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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[MARK ONE]
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 333-100126
BEHRINGER HARVARD MID-TERM VALUE ENHANCEMENT
FUND I LP
(Exact Name of Registrant as Specified in Its Charter)
TEXAS 71-0897613
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1323 NORTH STEMMONS FREEWAY, SUITE 211, DALLAS, TEXAS 75207
(Address of principal executive offices)
(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (866) 655-1610
Securities registered pursuant to section 12(b) of the Act:
NONE
Securities registered pursuant to section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.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. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of limited partnership interests held by
nonaffiliates of the Registrant as of June 30 2003 (the last business day of the
Registrant's most recently completed second fiscal quarter) was $0 and as of
December 31, 2003 was $2,233,449, assuming a market value of $10 per unit of
limited partnership interest.
While there is no established market for the Registrant's units of limited
partnership interest, the Registrant is currently selling units pursuant to a
Form S-11 Registration Statement under the Securities Act of 1933 at a price of
$10 per unit.
As of March 16, 2004, the Registrant had 471,107 units of limited partnership
interest outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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BEHRINGER HARVARD MID-TERM VALUE ENHANCEMENT FUND I LP
FORM 10-K
YEAR ENDED DECEMBER 31, 2003
PART I
PAGE
ITEM 1. BUSINESS.......................................................................3
ITEM 2. PROPERTIES.....................................................................7
ITEM 3. LEGAL PROCEEDINGS..............................................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND STOCKHOLDER MATTERS..................8
ITEM 6. SELECTED FINANCIAL DATA........................................................9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.................................................................10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..........................................................13
ITEM 9A. CONTROLS AND PROCEDURES.......................................................13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................15
ITEM 11. EXECUTIVE COMPENSATION........................................................18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS...................................................18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................18
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................................20
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...............21
SIGNATURES................................................................................22
2
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements, including
discussion and analysis of Behringer Harvard Mid-Term Value Enhancement Fund I
LP's (the "Partnership") financial condition, anticipated capital expenditures
required to complete projects, amounts of anticipated cash distributions to the
Partnership's limited partners in the future and other matters. These
forward-looking statements are not historical facts but are the intent, belief
or current expectations of the Partnership's management based on their knowledge
and understanding of the business and industry. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates" and variations
of these words and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of the future performance and
are subject to risks, uncertainties and other factors, some of which are beyond
the Partnership's control, are difficult to predict and could cause actual
results to differ materially from those expressed or forecasted in the
forward-looking statements.
Forward-looking statements that were true at the time made may ultimately
prove to be incorrect or false. You are cautioned to not place undue reliance on
forward-looking statements, which reflect the Partnership's management's view
only as of the date of this Form 10-K. The Partnership undertakes no obligation
to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes to future operating results.
Factors that could cause actual results to differ materially from any
forward-looking statements made in this Form 10-K include changes in general
economic conditions, changes in real estate conditions, construction costs that
may exceed estimates, construction delays, increases in interest rates, lease-up
risks, inability to obtain new tenants upon the expiration of existing leases,
and the potential need to fund tenant improvements or other capital expenditures
out of operating cash flow. The forward-looking statements should be read in
light of these factors and the factors identified in the "Risk Factors" section
of the Partnership's Registration Statement on Form S-11, as filed with the
Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS.
FORMATION
The Partnership is a limited partnership formed in Texas on July 30,
2002. The Partnership's general partners are Behringer Harvard Advisors I LP
("Behringer Advisors I") and Robert M. Behringer (the "General Partners"). The
Partnership was funded through capital contributions from its General Partners
and initial limited partner on September 20, 2002 and is currently offering its
limited partnership units pursuant to a public offering that commenced on
February 19, 2003 ("the Offering"), as described below. The Partnership intends
to use the proceeds from the Offering, after deducting offering expenses,
primarily to acquire institutional quality office and office service center
properties, in highly desirable locations in markets with barriers to entry and
limited potential for new development.
On February 19, 2003, the Partnership commenced an Offering of up to
40,000,000 units of limited partnership interest to be offered at a price of $10
per unit pursuant to a Registration Statement on Form S-11 filed under the
Securities Act of 1933. The Registration Statement also covers up to 4,000,000
units available to be issued pursuant to the Partnership's distribution
reinvestment plan. The Offering is a best efforts continuous offering that
terminates no later than February 19, 2005.
In December 2003, the Partnership made its initial acceptance of
subscriptions for 202,781 partnership units, which satisfied the minimum
offering requirement of $2,000,000 established for the Offering. In addition,
the minimum offering requirement of $2,500,000 for the Partnership's special
escrow account for New York residents was satisfied on January 26, 2004, and the
Partnership accepted subscriptions from the New York residents on February 1,
2004.
3
As of December 31, 2003, the Partnership was in the development stage and
had not commenced real estate operations. The Partnership commenced operations
in March 2004 with the purchase of a one-story office building in Hopkins,
Minnesota, a suburb of Minneapolis. See "Properties." The Partnership's
Agreement of Limited Partnership (the "Partnership Agreement") provides that it
will continue in existence until the earlier of December 31, 2022 or termination
of the Partnership pursuant to the dissolution and termination provisions of the
Partnership Agreement, which includes a majority vote of the limited partners.
INVESTMENT OBJECTIVES AND CRITERIA
The Partnership's objective is to invest in income-producing real estate
properties, including properties that have been constructed and have operating
histories, are newly constructed or are under development or construction. The
Partnership's investment objectives are:
o to preserve, protect and return investor's capital contributions;
o to maximize cash distributions paid to investors;
o to realize growth in the value of the Partnership's properties upon the
ultimate sale of such properties; and
o within eight years after termination of the offering, either (i) to make
an orderly disposition of the properties and distribute the cash to the
investors or (ii) upon the approval of the majority of the limited
partners, for all the investors to exchange their units for interests in
another Behringer Harvard fund.
ACQUISITION AND INVESTMENT POLICIES
The Partnership intends to primarily invest in quality office and other
commercial properties. These are properties that generally have premier business
addresses in especially desirable locations with limited potential for new
development or other barriers to entry. Such properties generally are of high
quality construction, offer personalized tenant amenities and attract higher
quality tenants. The Partnership's intention is to hold properties for a period
of time consistent with the anticipated life of the fund of from five to eight
years from the termination of the Offering, which management believes is the
optimal period to enable the Partnership to capitalize on the potential for
increased income and capital appreciation of the properties. However, economic
or market conditions may influence the Partnership to hold investments for
different periods of time. The General Partners believe that a portfolio
consisting of the types of properties described above enhances liquidity
opportunities for investors by making the sale of individual properties,
multiple properties or the investment portfolio as a whole attractive to
institutional investors.
