31, 2014 related to unamortized deferred borrowing costs on the old debt. We had no losses on early extinguishment of debt during the year ended December 31, 2013.
Equity in earnings (losses) of unconsolidated joint ventures.  Equity in earnings (losses) of unconsolidated joint ventures was earnings of $0.2 million for the year ended December 31, 2014 compared to a loss of $1.7 million for the year ended December 31, 2013. On August 7, 2014 one of our Central Europe Joint Venture properties was sold and we recorded our portion of the gain on sale which totaled $0.2 million. During the year ended December 31, 2013, our Central Europe Joint Venture recorded a $5.9 million non-cash impairment to reduce the value of three properties to their estimated fair value. The Company's portion of the impairment was approximately $2.8 million, which was recorded in the statement of operations through the equity in losses of unconsolidated joint ventures line item.
Reorganization items, net.  During the year ended December 31, 2013, we recorded reorganization expense of $0.2 million related to the Frisco Square loan restructuring. We did not incur any reorganization expense during the year ended December 31, 2014.

49


Gain on sale of real estate. On June 13, 2014, we sold 1.62 acres of land at our Frisco Square development to an unrelated third party for approximately $1.8 million. We recorded a $0.5 million gain on sale of real estate. On May 28, 2013, we sold Rio Salado to an unrelated third party for $9.3 million and recorded a $0.1 million gain on sale of real estate. The gain on sale of real estate for both of these sales was included in continuing operations.
Fiscal year ended December 31, 2013 as compared to the fiscal year ended December 31, 2012
As of December 31, 2013, we were invested in nine assets, seven of which were consolidated in our continuing operations.
As of December 31, 2012, we were invested in 12 assets, nine of which were consolidated in our continuing operations.
The following table provides summary information about our results of operations for the years ended December 31, 2013 and 2012 ($ in thousands):
 
 
2013
 
2012
 
$ Amount Change Incr (Decr)
 
Percentage Change Incr/(Decr)
 Revenues
 
 
 
 
 
 
 
 
 Rental revenue
$
21,009

 
$
27,054

 
$
(6,045
)
 
(22.3
)%
 
 Hotel revenue
30,655

 
4,705

 
25,950

 
551.5
 %
 
 Condominium sales
3,404

 
10,245

 
(6,841
)
 
(66.8
)%
 Total revenues
55,068

 
42,004

 
13,064

 
31.1
 %
 
 
 
 
 
 
 
 
 
 Expenses
 
 
 
 
 
 
 
 
 Property operating expenses
11,127

 
11,009

 
118

 
1.1
 %
 
 Hotel operating expenses
23,091

 
4,807

 
18,284

 
380.4
 %
 
 Bad debt expense
1,754

 
524

 
1,230

 
234.7
 %
 
 Cost of condominium sales
3,412

 
10,237

 
(6,825
)
 
(66.7
)%
 
 Condominium inventory impairment
264

 
12,161

 
(11,897
)
 
(97.8
)%
 
 Interest expense
9,780

 
10,570

 
(790
)
 
(7.5
)%
 
 Real estate taxes
4,100

 
3,608

 
492

 
13.6
 %
 
 Impairment charge
363

 
7,290

 
(6,927
)
 
(95.0
)%
 
 Provision for loan losses

 
12,249

 
(12,249
)
 
(100.0
)%
 
 Property management fees
1,745

 
1,022

 
723

 
70.7
 %
 
 Asset management fees
2,290

 
2,874

 
(584
)
 
(20.3
)%
 
 General and administrative
5,657

 
6,396

 
(739
)
 
(11.6
)%
 
 Depreciation and amortization
13,037

 
13,109

 
(72
)
 
(0.5
)%
 Total expenses
$
76,620

 
$
95,856

 
$
(19,236
)
 
(20.1
)%
 
 
 
 
 
 
 
 
 
 
Loss on early extinguishment of debt
$

 
$
(151
)
 
$
151

 
100.0
 %
 
Equity in losses of unconsolidated joint ventures
$
(1,694
)
 
$
(6,938
)
 
$
5,244

 
75.6
 %
 
Reorganization expenses
$
(171
)
 
$
(1,802
)
 