The Partnership is not limited to investments in institutional quality
office properties. It may invest in other commercial properties such as shopping
centers, business and industrial parks, manufacturing facilities and warehouse
and distribution facilities in order to reduce overall portfolio risk or enhance
overall portfolio returns if the General Partners determine that it would be
advantageous to do so. In addition, the General Partners may determine that it
would be advantageous to acquire commercial properties other than institutional
quality office properties in order to diversify the Partnership's portfolio or
in order to respond to changes in the real estate market. The Partnership may
also invest in commercial properties that are not preleased or in other types of
commercial properties such as hotels or motels. However, the Partnership will
not actively engage in the business of operating hotels, motels or similar
properties.
The Partnership may purchase properties that have been constructed and
have operating histories, are newly constructed or are under development or
construction. An advisory board has been established to provide the General
Partners with advice and guidance with respect to (i) the identification of
assets for acquisition; (ii) general economic and market conditions, general
business principles, and specific business principles relating to the
Partnership's business plan; (iii) inroads to establishing beneficial strategic
partners, customers, and suppliers; (iv) opportunities within and related to the
industry; and (v) other assistance as may be determined by the General Partners
or their representatives from time to time. For more information on the advisory
board, see "Directors and Executive Officers of the Registrant-Advisory Board."
4
An affiliate of the General Partners has developed and uses proprietary
modeling tools that the Partnership believes will help it to identify favorable
property acquisitions, enable it to forecast growth and make predictions at the
time of the acquisition of a property as to optimal portfolio blend, disposition
timing and sales price. Using these tools in concert with its overall
strategies, including individual market monitoring and ongoing analysis of
macro- and micro-regional economic cycles, management expects to be better able
to identify favorable acquisition targets, increase current returns and
resultant current distributions to investors and to maintain higher relative
portfolio property values and execute timely dispositions at appropriate sales
prices to enhance capital gains distributable to its investors.
In making investment decisions for the Partnership, the General Partners
will consider relevant real estate property and financial factors, including the
location of the property, its suitability for any development contemplated or in
progress, its income-producing capacity, the prospects for long-range
appreciation, and its liquidity and income tax considerations. In this regard,
the General Partners will have substantial discretion with respect to the
selection of specific investments.
In purchasing, leasing and developing properties, the Partnership will be
subject to risks generally incident to the ownership of real estate, including:
o changes in general economic or local conditions;
o changes in supply of or demand for similar or competing properties in an
area;
o changes in interest rates and availability of permanent mortgage funds
that may render the sale of a property difficult or unattractive;
o changes in tax, real estate, environmental and zoning laws;
o periods of high interest rates and tight money supply that may make the
sale of properties more difficult;
o tenant turnover; and
o general overbuilding or excess supply in the market area.
The Partnership and its performance will be subject to additional risks
as have been listed in the "Risk Factors" section of its Registration Statement
on Form S-11, as filed with the Securities and Exchange Commission, in
connection with the Partnership's sale of limited partnership units in the
Offering.
JOINT VENTURE AND CO-TENANCY INVESTMENTS
The Partnership is likely to enter into joint ventures for the
acquisition, development or improvement of properties for the purpose of
diversifying its portfolio of assets. The Partnership may enter into joint
ventures with affiliates such as Behringer Harvard Short-Term Opportunity Fund I
LP or other Behringer Harvard programs, joint ventures or partnerships. It is
also possible that the joint ventures could involve co-ownership arrangements
with non-affiliates including real estate developers, owners and other third
parties. In determining whether to invest in a particular joint venture, the
General Partners will evaluate the investments that such joint venture owns or
is being formed to own under the same criteria as other potential Partnership
investments. For more information on these criteria, see "Business - Acquisition
and Investment Policies" and "Business-Conflicts of Interest."
In addition, the Partnership may acquire co-tenancy interests in
properties that are sponsored as tenant in common offerings by Behringer Harvard
Holdings, LLC ("Behringer Holdings"), the ultimate parent company of Behringer
Advisors I. The General Partners believe that there are significant advantages
to the Partnership to become a co-investor in properties in which Behringer
Holdings obtains other tenant in common investors. These advantages include
permitting the Partnership to invest proceeds of the Offering earlier than it
might otherwise be able if it were required to acquire the entirety of the
property, the ability to obtain greater diversification in the Partnership's
portfolio of property investments by applying its capital in lesser amounts over
more properties and the ability to acquire interests in properties that it would
be unable to acquire using only its own capital sources.
5
BORROWING POLICIES
There is no limitation on the amount the Partnership may invest in any
single improved property or other asset. However, the Partnership will not
borrow funds to acquire any of its properties. The Partnership Agreement
authorizes the Partnership to borrow funds, but only for the following limited
purposes: (i) for operating purposes in the event of unexpected circumstances in
which cash resources become insufficient for the maintenance and repair of the
properties or for the protection or replacement of assets; (ii) to finance
improvement of properties when the General Partners deem such improvements to be
necessary or appropriate to protect the capital previously invested in
properties; (iii) to protect the value of the Partnership's investment in a
particular property; and (iv) to make a particular property more attractive for
sale or lease. Further, the aggregate amount of borrowings by the Partnership at
any given time may not exceed amounts permissible under applicable North
American Securities Administrators Association ("NASAA") Guidelines.
COMPETITION
The Partnership may experience competition for tenants from owners and
managers of similar projects, which may include its affiliates. The Partnership
will experience competition in the acquisition of real estate from similar
companies with access to greater resources than those available to the
Partnership. At the time the Partnership elects to dispose of its properties,
the Partnership will also be in competition with sellers of similar properties
to locate suitable purchasers for its properties.
EMPLOYEES
The Partnership has no direct employees. The employees of Behringer
Advisors I and other affiliates of the Partnership perform a full range of real
estate services for the Partnership, including acquisitions, property
management, accounting, asset management, wholesale brokerage and investor
relations.
The Partnership is dependent on its affiliates for services that are
essential to the Partnership, including the sale of the Partnership's limited
partnership units, asset acquisition decisions, property management and other
general and administrative responsibilities. In the event that these companies
were unable to provide these services to the Partnership, the Partnership would
be required to obtain such services from other sources.
AVAILABLE INFORMATION
The Partnership electronically files its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments
to those reports with the Securities and Exchange Commission ("SEC"). Copies of
the Partnership's filings with the SEC may be obtained from its website at
HTTP://WWW.BHFUNDS.COM or at the SEC's website, at HTTP://WWW.SEC.GOV. Access to
these filings is free of charge.
CONFLICTS OF INTEREST
The Partnership is subject to various conflicts of interest arising out
of its relationship with its General Partners and their affiliates, including
conflicts of interest related to the arrangements pursuant to which the
Partnership will compensate the General Partners and their affiliates. All of
the Partnership's agreements and arrangements with its General Partners and
their affiliates, including those relating to compensation, are not the result
of arm's-length negotiations. For more information on conflicts of interest, see
the "Risk Factors" section of the Partnership's Registration Statement on Form
S-11, as filed with the Securities and Exchange Commission.
The General Partners and their affiliates attempt to balance the
Partnership's interests with their activities on behalf of other Behringer
Harvard programs. However, to the extent that the General Partners or their
affiliates take actions that are more favorable to other entities than to the
Partnership, these actions may have a negative impact on the Partnership's
financial
6
performance and, consequently, on distributions to investors and on the value of
the limited partnership units.
ITEM 2. PROPERTIES.
GENERAL
The Partnership's investments in real estate generally will take the
form- of holding fee title or a long-term leasehold estate. The Partnership will
acquire such interests either directly or through investments in joint ventures,
partnerships, co-tenancies or other co-ownership arrangements with the
developers of the properties, affiliates of the General Partners or other
persons. The Partnership is not limited in the number or size of properties it
may acquire or on the percentage of net proceeds of the Offering that it may
invest in a single property. The number and mix of properties it acquires will
depend upon real estate and market conditions and other circumstances existing
at the time it acquires properties and the amount of proceeds raised in the
Offering.
PROPERTIES
The Partnership was in the development stage and owned no properties as
of December 31, 2003.
On March 12, 2004, the Partnership acquired a one-story office building
containing approximately 29,660 of rentable square feet, located on
approximately 2.5 acres of land (the "Hopkins Property"). The Hopkins Property
is located in Hopkins, Minnesota, a suburb of Minneapolis. The purchase price of
the Hopkins Property was $2,925,000 plus preliminary closing costs of
approximately $144,925. The Partnership used proceeds from the Offering to pay
the entire purchase price and all closing costs of the acquisition.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
There is no established trading market for the Partnership's limited
partnership units, and the Partnership does not expect that one will develop.
Therefore, there is the risk that a security holder may not be able to sell the
units at a time or price acceptable to the security holder. Pursuant to the
Offering, the Partnership is currently selling units of its limited partnership
interest to the public at a price of $10 per unit.
For the first three full fiscal years following the termination of the
Offering, the value of the Partnership's units will be deemed to be $10 and no
valuation or appraisal of the Partnership's units will be performed. Thereafter,
the Partnership will prepare annual valuations of its units based upon the
estimated amount a limited partner would receive if all partnership assets were
sold for their estimated values as of the close of the Partnership's fiscal year
and all proceeds from such sales, without reduction for selling expenses,
together with any funds held by it, were distributed to the limited partners
upon liquidation. Such estimated property values will be based upon annual
valuations performed by the General Partners, and no independent property
appraisals will be obtained. While the General Partners are required under the
Partnership Agreement to obtain the opinion of an independent third party
stating that their estimates of value are reasonable, the unit valuations
provided by the General Partners may not satisfy the technical requirements
imposed on plan fiduciaries under ERISA. Similarly, the unit valuations provided
by the General Partners may be subject to challenge by the Internal Revenue
Service if used for any tax (income, estate and gift, or otherwise) valuation
purpose as an indicator of the fair value of the units.
The Partnership Agreement includes a unit redemption program. Limited
partners who have held their units for a least one year may receive the benefit
of limited liquidity by presenting for redemption all or a portion of their
units to the Partnership at any time in accordance with the procedures described
below. At that time, the Partnership may, subject to the conditions and
limitations below, redeem the units presented for redemption for cash to the
extent that sufficient funds from operations are available to fund such
redemption. The purchase price for the redeemed units for the period beginning
after a limited partner has held the units for a period of one year and ending
after the first three full fiscal years following termination of the Offering
will generally be the lesser of (1) $8.50 per unit or (2) the price the limited
partner actually paid for the units. Thereafter, the purchase price will be the
lesser of (1) 90.0% of the fair value per unit, or (2) the price the limited
partner actually paid for the units. The fair value utilized for purposes of
establishing the purchase price per unit will be the estimated value of units
determined annually for ERISA purposes. The fair value will be based on annual
appraisals of the Partnership's properties performed by the General Partners and
not by an independent appraiser. The General Partners will, however, obtain
annually an opinion of an independent third party that their estimate of the
fair value of each unit for such year is reasonable and was prepared in
accordance with appropriate methods for valuing real estate. The General
Partners reserve the right in their sole discretion at any time and from time to
time to (1) waive the one-year holding period in the event of the death or
bankruptcy of a limited partner or other exigent circumstances, (2) reject any
request for redemption, (3) change the purchase price for redemptions, or (4)
terminate, suspend and/or reestablish the unit redemption program. In addition,
for redemptions of units upon the death of a limited partner, the purchase price
for units until after the first three full fiscal years following termination of
the Offering will be equal to the price the limited partner actually paid for
the units. Thereafter, the purchase price will be the fair value of the units as
determined by estimated unit valuations. Under the terms of the plan, during any
calendar year the Partnership will not redeem in excess of 3.0% of the weighted
average number of units outstanding during the prior calendar year. In addition,
the General Partners will determine whether the Partnership has sufficient cash
from operations to repurchase units, and such purchases will generally be
limited to 1.0% of operating cash flow for the previous fiscal year plus
proceeds of the Partnership's distribution reinvestment plan.
8
HOLDERS
As of March 16, 2004, the Partnership had 471,107 limited partnership
units outstanding that were held by a total of approximately 159 limited
partners.
DISTRIBUTIONS
The timing and amount of cash to be distributed to the Partnership's
limited partners will be determined by the General Partners and will be
dependent on a number of factors, including funds available for payment of
distributions, financial condition and capital expenditures. However, the
Partnership Agreement generally requires cash distributions at least as often as
quarterly. It is the intention of the Partnership to declare and pay dividends
on a monthly basis. The General Partners have announced their intention to
initiate such monthly distribution to the Partnership's limited partners at an
annual rate of 6% on or about April 30, 2004.
RECENT SALES OF UNREGISTERED SECURITIES
The Partnership issued ten units of its limited partnership interest to
its initial limited partner at a price of $10 per unit in conjunction with the
Partnership's organization in 2002. These units were not registered under the
Securities Act of 1933, as amended, and were issued in reliance on Rule 4(2) of
the Securities Act.
USE OF PROCEEDS FROM OFFERING OF SECURITIES
As of December 31, 2003, the Company had sold 223,345 limited partnership
units pursuant to the Offering for an aggregate offering price of $2,224,115.
The above-stated number of units sold and the gross offering proceeds
received from such sales does not include the ten units issued to the
Partnership's initial limited partner preceding the commencement of the
Offering.
As the Partnership had not yet purchased any investments as of December
31, 2003, proceeds received from the Offering, net of expenses incurred in
connection with the Offering and operating expenses are held in money market
investment accounts.
ITEM 6. SELECTED FINANCIAL DATA.
The Partnership, which was organized on September 20, 2002, did not
commence operations until March 2004 when it made its first real estate
investment. Accordingly, the following selected financial data for the year
ended December 31, 2003 is not comparable to the period from inception
(September 20, 2002) through December 31, 2002. The following data should be
read in conjunction with the Partnership's financial statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Form 10-K. The selected
financial data presented below has been derived from our financial statements.