$
1,631

 
90.5
 %
 
Gain on sale of real estate
$
86

 
$

 
$
86

 
100.0
 %



50


Continuing Operations
Revenues.    Our total revenues increased by $13.1 million to $55.1 million for the year ended December 31, 2013 as compared to $42 million for the year ended December 31, 2012. The change in revenues include the following:
Rental revenue decreased $6.1 million to $21 million for the year ended December 31, 2013 as compared to $27.1 million for 2012. Rental revenue decreased approximately $6.4 million due to the termination of the Chase Park Plaza Hotel operating lease with Kingsdell L.P. on February 19, 2013 and the subsequent consolidation of the hotel operations. As a result of the termination of the lease and subsequent consolidation, we ceased recognizing rental income related to the lease and began recognizing hotel revenue and hotel operating expenses in our consolidated statements of operations and comprehensive loss (see below). Rental revenues at Frisco Square decreased $0.1 million due to a decrease in recovery income for common area expenses. At Las Colinas Commons, rental revenues decreased by $0.1 million due to tenant lease concessions for a tenant lease that will expire in June 2014. Rental revenue at Northborough increased $0.3 million due to increased recovery income for common area expenses. Rental revenue at Northpoint increased $0.4 million due to a decrease in recovery income.
Hotel revenue increased $26 million to $30.7 million for the year ended December 31, 2013. Approximately $25.7 million of the increase is due to the consolidation of the operations of Chase Park Plaza Hotel effective February 19, 2013. The hotel revenue for The Lodge & Spa at Cordillera had a nominal increase in a year-over-year comparison.
Income from condominium sales decreased $6.8 million to $3.4 million for the year ended December 31, 2013 compared to $10.2 million for 2012. We sold three condominium units at Chase—The Private Residences in the year ended December 31, 2013 as compared to 17 units sold during 2012. We have one unit remaining in inventory.
Property Operating Expenses.    Property operating expenses remained fairly constant at $11.1 million and $11 million for the years ended December 31, 2013 and 2012, respectively, and were comprised of operating expenses from our consolidated properties. During the year ended December 31, 2013, we incurred $0.9 million of expense for our allocated portion of a Frisco Plaza public improvement project constructed and owned by City of Frisco in accordance with the development agreement.  No such expense was incurred for the same period of 2012. This increase was partially offset by decreases of approximately $0.6 million in property operating expenses at Chase Park Plaza primarily due to a $0.3 million reduction of marketing and selling costs related to reduced condominium inventory and a reduction of $0.3 million for property insurance expense, which is included in hotel operating expenses in 2013. Operating expenses at Las Colinas Commons decreased by $0.1 million due to reduced parking lot repairs. Operating expenses at Northpoint increased by $0.2 million due to increased repairs and maintenance expenditures. Operating expenses at Northborough were consistent year-over-year.
Hotel Operating Expenses. Hotel operating expenses for the year ended December 31, 2013 were $23.1 million, an increase of $18.3 million over the expense for 2012. Approximately $17.9 million of the increase is due to the consolidation of the operations of Chase Park Plaza Hotel effective February 19, 2013. The Lodge & Spa at Cordillera operating expenses increased $0.4 million for the year ended December 31, 2013 as compared to the expense for 2012 primarily due to increased repairs and maintenance expense as well as transition costs incurred related to a change of the third party property management company.
Bad debt expense.  Bad debt expense was $1.8 million for the year ended December 31, 2013, an increase of $1.2 million over the expense for 2012, primarily due to a provision of $1.3 million related to the termination of the hotel operating lease between Kingsdell, L.P. and Chase Park Plaza Hotel.  Additionally, we reserved approximately $0.3 million related to the receivable for the portion of the Frisco Plaza public improvement project due from the POA.
Cost of Condominium Sales.    Cost of condominium sales relating to the sale of condominium units at Chase—The Private Residences for the year ended December 31, 2013 was $3.4 million compared to $10.2 million for the year ended December 31, 2012. We sold three condominium units during the year ended December 31, 2013 and 17 condominium units during the year ended December 31, 2012.
Condominium inventory impairment.    During the year ended December 31, 2013, we recognized non-cash charges of $0.3 million to reduce the carrying value of condominiums at Chase—The Private Residences to current market prices and an additional $0.2 million of impairment was recorded on a related intangible asset. We recognized non-cash charges of $11.7 million and $0.4 million to reduce the carrying value of condominiums at The Lodge & Spa at Cordillera and Chase—The Private Residences, respectively, during the year ended December 31, 2012. These impairments, to record the assets at current market prices, were due largely to the nationwide downturn in the secondary condominium market that began during 2007 and has continued, resulting in reduced selling prices. We currently have one condominium unit in inventory at Chase—The Private Residences, which we plan to divide and market as two separate units. In the event that market conditions decline in the future or difficult market conditions extend beyond our expectations, additional adjustments may be necessary.