9
From inception
(September 20, 2002)
Year ended through
December 31, 2003 December 31, 2002
---------------------- ---------------------
Total assets $ 2,092,836 $ 600
====================== =====================
Long-term debt obligations $ - $ -
Other liabilities 236,989 -
Partners' capital 1,855,847 600
---------------------- ---------------------
Total liabilities and partners' capital $ 2,092,836 $ 600
====================== =====================
Revenues $ - $ -
Expenses (103,724) -
Other income 84 -
---------------------- ---------------------
Net loss $ (103,640) $ -
====================== =====================
Net loss per weighted average limited
partnership units outstanding $ (20.73) $ -
====================== =====================
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 financial statements of the Partnership and the notes thereto:
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of financial condition and results
of operations are based upon the Partnership's financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Partnership's 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. On a regular basis, the
Partnership will evaluate these estimates. 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. As the Partnership was in the development stage as
of December 31, 2003, there were no critical accounting policies in existence at
that time. The Partnership acquired its first investment in real estate in March
2004. Therefore, purchase price allocation will be the most critical accounting
policy for the Partnership in the first quarter of 2004 and therefore has been
described below.
PURCHASE PRICE ALLOCATIONS
Upon the acquisition of real estate properties, the Partnership will
allocate the purchase price of those properties to the tangible assets acquired,
consisting of land and buildings, and identified intangible assets. Identified
intangible assets may consist of the fair value of above-market and below-market
leases, in-place leases, in-place tenant improvements and tenant relationships.
The fair value of the tangible assets acquired, consisting of land and
buildings, will be determined by valuing the property as if it were vacant, and
the "as-if-vacant" value will then be allocated to land and buildings based on
management's determination of the relative fair value of
10
these assets. Management's estimates of value will be made using discounted cash
flow analyses or similar methods. Factors considered by management in its
analysis will include an estimate of carrying costs during hypothetical expected
lease-up periods considering current market conditions, and costs to execute
similar leases. Management will also consider information obtained about each
property as a result of pre-acquisition due diligence, marketing and leasing
activities in estimating the fair value of the tangible and intangible assets
acquired. In estimating carrying costs, management will also include real estate
taxes, insurance and other operating expenses and estimates of lost rentals at
market rates during the expected lease-up periods. Management will also estimate
costs to execute similar leases including leasing commissions and legal and
other related expenses to the extent that such costs are not already incurred in
connection with a new lease origination as part of the transaction.
The Partnership will determine the value of above-market and below-market
in-place leases for acquired properties based on the present value (using an
interest rate that reflects the risks associated with the leases acquired) of
the difference between (i) the contractual amounts paid pursuant to the in-place
leases and (ii) management's estimate of current market lease rates for the
corresponding in-place leases, measured over a period equal to the remaining
non-cancelable terms of the respective leases. The fair value of above-market
and below-market leases will be recorded by the Partnership as intangible assets
and amortized as an adjustment to rental income over the remaining
non-cancelable terms of the respective leases.
The total value of identified real estate intangible assets acquired will
be further allocated to in-place lease values, in-place tenant improvements and
tenant relationships based on management's evaluation of the specific
characteristics of each tenant's lease and the Partnership's overall
relationship with that respective tenant. Characteristics to be considered by
management in allocating these values will include the nature and extent of
existing business relationships with the tenant, growth prospects for developing
new business with the tenant, the tenant's credit quality and expectations of
lease renewals (including those existing under the terms of the lease
agreement), among other factors.
The Partnership will amortize the value of in-place leases to expense
over the initial term of the respective leases. The value of tenant relationship
intangibles will be amortized to expense over the initial term and any assumed
renewal periods, but in no event will the amortization period for intangible
assets exceed the remaining depreciable life of the building. Should a tenant
terminate its lease, the unamortized portion of the in-place lease value and
tenant relationship intangibles would be charged to expense.
RESULTS OF OPERATIONS
As of December 31, 2003, the Partnership has not yet commenced
operations. Although the Partnership received and accepted subscriptions for a
minimum of $2,000,000 on December 22, 2003, there were no real estate
acquisitions in 2003. The Partnership's first real estate acquisition occurred
with the purchase of the Hopkins Property on March 12, 2004. See "Properties."
Results of operations for the year ended December 31, 2003 consist
primarily of the following:
General and administrative expense of $103,724 includes a full year of
corporate overhead and administrative start-up expenses.
Interest income of $84 includes interest income on funds held by the
Partnership from the date the Partnership first accepted subscriptions, December
22, 2003, through December 31, 2003.
There were no start-up expenses or interest income on funds held by the
Partnership in 2002.
11
CASH FLOW ANALYSIS
The Partnership had not commenced operations as of December 31, 2003.
Therefore, cash flows in 2003 are not necessarily comparable to other periods.
In 2003, the Partnership used $58,894 of cash from operations, primarily due to
the net loss incurred in 2003, partially offset by changes in current assets and
liabilities. There were no investing activities in 2003. The cash flows from
financing activities were $2,044,408 in 2003 and result primarily from the
issuance of partnership units, net of offering costs of $1,958,887.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's cash and cash equivalents were $1,986,114 at December
31, 2003. In March 2004, the Partnership acquired the Hopkins Property in
Hopkins, Minnesota for a purchase price of $2,925,000 plus preliminary closing
costs of approximately $144,925. The Partnership used the proceeds from the
Offering to pay the entire purchase price and all closing costs of the
acquisition.
The timing and amount of cash to be distributed to the Partnership's
limited partners will be determined by the General Partners and will be
dependent on a number of factors, including funds available for payment of
distributions, financial condition and capital expenditures.
The Partnership's principal demands for funds will be for property
acquisitions, either directly or through investment interests, for the payment
of operating expenses and distributions, and for the payment of interest on the
Partnership's outstanding indebtedness and other investments. Generally, cash
needs for items other than property acquisitions are expected to be met from
operations, and cash needs for property acquisitions are expected be met from
the Offering. However, there may be a delay between the sale of the
Partnership's units and its purchase of properties, which could result in a
delay in the benefits to its limited partners, if any, of returns generated from
the Partnership's operations. The Partnership expects that at least 84.2% of the
money that limited partners invest in the Offering will be used to buy real
estate or make other investments and approximately 0.8% of the gross proceeds of
the offering will be set aside as initial working capital reserves for such
properties. The remaining 15.0% will be used to pay expenses and fees for
selling commissions and dealer manager fees, organization and offering expenses,
acquisition and advisory fees and acquisition expenses. The General Partners
will evaluate potential property acquisitions and will engage in negotiations
with sellers on the Partnership's behalf. Investors should be aware that after a
contract for the purchase of a property is executed, the property generally will
not be purchased until the successful completion of due diligence. During this
period, the Partnership may decide to temporarily invest any unused proceeds
from the Offering in investments that could yield lower returns than the
properties. These lower returns may affect the Partnership's ability to make
distributions.
Potential future sources of capital include proceeds from secured or
unsecured financings from banks or other lenders, proceeds from the sale of
properties and undistributed funds from operations. If necessary, the
Partnership may use financings or other sources of capital in the event of
unforeseen significant capital expenditures.
On December 22, 2003, the Partnership satisfied the minimum offering
requirement of $2,000,000 established for the Offering. Subscription proceeds
are held in escrow until investors are admitted as limited partners. The
Partnership intends to continue to admit new limited partners at least monthly.
At that time, subscription proceeds are released to the Partnership from escrow
and utilized as consideration for investments and the payment or reimbursement
of dealer manager fees, selling commissions and other organization and offering
expenses. Until required for such purposes, net offering proceeds are held in
short-term, liquid investments. Amounts associated with non-admitted
subscriptions are reflected in "Restricted cash" and "Subscriptions for limited
partnership units" on the Partnership's balance sheets.
The Partnership expects to meet its future short-term operating liquidity
requirements through net cash provided by the operations of properties to be
acquired in the future.
12
Management also expects that the Partnership's properties will generate
sufficient cash flow to cover operating expenses and the payment of a monthly
distribution. Other potential future sources of capital include proceeds from
secured or unsecured financings from banks or other lenders, proceeds from the
sale of properties and undistributed funds from operations. If necessary, the
Partnership may use financings or other sources of capital in the event of
unforeseen significant capital expenditures.
OFF-BALANCE SHEET ARRANGEMENTS
The Partnership has no off-balance sheet arrangements that are reasonably
likely to have a current or future material effect on the Partnership's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The Partnership had no contractual obligations as of December 31, 2003,
nor did the Partnership incur any contractual obligations in its acquisition of
the Hopkins Property in March 2004.
NEW ACCOUNTING PRONOUNCEMENTS
FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51" was issued in January 2003. In
December 2003, FIN No. 46R was issued, which replaced FIN No. 46 and clarified
ARB No. 51. This FIN requires the consolidation of results of variable interest
entities in which the Partnership is deemed to be the primary beneficiary, as
defined. The adoption of FIN No. 46R did not have a material effect on the
financial condition, results of operations, or liquidity of the Partnership.
Interests in entities acquired or created after December 31, 2003 will be
evaluated based on FIN No. 46R criteria.
INFLATION
The real estate market has not been affected significantly by inflation
in the past several years due to the relatively low inflation rate. The majority
of the Partnership's leases will contain inflation protection provisions
applicable to 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Partnership has limited exposure to financial market risks, including
changes in interest rates and other relevant market prices. The Partnership has
no investments that would be affected by an increase or decrease in interest
rates. The Partnership does not have any foreign operations and thus is not
exposed to foreign currency fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item 8 is hereby incorporated by
reference to the Partnership's 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.
Within the 90-day period prior to the filing of this report, the
management of Behringer Advisors I evaluated, with the participation of its
chief executive officer and chief financial officer, the effectiveness of the
Partnership's disclosure controls and procedures as of December 31, 2003. Based
on that evaluation, the chief executive officer and chief financial officer of
Behringer Advisors I have concluded that the Partnership's disclosure controls
and procedures were effective as of the end of the period covered by this
report. To these officers' knowledge,
13
there were no significant changes in the Partnership's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
THE GENERAL PARTNERS
The Partnership operates under the direction of its General Partners,
which are responsible for the management and control of its affairs. The General
Partners are assisted by the employees of Harvard Property Trust, LLC ("HPT"),
the general partner of Behringer Advisors I. In addition, the General
Partners are advised by an advisory board comprised of industry professionals.
The Partnership does not employ its own management personnel; rather it pays
fees to its General Partners for their services to the Partnership.
The General Partners are responsible for the Partnership's direction and
management, including acquisition, construction and property management. Any
action required to be taken by the General Partners will be taken only if it is
approved, in writing or otherwise, by both General Partners, unless the General
Partners agree between themselves to a different arrangement for the approval of
actions by the General Partners.
The General Partners are Behringer Advisors I and Robert M. Behringer,
individually. Behringer Advisors I is a Texas limited partnership formed in July
2002. The executive office of the General Partners is located at 1323 North
Stemmons Freeway, Suite 211, Dallas, Texas 75207. Behringer Advisors I is owned
by HPT, its sole general partner, and Behringer Harvard Partners, LLC
("Behringer Partners") its sole limited partner. Behringer Holdings is the sole
owner of HPT and Behringer Partners. Mr. Behringer is the President and sole
manager of each of these companies. Mr. Behringer is the majority owner, the
President and sole manager of Behringer Holdings. Behringer Holdings also is the
indirect owner of HPT Management Services LP ("HPT Management"), the
Partnership's property manager, Behringer Development LP ("Behringer
Development"), a real estate development company and Behringer Securities LP
("Behringer Securities"), the Partnership's dealer manager.
Behringer Advisors I was created in 2002 for the sole purpose of acting
as the Partnership's general partner. It is managed by its executive officers,
namely:
Name Age Position(s)
Robert M. Behringer 55 Chief Executive Officer and Chief Investment Officer
Robert S. Aisner 57 President
Gerald J. Reihsen, III 45 Executive Vice President - Corporate Development
and Legal and Secretary
Gary S. Bresky 37 Chief Financial Officer and Treasurer
M. Jason Mattox 28 Senior Vice President - Asset Acquisition and
Management
ROBERT M. BEHRINGER is the Chief Executive Officer and Chief Investment
Officer of Behringer Advisors I. He is also the Chief Executive Officer,
President and Chairman of the Board of Directors of Behringer Harvard REIT I,
Inc ("Behringer Harvard REIT I"). Mr. Behringer is the majority owner, sole
manager and Chief Executive Officer and President of Behringer Holdings. Since
2002, Mr. Behringer has also been a general partner of Behringer Harvard
Short-Term Opportunity Fund I LP, a publicly registered real estate limited
partnership. Since 2001, Mr. Behringer has also been the Chief Executive Officer
and sole manager of the following: HPT, the general partner of Behringer
Advisors I; HPT Management, the Partnership's property manager; Behringer
Securities, the Partnership's dealer manager; IMS, LLC ("IMS"), the general
partner of HPT Management; Behringer Development, a company organized to develop
real properties; and Behringer Advisors LP ("Behringer Advisors"), a limited
partnership organized to advise Behringer Harvard REIT I. Since 2001, Mr.
Behringer has also been the Chief Executive Officer, President and a manager of
Behringer Partners, which is the
15
limited partner of each of Behringer Securities, HPT Management, HPT, Behringer
Advisors and IMS.
From 1995 until 2001, Mr. Behringer was Chief Executive Officer of
Harvard Property Trust, Inc., a privately held REIT. Before forming Harvard
Property Trust, Inc., Mr. Behringer invested in commercial real estate as
Behringer Partners, a sole proprietorship formed in 1989 that invested in single
asset limited partnerships. From 1985 until 1993, Mr. Behringer was Vice
President and Investment Officer of Equitable Real Estate Investment Management,
Inc., one of the largest pension fund advisors and owners of real estate in the
United States. While at Equitable, Mr. Behringer was responsible for its General
Account Real Estate Assets located in the South Central United States, including
Texas, Louisiana, Arkansas, Oklahoma and Mississippi. The portfolio included
institutional quality office, industrial, retail, apartment and hotel properties
exceeding 17 million square feet with a value of approximately $2.8 billion.