51


Interest expense. Interest expense was $9.8 million for the year ended December 31, 2013, a decrease of $0.8 million over the expense for 2012. Interest expense decreased approximately $1.2 million due to a lower loan balance related to Frisco Square after the loan restructuring in December 2012.  Our interest expense related to the Chase Park Plaza Hotel also decreased $0.3 million due to a lower loan balance that resulted from paydowns from the condominium unit sales. These decreases were partially offset by increases in interest expense related to Royal Island of $0.5 million due to a higher loan balance from borrowings primarily to secure and maintain the property.
Real estate taxes. Real estate tax expense was $4.1 million for the year ended December 31, 2013, an increase of $0.6 million over the expense for 2012, primarily due to increases in real estate and personal property tax expense related to The Lodge & Spa at Cordillera and Northpoint properties.
Impairment charge.    During the year ended December 31, 2013, we recorded a non-cash impairment charge of $0.1 million in continuing operations related to 4950 S. Bowen Road land based upon the sale price. The sale was completed on October 22, 2013. During 2013, we also recognized non-cash charges of $0.3 million to reduce the carrying value of condominiums at Chase—The Private Residences to current market prices (see Condominium Inventory Impairment above) and an additional $0.2 million of impairment was recorded on a related intangible asset. For the year ended December 31, 2012, we recognized impairment charges of $7.3 million related to Rio Salado based upon a signed purchase and sale agreement. On May 28, 2013, we sold Rio Salado to an unrelated third party.
Provision for loan losses.    There was no provision for loan losses during the year ended December 31, 2013. During the year ended December 31, 2012, we recorded a $12 million provision for loan losses related to our Royal Island note receivable to record the note receivable balance to the underlying collateral value. We also recorded $0.2 million provision for loan losses related to our working capital loan to the Chase Hotel lessor, Kingsdell, L.P. We have previously fully reserved our Alexan Black Mountatin mezzanine loan.
Property management fees. Property management fee expense was $1.7 million for the year ended December 31, 2013, an increase of $0.7 million over the expense for 2012, primarily due to an increase of $0.6 million for the acquisition and consolidation of Chase Park Plaza Hotel during the year ended December 31, 2013.
Asset management fees. Asset management fee expense was $2.3 million for the year ended December 31, 2013, a decrease of $0.6 million over the expense for 2012, primarily due to the changes in the advisory agreement effective January 1, 2013.  Under the amended agreement, the fee was reduced to an annual rate of 0.575% in 2013 as compared to a 0.60% annual rate in 2012.  Additionally, under the amended advisory agreement, no asset management fee was incurred related to Alexan Black Mountain and Royal Island for the year ended December 31, 2013.
General and administrative. General and administrative expense was $5.7 million for the year ended December 31, 2013, a decrease of $0.7 million over the expense for 2012. The decrease is primarily due to a decrease in acquisition expense of $1.2 million, which was incurred during the year ended December 31, 2012 related to the Royal Island acquisition. We also had decreases in corporate overhead charges of $0.5 million and a decrease in auditing expense of $0.2 million. These decreases were partially offset by an increase in legal expense of $1.2 million due to the Chase Park Plaza litigation.
Depreciation and amortization. Depreciation and amortization were comparable year-over-year at $13 million and $13.1 million for the years ended December 31, 2013 and 2012, respectively.
Loss on early extinguishment of debt.     During the year ended December 31, 2012, we recorded a $0.2 million loss on early extinguishment of debt for the write-off of unamortized debt issuance costs related to the debt on our Bowen Road property which we sold in October 2013. Our Bowen Road property represented a land-only interest and its results of operations were classified as continuing operations. We had no losses on early extinguishment of debt during the year ended December 30, 2013.
Equity in losses of unconsolidated joint ventures.    Our equity in losses of unconsolidated joint ventures decreased by $5.2 million for the year ended December 31, 2013. The decrease primarily related to the Royal Island joint venture which was consolidated on June 6, 2012, but prior to consolidation recorded a loss of $3.2 million. Santa Clara 800 was disposed of on May 4, 2012, but prior to disposition there was a loss of $0.1 million recorded. Central Europe Joint Venture, which represented our only unconsolidated joint venture in 2013, recorded equity losses of $1.7 million for the year ended December 31, 2013 as compared to equity losses of $3.6 million for 2012. The primary reason for the decrease is due to currency translation losses recognized during 2012 related to Czech denominated loans. The equity losses for Central Europe Joint Venture for the year ended December 31, 2013 include a non-cash impairment expense of $5.9 million to reduce the value of three properties to their estimated fair value. The Company’s portion of the impairment totaled $2.8 million and was recorded in the statement of operations through the equity in losses of unconsolidated joint ventures line item. During 2012, the Central Europe Joint Venture equity losses included an impairment of $5.8 million, of which the Company's portion was $2.7 million.