Although Mr. Behringer was a significant participant in acquisitions,
management, leasing, redevelopment and dispositions, his primary responsibility
to increase net operating income and the overall value of the portfolio.
Mr. Behringer has over 25 years of experience in real estate investment,
management and finance activities, including approximately 140 different
properties with over 24 million square feet of office, retail, industrial,
apartment, hotel and recreational properties. In addition to being the Chief
Executive Officer of Behringer Advisors I, he is currently the general partner
or a co-general partner in several real estate limited partnerships formed for
the purpose of acquiring, developing and operating office buildings and other
commercial properties. Mr. Behringer is a Certified Property Manager, Real
Property Administrator, Certified Hotel Administrator and Texas Real Estate
Broker, holds Series 7, 24 and 63 securities licenses and is a member of the
Institute of Real Estate Management, the Building Owners and Managers
Association, the Urban Land Institute and the Real Estate Council. Mr. Behringer
has also been a licensed certified public accountant for over 20 years. Mr.
Behringer received a Bachelor of Science degree from the University of
Minnesota.
ROBERT S. AISNER is the President of Behringer Advisors I. He is also
Chief Operating Officer and a director of Behringer Harvard REIT I. Mr. Aisner
has over 29 years of commercial real estate experience. From 1996 until 2003,
Mr. Aisner served as (i) Executive Vice President of Amli Residential Properties
Trust, a New York Stock Exchange listed REIT that is focused on the development,
acquisition and management of upscale apartment communities and serves as
institutional advisor and asset manager for institutional investors with respect
to their multifamily real estate investment activities, (ii) President of Amli
Management Company, which oversees all of Amli's apartment operations in 80
communities, (iii) President of the Amli Corporate Homes division, which invests
in and manages corporate housing properties, (iv) Vice President of Amli
Residential Construction, a division of Amli that performs real estate
construction services, and (v) Vice President of Amli Institutional Advisors,
the Amli division that serves as institutional advisor and asset manager for
institutional investors with respect to their multifamily real estate
activities. Mr. Aisner also served on Amli's Executive Committee and Investment
Committee from 1999 until 2003. From 1994 until 1996, Mr. Aisner owned and
operated Regents Management, Inc., which had both a multifamily development and
construction group and a general commercial property management company. From
1984 to 1994, he was employed by HRW Resources, Inc., a real estate development
company, where he served as Vice President.
Mr. Aisner served as an independent director of Behringer Harvard REIT I
from June 2002 until February 2003 and currently serves as a management director
of Behringer Harvard REIT I, a position he has held since June 2003. Since
February 2003, Mr. Aisner has also served as Executive Vice President - Real
Estate Operations of Behringer Holdings and President of HPT, IMS, HPT
Management and Behringer Development. Mr. Aisner received a Bachelor of Arts
degree from Colby College and a Masters of Business Administration degree from
the University of New Hampshire.
GERALD J. REIHSEN, III is the Executive Vice President - Corporate
Development and Legal and Secretary of Behringer Advisors I. He is also
Executive Vice President - Corporate
16
Development and Legal and Secretary of Behringer Harvard REIT I and is the
primary contact for Behringer Advisors I, Behringer Harvard Advisors II LP,
Behringer Harvard REIT I and all of their affiliates for banks, attorneys and
other service providers and contractual relations. From their inception in 2001
until February 2003, he served as Chief Operating Officer, Chief Legal Officer
and Secretary of Behringer Securities, Behringer Holdings, Behringer
Development, HPT and Behringer Partners. From 2001 until February 2003, Mr.
Reihsen served as Chief Legal Officer and Secretary of IMS and HPT Management.
Since 2002, he has served as Chief Operating Officer, Chief Legal Officer and
Secretary of Behringer Advisors. Currently, Mr. Reihsen holds the following
positions: President of Behringer Securities; Chief Operating Officer, Chief
Legal Officer and Secretary of Behringer Holdings and Behringer Partners; and
Executive Vice President - Corporate Development and Legal and Secretary of
Behringer Development, HPT, IMS and HPT Management.
For over 19 years, Mr. Reihsen's business and legal background has
centered on sophisticated financial and transactional matters, including
commercial real estate transactions, real estate partnerships, and public and
private securities offerings. For the period from 1985 to 2000, Mr. Reihsen
practiced as an outside corporate securities attorney. After serving from 1986
to 1995 in the corporate department of Gibson, Dunn & Crutcher, a leading
international commercial law firm, Mr. Reihsen established his own firm, Travis
& Reihsen, where he served as a corporate/securities partner until 1998. In
1998, Mr. Reihsen became the lead partner in the corporate/securities section of
the law firm Novakov Davis, where he served until 2000. In 2000, he practiced
law as a principal of Block & Balestri, a corporate and securities law firm. In
2000 and 2001, Mr. Reihsen was employed as the Vice President - Corporate
Development and Legal of Xybridge Technologies, Inc., a telecommunications
software company that Mr. Reihsen helped guide through venture funding,
strategic alliances with international telecommunications leaders and its
ultimate sale to Zhone Technologies, Inc. Mr. Reihsen holds Series 7, 24, 27 and
63 securities licenses. Mr. Reihsen received a Bachelor of Arts degree, magna
cum laude, from the University of Mississippi and a Juris Doctorate degree, cum
laude, from the University of Wisconsin.
GARY S. BRESKY is the Chief Financial Officer and Treasurer of Behringer
Advisors I. Since 2002, Mr. Bresky has also served as the Chief Financial
Officer and Treasurer of Behringer Harvard REIT I and is the primary contact for
Behringer Advisors I LP, Behringer Harvard Advisors II LP, Behringer Harvard
REIT I, and all of their affiliates for accountants and auditors. Since 2002,
Mr. Bresky has served as Chief Financial Officer and Treasurer of Behringer
Advisors. Since 2001, he has served as Chief Financial Officer and Treasurer of
Behringer Securities, Behringer Holdings, Behringer Development, HPT, and IMS.
From their inception in 2001 until February 2003, Mr. Bresky served as Chief
Operating Officer, Chief Financial Officer and Treasurer of HPT Management and
as Chief Financial Officer, Treasurer and a manager of Behringer Partners.
Currently, Mr. Bresky serves as Chief Financial Officer and Treasurer of HPT
Management and Treasurer and a manager of Behringer Partners.
Prior to his employment with Behringer Advisors I, Mr. Bresky served,
from 1996 to 2001, as a Senior Vice President of Finance with Harvard Property
Trust, Inc. In this capacity, Mr. Bresky was responsible for directing all
accounting and financial reporting functions and overseeing all treasury
management and banking functions. Mr. Bresky was also integral in analyzing deal
and capital structures as well as participating in all major decisions related
to any acquisition or sale of assets.