52


Reorganization items, net.  During the years ended December 31, 2013 and 2012, we recorded reorganization expense of $0.2 million and $1.8 million, respectively, related to the Frisco Square loan restructuring.
Gain on sale of real estate. On May 28, 2013, we sold Rio Salado to an unrelated third party for $9.3 million and recorded a $0.1 million gain on sale. Our Rio Salado property represented a land-only interest and its results of operations and gain on sale were classified as continuing operations. As discussed in Note 17, Discontinued Operations and Real Estate Held for Sale, all sales of real estate during 2012 were considered discontinued operations.
Cash Flow Analysis
Fiscal year ended December 31, 2014 as compared to the fiscal year ended December 31, 2013
During the year ended December 31, 2014, net cash used in operating activities was $1.8 million as compared to net cash used in operating activities of $3.8 million for the year ended December 31, 2013. The primary reason for the increase in cash flow from operating activities was the improved operations at our Chase Park Plaza Hotel.
Net cash used in investing activities for the year ended December 31, 2014 was $14.4 million as compared to net cash provided by investing activities of $27.7 million for the year ended December 31, 2013. The difference of $42.1 million is primarily a result of sales proceeds of $30.6 million from the sale of Becket House, Rio Salado and 4950 S. Bowen Road land in 2013. We received sales proceeds of $1.7 million on June 13, 2014 for the sale of 1.62 acres at our Frisco Square property. In addition, we purchased property and equipment totaling $13.3 million during the year ended December 31, 2014 compared to $3.9 million in 2013. The $9.4 million increase in fixed asset additions was primarily due to tenant improvements and building renovations at our Northborough Tower, Frisco Square, Chase Park Plaza Hotel and Las Colinas Commons properties during 2014. In addition, we commenced construction on a 275-unit multifamily development located in Frisco Square on September 2, 2014.
Net cash provided by financing activities for the year ended December 31, 2014 was $14.4 million compared to net cash used in financing activities of $21.9 million for the comparable period of 2013. The $36.3 million difference is primarily the result of proceeds of $62.5 million received on the refinance of the Chase Park Plaza Hotel debt with a new lender on August 11, 2014, partially offset by the repayment of the old Chase Park Plaza Hotel debt, which had a balance of approximately $46.5 million. In addition, we paid off the debt totaling $19.8 million for the Becket House property which we sold in the second quarter of 2013.
Fiscal year ended December 31, 2013 as compared to the fiscal year ended December 31, 2012
Net cash used in operating activities for the years ended December 31, 2013 and 2012 was $3.8 million and $3.1 million, respectively. The primary reason for the decrease in cash flow from operating activities was an increase in real estate taxes of $0.5 million due to increases in real estate and personal property tax expense related to The Lodge & Spa at Cordillera and Northpoint properties.
Net cash provided by investing activities for the year ended December 31, 2013 was $27.7 million compared to net cash provided of $129.8 million for the year ended December 31, 2012. The difference of $102.1 million is primarily a result of sales proceeds of $135.4 million from the sale of 4 real estate investments in 2012. During 2013, we received sales proceeds of $30.6 million from the sale of two properties and a parcel of land.
Net cash used in financing activities for the year ended December 31, 2013 was $21.9 million compared to net cash used of $105.4 million during 2012. During the year ended December 31, 2013, we made payments on debt of $23.8 million, including $19.8 million for the payoff of debt on a property we sold. During 2012, we paid $116 million on our debt, including the payoff of debt on the four properties we sold. In addition, we fully repaid our senior secured revolving credit facility with funds totaling $37.5 million in 2012. These payments were partially offset by $50.9 million in proceeds from notes payable.
Funds from Operations
Funds from operations ("FFO") is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts ("NAREIT") in the April 2002 "White Paper of Funds From Operations" which is net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property and impairments of depreciable real estate (including impairments of investments in unconsolidated joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciable real estate held by the joint venture or partnership), plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures, subsidiaries, and noncontrolling interests as one measure to evaluate our operating performance. In October 2011, NAREIT clarified the FFO definition to exclude impairment charges of depreciable real estate (including impairments of investments in

53


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).
Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance.
We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, impairments of depreciable assets, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income.
FFO should not be considered as an alternative to net income (loss), as an indication of our liquidity, nor as an indication of funds available to fund our cash needs, including our ability to make distributions and should be reviewed in connection with other GAAP measurements. Additionally, the exclusion of impairments limits the usefulness of FFO as a historical operating performance measure since an impairment charge indicates that operating performance has been permanently affected. FFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO. Our FFO, as presented, may not be comparable to amounts calculated by other REITs that do not define these terms in accordance with the current NAREIT definition or that interpret the definition differently.
Our calculation of FFO for the years ended December 31, 2014, 2013 and 2012 is presented below ($ in thousands, except per share amounts):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Net loss attributable to common stockholders
$
(23,530
)
 
$
(20,256
)
 
$
(52,776
)
Adjustments for(1):
 
 
 
 
 
Impairment charge(2)
9,371

 
3,625

 
23,610

Real estate depreciation and amortization(3)
14,617

 
15,049

 
18,125

Gain on sale of real estate(4)
(684
)
 
(86
)
 
(11,997
)
Funds from operations (FFO)
$
(226
)
 
$
(1,668
)
 
$
(23,038
)
GAAP weighted average shares:
 
 
 
 
 
Basic and diluted
56,500

 
56,500

 
56,500

FFO per share
$

 
$
(0.03
)
 
$
(0.41
)
Net loss per share
$
(0.42
)
 
$
(0.36
)
 
$
(0.93
)
_______________________________________________________________________________
(1)
Reflects the adjustments for 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. We recorded a $9.4 million impairment on our Northborough office building in the fourth quarter of 2014.
(3)
Real estate depreciation and amortization includes our consolidated real estate depreciation and amortization expense, as well as our pro rata share of those unconsolidated investments which we account for under the equity method of accounting and the noncontrolling interest adjustment for the third-party partners' share of the real estate depreciation and amortization.
(4)
The gain on sale of real estate for the year ended December 31, 2014 includes our pro rata share, $0.2 million, of the gain from the sale of one of our unconsolidated joint venture properties in August 2014.
Cash flows generated from FFO may be used to fund all or a portion of certain capitalizable items that are excluded from FFO, such as capital expenditures and payments of principal on debt, each of which may impact the amount of cash available for future distributions to our stockholders.
Share Redemption Program
In February 2006, our board of directors authorized a share redemption program for stockholders who held their shares for more than one year. Under the program, our board reserved the right in its sole discretion at any time, and from time to time, to (1) waive the one-year holding period in the event of the death, disability or bankruptcy of a stockholder or other exigent circumstances, (2) reject any request for redemption, (3) change the purchase price for redemptions, or (4) terminate, suspend or amend the share redemption program.

54


Our board of directors has not considered requests for Ordinary Redemptions for reasons other than in the event of death, disability or need for long-term care since March 2009 when the board determined not to accept, and to suspend until further notice, Ordinary Redemptions.
In January 2011, the board completely suspended the redemption program and has not considered any redemption requests since 2010.  Therefore, we did not redeem any shares of our common stock during the year ended December 31, 2014.
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 decision will be influenced, in substantial part, by its obligation to ensure that we maintain our status as a REIT. In connection with entering our disposition phase, on March 28, 2011, our board of directors discontinued regular quarterly distributions. Any future distributions will be based on available cash after weighing operational needs.
Historically, distributions paid to stockholders have been funded through various sources, including cash flow from operating activities, proceeds raised as part of our initial public offering, reinvestment through our distribution reinvestment plan and/or additional borrowings. We had no distributions in 2014 or 2013.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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 GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates, including investment impairment, on a regular basis. These estimates will be based on management's historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.
Principles of Consolidation and Basis of Presentation
Our consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control. All inter-company transactions, balances, and profits have been eliminated in consolidation. Interests in entities acquired will be evaluated based on applicable GAAP, which includes the requirement to consolidate entities deemed to be variable interest entities ("VIE") in which we are the primary beneficiary. If the interest in the entity is determined not to be a VIE, then the entity will be evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.
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.