From 1995 until 1996, Mr. Bresky worked in the Real Estate Group at
Coopers & Lybrand LLP in Dallas, Texas, where he focused on finance and
accounting for both public and private REITs. His experience included conducting
annual audits, preparing quarterly and annual public securities reporting
compliance filings and public real estate securities registration statements for
his clients. From 1989 to 1994, Mr. Bresky worked with Ten West Associates, LTD
and Westwood Financial Corporation in Los Angeles, California as a real estate
analyst and asset manager for two commercial real estate portfolios totaling in
excess of $185.0 million. From 1988 until 1989, Mr. Bresky worked as an
analysts' assistant for both Shearson-Lehman Bros., Inc. and Hambrecht and Quist
Inc. assisting brokers in portfolio management. Mr. Bresky
17
has been active in commercial real estate and related financial activities for
over 15 years and holds Series 7, 24, 27 and 63 securities licenses. Mr. Bresky
received a Bachelor of Arts degree from the University of California - Berkeley
and a Masters of Business Administration degree from the University of Texas.
M. JASON MATTOX is the Senior Vice President - Asset Acquisition and
Management of Behringer Advisors I. He is also Vice President - Asset
Acquisition and Management of Behringer Harvard REIT I. Since 2002, Mr. Mattox
has served as a Vice President of Behringer Advisors. Since 2001, he has served
as a Vice President of Behringer Securities. From their inception in 2001 until
February 2003, Mr. Mattox served as Vice President of Behringer Holdings,
Behringer Development, HPT, Behringer Partners, IMS and HPT Management.
Currently, Mr. Mattox serves as Senior Vice President - Asset Acquisition and
Management of Behringer Holdings, HPT, and HPT Management, and Vice President
and Secretary of Behringer Securities.
From 1997 until joining Behringer Advisors I in 2002, Mr. Mattox served
as a Vice President of Harvard Property Trust, Inc. and became a member of its
Investment Committee in 1998. From 1999 until 2001, Mr. Mattox served as Vice
President of Sun Resorts International, Inc., a recreational property investment
company coordinating marina acquisitions throughout the southern United States
and the U.S. Virgin Islands. From 1999 until 2001, in addition to providing
services related to investing, acquisition, disposition and operational
activities, Mr. Mattox served as an asset manager with responsibility for over
1.0 million square feet of Harvard Property Trust, Inc.'s commercial office
assets in Texas and Minnesota, overseeing property performance, management
offices, personnel and outsourcing relationships.
Mr. Mattox is a continuing member of the Building Owners and Managers
Association and the National Association of Industrial and Office Properties.
Mr. Mattox formerly was a member of the National Association of Real Estate
Investment Trusts and the Texas Association of Builders. Mr. Mattox has been
active in commercial real estate and related financial activities for over six
years and holds Series 7, 24 and 63 securities licenses. Mr. Mattox received a
Bachelor of Business Administration degree, with honors, and a Bachelor of
Science degree, cum laude, from Southern Methodist University.
OTHER PERSONNEL
The general partner of Behringer Advisors I is HPT. HPT and its
affiliates currently employ 38 persons, including the executive officers listed
above and five persons employed by HPT Management and 13 employed by Behringer
Securities, eighteen of whom have experience in selecting, acquiring and/or
managing commercial properties. HPT and its affiliates expect to hire
approximately 30 additional persons through the third quarter of 2004. HPT and
its affiliates also will engage the services of non-affiliated third parties to
assist with the identification of properties for possible acquisition and
management of the Partnership's operations.
ADVISORY BOARD
The Partnership does not have a board of directors. The General Partners
are assisted by an advisory board. No member of the advisory board may be a
general partner, officer or employee of the Partnership, Behringer Advisors I,
or an affiliate of the Partnership or Behringer Advisors I, although members of
the advisory board may purchase or own securities of, or have other business
relations with, such parties. The members of the advisory board are Patrick M.
Arnold, Ralph G. Edwards, Jr., Robert "Bobby" W. McMillan and Scott F. McMullin.
NO AUDIT COMMITTEE; NO "AUDIT COMMITTEE FINANCIAL EXPERT"
The Partnership does not have a board of directors and, as such, has no
board committees such as an sudit committee. Because the Partnerhip does not
have an audit committee, the Partnership does not have an "audit committee
financial expert." The General Partners are responsible for managing the
relationship with the Partnership's Independent Auditors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Because the Partnership does not have a class of equity securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934, the
Partnership is not yet required to comply with beneficial ownership reporting
under Section 16(a) of the Exchange Act.
18
CODE OF ETHICS
Behringer Advisors I has adopted a code of ethics applicable to its
principal executive officer, principal financial officer, principal accounting
officer, controller and other employees. A copy of Behringer Advisors I code of
ethics may be obtained from the Partnership's website at http://www.bhfunds.com.
The website will be updated to include any material waivers or modifications to
the code of ethics.
ITEM 11. EXECUTIVE COMPENSATION.
The Partnership operates under the direction of its General Partners,
which are responsible for the management and control of its affairs. The General
Partners are assisted by the officers and employees of HPT, which is the general
partner of Behringer Advisors I. The officers and employees of HPT do not devote
all of their time to the management of the Partnership, and they do not receive
any compensation from the Partnership for their services. The Partnership does
pay fees to Behringer Advisors I and its other affiliates. See "Market for
Registrant's Common Equity and Related Stockholder Matters - Use of Proceeds
from Offering of Securities" and "Certain Relationships and Related
Transactions" for a description of the fees payable and expenses reimbursed to
the Partnership's affiliates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Set forth below is the security ownership of the limited partners known
by the Partnership to beneficially own more than 5% of the Partnership as of
March 16, 2004:
TITLE OF AMOUNT AND NATURE OF
CLASS NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------ ------------------------------------- --------------------------- --------------------
Units of James J. O'Connor Trust 40,000.00 8.5%
Limited
Partnership Juan Martin and Ximina Martin 30,000.00 6.4%
Interest
The Partnership does not have any officers or directors. The two General
Partners, Robert M. Behringer and Behringer Harvard Advisors I, each own 50% of
the general partnership interest and no units of the limited partnership
interest. The Partnership does not maintain any equity compensation plans, and
no arrangements exist that would, upon operation, result in a change in control
of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The compensation and fees paid or to be paid by the Partnership to its
General Partners and their affiliates in connection with the operation of the
Partnership are as follows:
The Partnership pays selling commissions and a dealer manager fee to
Behringer Securities. Selling commissions equal 7% of aggregate gross offering
proceeds, which commissions may be reduced under certain circumstances, and the
dealer manager fee equals 2.5% of aggregate gross offering proceeds (1% for
distribution reinvestment plan purchases). Behringer Securities may pay
commissions of up to 7% of the gross offering proceeds to other broker-dealers
participating in the offering of units. Behringer Securities may reallow a
portion of its dealer manager fee in an aggregate amount up to 1.5% of gross
offering proceeds to broker-dealers participating in the offering to be paid as
marketing fees, including bona fide conference fees incurred, and due diligence
expense reimbursement. In no event shall the total underwriting compensation,
including selling commissions, the dealer manager fee and underwriting expense
reimbursements, exceed 10% of gross offering proceeds. Behringer Securities
earned $147,008 in selling commissions and $55,603 in dealer manager fees in the
year ended December 31, 2003.