55


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.
The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land and buildings. Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management's estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants. The value of hotels and all other buildings is depreciated over the estimated useful lives of 39 years and 25 years, respectively, using the straight-line method.
We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain at the date of the debt assumption. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.
We determine the value of above-market and below-market leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) management's estimate of current market lease rates for the corresponding in-place leases, measured over a period equal to (a) the remaining non-cancelable lease term for above-market leases, or (b) the remaining non-cancelable lease term plus any below-market fixed rate renewal options that, based on a qualitative assessment of several factors, including the financial condition of the lessee, the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, are reasonably assured to be exercised by the lessee for below-market leases. We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the determined lease term.
The total value of identified real estate intangible assets acquired is further allocated to in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships based on our evaluation of the specific characteristics of each tenant's lease and our overall relationship with that respective tenant. The aggregate value for tenant improvements and leasing commissions is based on estimates of these costs incurred at inception of the acquired leases, amortized through the date of acquisition. The aggregate value of in-place leases acquired and tenant relationships is determined by applying a fair value model. The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease-up periods for the respective spaces considering current market conditions. In estimating the carrying costs that would have otherwise been incurred had the leases not been in place, we include such items as real estate taxes, insurance and other operating expenses as well as lost rental revenue during the expected lease-up period based on current market conditions. The estimates of the fair value of tenant relationships also include costs to execute similar leases including leasing commissions, legal fees and tenant improvements as well as an estimate of the likelihood of renewal as determined by management on a tenant-by-tenant basis.
We amortize the value of in-place leases, in-place tenant improvements and in-place leasing commissions to expense over the initial term of the respective leases. The tenant relationship values are amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets or liabilities exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the acquired lease intangibles related to that tenant would be charged to expense. The estimated remaining average useful lives for acquired lease intangibles range from less than one year to approximately ten years.

56


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 10 years using the straight-line method.
Investment Impairment
For all of our real estate and real estate related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable. Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to: a significant decrease in the market price of an asset; a significant change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers and changes in the global and local markets or economic conditions. Our assets may at times be concentrated in limited geographic locations and, to the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at a portion of our properties within a short time period, which may result in asset impairments.
When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset. These projected cash flows are prepared internally by the Advisor and reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions.  The Company's Principal Executive Officer and Principal Financial Officer, as well as a panel of asset managers and a financial analyst of the Advisor, review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions that are consistent with market data and with assumptions that would be used by a third-party market participant and assume the highest and best use of the investment.  We consider trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist.  In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value.  While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.
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 notes, 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 loans 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 statements of operations.
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, planned development and the projected sales price of each of the properties. A future change in these estimates and assumptions could result in understating or overstating the book value of our investments, which could be material to our financial statements.
We also evaluate our investments in unconsolidated joint ventures at each reporting date.  If we believe there is an other than temporary decline in market value, we will record an impairment charge based on these evaluations.  We assess potential impairment by comparing our portion of estimated future undiscounted operating cash flows expected to be generated by the joint venture over the life of the joint venture’s assets to the carrying amount of the joint venture.  In the event that the carrying amount exceeds our portion of estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the joint venture to its estimated fair value. 
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.

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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.
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.
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. We currently have one remaining condominium unit in inventory at Chase—The Private Residences.
New Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-05 ("ASU 2013-05"), Foreign Currency Matters, Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.  ASU 2013-05 specifies that a cumulative translation adjustment ("CTA") should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. For sales of an equity method investment that is a foreign entity, a pro rata portion of CTA attributable to the investment would be recognized in earnings when the investment is sold. When an entity sells either a part or all of its investment in a consolidated foreign entity, CTA would be recognized in earnings only if the sale results in the parent no longer having a controlling financial interest in the foreign entity. ASU 2013-05 is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years beginning after December 15, 2014, and interim and annual periods thereafter. ASU 2013-05 should be applied prospectively to derecognition events occurring after the effective date. Early adoption is permitted. The Company will adopt ASU 2013-05 effective January 1, 2015. We are currently evaluating the impact of the adoption of ASU 2013-05 on our consolidated financial statements and notes therein.
In April 2014, the FASB issued Accounting Standards Update No. 2014-08 (“ASU 2014-08”), Presentation of Financial Statements and Property, Plant, and Equipment (Topics 205 and 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  The updated guidance revised the definition of a discontinued operation by limiting discontinued operations reporting to disposals of components of an entity that represent a strategic shift, or change in the entity's strategy, that has, or will have, a major effect on an entity’s operations and financial results. This guidance applies to a component of an entity or a group of components of an entity classified as held for sale or disposed of by sale or by means other than a sale, such as an abandonment. Examples of a strategic shift could include a disposal of all assets in a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity. In addition, ASU 2014-08 requires expanded disclosures for discontinued operations so users of the financial statements will be provided with more information about the assets, liabilities, revenues and expenses of discontinued operations. ASU 2014-08 is effective prospectively for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued or available for issuance. The Company will adopt ASU 2014-08 commencing January 1, 2015. As a result of this adoption, the results of operations and gains on sales of real estate from January 1, 2015 forward which do not meet the criteria of a strategic shift that has or will have a major effect on our operations and financial results will be presented as continuing operations in our consolidated statements of operations. Any sales of real estate prior to January 1, 2015 which have been reported in discontinued operations in prior reporting periods will continue to be reported as discontinued operations. We believe future sales of our individual operating properties will no longer qualify as discontinued operations.

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In May 2014, the FASB issued an update (“ASU 2014-09”) to ASC Topic 606, Revenue from Contracts with Customers.  ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.  ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures.  ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2016.  We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
In July 2014, the FASB issued an update ("ASU 2014-15"), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. ASU 2014-15 requires management's assessment of a company's ability to continue as a going concern and provide related footnote disclosures when conditions give rise to substantial doubt about a company's ability to continue as a going concern within one year from the financial statement issuance date. ASU 2014-15 applies to all companies and is effective for the annual period ending after December 15, 2016, and all annual and interim periods thereafter. We are currently evaluating the impact of the adoption of ASU 2014-15 on our consolidated financial statements.
In January 2015, the FASB issued ("ASU 2015-01"), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01 eliminates the concept of an extraordinary item from U.S. GAAP. An entity is no longer required to (i) segregate an extraordinary item from the results of ordinary operations; (ii) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; and (iii) disclose income taxes and earnings per share data applicable to an extraordinary item. ASU 2015-01 does not affect disclosure guidance for events or transactions that are unusual in nature or infrequent in occurrence. ASU 2015-01 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015, with early adoption permitted. We do not expect the adoption of ASU 2015-01 to impact our consolidated financial statements and notes therein.
In February 2015, the FASB issued ("ASU No. 2015-02"), Amendments to the Consolidation Analysis, which improves targeted areas of the consolidation guidance and reduces the number of consolidation models. The amendments in ASU 2015-02 are effective for interim and annual reporting periods in fiscal years beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the effect this guidance will have on its consolidated financial statements.
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We may be exposed to interest rate changes, primarily as a result of long-term variable rate debt used to acquire properties and make loans and other permitted investments.  Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, we will borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates.  With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.  We may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps, or floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate portion of our variable rate debt. Of our $153.6 million in notes payable, at December 31, 2014, $31.1 million represented debt subject to variable interest rates. If our variable interest rates increased 100 basis points, we estimate that total annual interest cost, including interest expensed and interest capitalized, would increase by $0.3 million.
Foreign Currency Exchange Risk
At December 31, 2014, we own an approximately 47% interest in a joint venture consisting of 21 properties in the Czech Republic, Poland, Hungary, and Slovakia that holds $3.9 million in local currency-denominated accounts at European financial institutions.  As the cash is held in the same currency as the real estate assets and related loans, we believe that we are not materially exposed to any significant foreign currency fluctuations related to these accounts as it relates to ongoing property operations.  Additionally, we hold $0.4 million in a Euro-denominated account in a United States financial institution.  Material movements in the exchange rate of Euros could materially impact distributions from our foreign investments.

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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.
Item 8.    Financial Statements and Supplementary Data.
The information required by this Item 8 is included in our Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.
Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.    Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our President and Principal Executive Officer and Principal Financial Officer, evaluated, as of December 31, 2014, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our President and Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2014, to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our President and Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.
Management's Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our management, including our President and Principal Executive Officer and Principal Financial Officer, evaluated, as of December 31, 2014, the effectiveness of our internal control over financial reporting using the framework in Internal Control—New Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our President and Principal Executive Officer and Principal Financial Officer concluded that our internal controls, as of December 31, 2014, were effective.
Changes in Internal Control over Financial Reporting
There has been no change in internal control over financial reporting that occurred during the quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.    Other Information.
None.

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PART III
Item 10.    Directors, Executive Officers and Corporate Governance.
Directors
Because our directors take a critical role in guiding our strategic direction and overseeing our management, they must demonstrate broad-based business, professional skills and experiences, concern for the long-term interests of our stockholders, and personal integrity and judgment. In addition, our directors must have time available to devote to board activities and to enhance their knowledge of our industry. As described further below, we believe our directors have the appropriate mix of experiences, qualifications, attributes, and skills required of our board members in the context of the current needs of our company.
Steven J. Kaplan, 64, has served as one of our directors since February 2006 and as Non-Executive Chairman of the Board since October 2014. He has over 30 years of experience in the commercial real estate industry. From 1979 through 1993, Mr. Kaplan was a principal of and general counsel for Edgewood Investment Corporation, a regional real estate firm that acquired, operated and disposed of over 15 apartment communities, 12 shopping centers, 14 office buildings and six hotels. From 1994 through August 1999, Mr. Kaplan served as the President and Chief Executive Officer of Landauer Associates, Inc., a national valuation and consulting firm. In this capacity, Mr. Kaplan expanded the services of Landauer to include a national capital markets group as well as an international hospitality division. Landauer was sold to Grubb & Ellis in August 1999, and Mr. Kaplan served as Chief Operating Officer of this international brokerage and property management firm. Since leaving Grubb & Ellis in March 2000, Mr. Kaplan has provided advisory services for various real estate service providers, owners and investors and has engaged in the practice of law with a focus on commercial real estate transactions. Mr. Kaplan served as a director of TIER REIT, Inc. from May 2003 until April 2004. Mr. Kaplan is an attorney and is admitted to practice law in Texas.
Our board of directors has concluded that Mr. Kaplan is qualified to serve as one of our directors for reasons including his significant experience relating to real estate investments and his prior experience serving as a director of TIER REIT, Inc. Mr. Kaplan is a 40-year commercial real estate industry veteran, and has substantial experience as an attorney and general counsel which brings a unique perspective to our board. In addition, as a former director of TIER REIT, Inc., Mr. Kaplan has an understanding of the requirements of serving on a public company board. Mr. Kaplan continues to represent commercial real estate investors and developers and, as such, remains in tune with industry trends and issues.
Barbara C. Bufkin, 59, has served as one of our directors since March 2005. Ms. Bufkin has more than 30 years’ experience in the insurance industry. Ms. Bufkin has served as Executive Vice President of Hamilton USA, a member of the Hamilton Insurance Group, since September 2014. Ms. Bufkin served as Chief Operating Officer of Global Strategic Advisory at Guy Carpenter & Company, LLC from August 2013 to September 2014. She served as Executive Vice President, Business Development of Argo Group International Holdings, Ltd. (“Argo Group”) from March 2011 through June 2013. Prior to that, Ms. Bufkin served as Senior Vice President, Business Development of Argo Group from August 2007 to March 2011. Prior to that, from August 2004 until August 2007, Ms. Bufkin was Senior Vice President, Corporate Business Development of Argonaut Group, Inc. ("Argonaut"). From September 2002 until August 2004, Ms. Bufkin was Vice President of Corporate Business Development of Argonaut. From 2001 until Ms. Bufkin became an employee of Argonaut in September 2002, she provided insurance and business development consulting services to Argonaut. From 2000 to September 2002, Ms. Bufkin also provided insurance and business development consulting services to other insurance companies and financial institutions, including consulting services to Swiss Re New Markets, General Re and AIG in connection with the privatization of the Florida Special Disability Trust Fund. Prior to that, Ms. Bufkin served as Director of Swiss Re New Markets and Chairman, President and Chief Executive Officer of Swiss Re subsidiaries Facility Insurance Corporation (FIC) and Facility Insurance Holding Corporation (FIHC). Her background also includes nearly 15 years of industry experience in executive positions with Sedgwick Payne Company, E.W. Blanch Company and other insurance industry firms. Ms. Bufkin graduated cum laude from the State University of New York at Buffalo, with a Bachelors of Arts degree in Philosophy. She is an alumna of the Leadership Texas, Stanford Executive Education, and Wharton Executive Education programs. She was a Director of the Southwestern Insurance Information Service for eight years. In 2000, she was nominated to the Texas Women’s Hall of Fame and was selected to the 2004 Class of Leadership America. Ms. Bufkin was chosen as APIW (Association of Professional Insurance Woman) 2012 Insurance Woman of the Year.
Our board of directors has concluded that Ms. Bufkin is qualified to serve as one of our directors for reasons including her significant corporate business development experience as an insurance industry executive. Ms. Bufkin’s background compliments that of our other board members and brings a unique perspective to our board. She provides valuable knowledge and insight into business development and management issues.

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Michael D. Cohen, 40, has served as one of our directors since October 2014 and as our interim President since February 2015. Mr. Cohen serves as a Manager and Executive Vice President of Behringer. Since February 2013, Mr. Cohen has served as a director of Behringer Harvard Opportunity REIT II, Inc. Mr. Cohen also works closely with Behringer Securities to develop institutional investments and manage relationships with the Company’s institutional investors. Mr. Cohen joined Behringer in 2005 from Crow Holdings, the investment office of the Trammell Crow family, where he concentrated on the acquisition and management of the firm’s office, retail, and hospitality assets. Mr. Cohen began his career in 1997 at Harvard Property Trust and Behringer Partners, predecessor companies to Behringer. He received a Bachelor of Business Administration degree from the University of the Pacific in Stockton, California, and a Master of Business Administration degree from Texas Christian University in Fort Worth, Texas. He is a member of the Association of Foreign Investors in Real Estate.
Our board of directors has concluded that Mr. Cohen is qualified to serve as one of our directors for reasons including his significant experience in commercial real estate, which allows him to provide valuable investment advice.