The Partnership reimburses its affiliates for a portion of their
organization and offering expenses, which are defined generally as any and all
costs and expenses incurred by the
19
Partnership, its General Partners or their affiliates in connection with the
Partnership's formation, qualification and registration and the marketing and
distribution of its units, including but not limited to, accounting and escrow
fees, printing, advertising and marketing expenses and all other accountable
offering expenses, other than selling commissions and the dealer manager fee.
The General Partners will be responsible for the payment of organization and
offering expenses, other than selling commissions and the dealer manager fee, to
the extent they exceed 2.5% of gross offering proceeds without recourse against
or reimbursement by the Partnership. The Partnership paid $55,603 to its
affiliates in the year ended December 31, 2003 as reimbursement of organization
and offering expenses.
The Partnership reimburses its General Partners for all expenses paid or
incurred by the General Partners in connection with the prudent operation of the
Partnership's business, subject to the limitation that (i) the reimbursement
will be at the lower of the General Partners' actual cost or the amount the
Partnership would be required to pay to independent parties for comparable
administrative services in the same geographic location and (ii) the Partnership
will not reimburse its General Partners or their affiliates for services for
which the General Partners are entitled to compensation by way of a separate
fee. The Partnership made no payments to its affiliates in the year ended
December 31, 2003 as reimbursement of expenses.
The Partnership pays its General Partners and their affiliates
acquisition and advisory fees of 3% of the contract price of each purchased
asset. Acquisition and advisory fees are defined generally as fees and
commissions paid by any party to any person in connection with identifying,
reviewing, evaluating, investing in, and the purchase, development or
construction of properties. Acquisition fees do not include acquisition
expenses, which include legal fees and expenses, travel expenses, costs of
appraisals, nonrefundable option payments on property not acquired, accounting
fees and expenses, title insurance premiums and other closing costs and
miscellaneous expenses relating to the selection, acquisition and development of
real properties. The Partnership pays its General Partners or their affiliates
acquisition expense reimbursements of up to 0.5% of the contract price of each
purchased asset. The Partnership did not pay any acquisition and advisory fees
or acquisition expense reimbursements in the year ended December 31, 2003.
For the management and leasing of its properties, the Partnership pays
HPT Management, its property manager, property management and leasing fees equal
to the lesser of: (A) the amounts charged by unaffiliated persons rendering
comparable services in the same geographic area or (B)(1) for commercial
properties that are not leased on a long-term net lease basis, 4.0% of gross
revenues, plus separate leasing fees of up to 1.5% of gross revenues based upon
the customary leasing fees applicable to the geographic location of the
properties, and (2) in the case of commercial properties that are leased on a
long-term (10 or more years) net lease basis, 1.0% of gross revenues plus a
one-time initial leasing fee of 3.0% of gross revenues payable over the first
five years of the lease term. The Partnership will reimburse the costs and
expenses incurred by HPT Management on the Partnership's behalf, including the
wages and salaries and other employee-related expenses of all on-site employees
of HPT Management who are engaged in the operation, management, maintenance and
leasing or access control of Partnership properties, including taxes, insurance
and benefits relating to such employees, and legal, travel and other
out-of-pocket expenses that are directly related to the management of specific
properties. The Partnership did not pay any property management and leasing fees
in the year ended December 31, 2003.
The Partnership pays its General Partners and their affiliates an annual
asset management fee of 0.5% of the aggregate asset value. The fee is payable
monthly in an amount equal to one-twelfth of 0.5% of the aggregate asset value
as of the last day of the immediately preceding month. Any portion of the asset
management fee may be deferred and paid in a subsequent year. The Partnership
did not pay any asset management fees in the year ended December 31, 2003.
The Partnership distributes to its General Partners a share of net cash
from operations, a 15% distribution after the limited partners have received
distributions equal to their net capital contributions plus an 8.0% annual
cumulative (noncompounded) return on their net capital
20
contributions; provided, however, that in no event will the General Partners
receive more than 10.0% of cash available for distribution.
In connection with the sale of the properties of the Partnership, the
Partnership will pay to the General Partners or their affiliates a subordinated
disposition fee, real estate commissions in an amount not exceeding the lesser
of: (A) 50.0% of the reasonable, customary and competitive real estate brokerage
commissions customarily paid for the sale of a comparable property in light of
the size, type and location of the property, or (B) 3.0% of the gross sales
price of each property, subordinated to distributions to Limited Partners from
the sale proceeds of an amount which, together with prior distributions to the
Limited Partners, will equal (1) 100.0% of their capital contributions plus (2)
a 8.0% annual cumulative (noncompounded) return of their net capital
contributions. Subordinated real estate commissions that are not payable at the
date of sale, because Limited Partners have not yet received their required
minimum distributions, will be deferred and paid at such time as these
subordination conditions have been satisfied. In addition, after the limited
partners have received a return of their net capital contributions and an 8.0%
annual cumulative (noncompounded) return on their net capital contributions,
then the General Partners are entitled to receive 15.0% of the remaining
residual proceeds available for distribution (a subordinated participation in
net sale proceeds and distributions); provided, however, that in no event will
the General Partners receive in the aggregate more than 15.0% of sale proceeds
remaining after the limited partners have received a return of their net capital
contributions plus a 6.0% annual cumulative (noncompounded) return on their net
capital contributions.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Because the Partnership does not have a board of directors or any board
committees, including an audit committee, the General Partners pre-approve all
auditing and permissible non-auditing services provided by the Partnership's
independent public accountants. The independent public accountants may not be
retained to perform the non-auditing services specified in Section 10A(g) of the
Securities Exchange Act of 1934.
FEES PAID TO INDEPENDENT PUBLIC ACCOUNTANTS
The following table presents fees for professional audit services
rendered by PricewaterhouseCoopers LLP for the audit of the Partnership's annual
financial statements for the years ended December 31, 2003, and December 31,
2002, and fees billed for other services rendered by PricewaterhouseCoopers
during those periods:
2003 2002
------------- ------------
Audit Fees (1) $ 40,000 $ 21,000
Audit-Related Fees (2) 1,367 3,750
Tax Fees (3) 5,500 5,750
All Other Fees - -
------------- ------------
Total Fees $ 46,867 $ 30,500
============= ============
- --------------------------------------------------------------------------------
(1) Audit fees consisted of professional services performed in connection with
the audit of the Partnerhip's annual financial statements and review of
financial statements included in its Form 10-Qs.
(2) Fees for 2002 consisted of professional services performed in connection
with a review of the General Partner's financial statements which was included
in the Partnership's Form S-11. Fees for 2003 related to consultations
concerning financial accounting and reporting standards.
(3) Tax fees consisted principally of assistance with matters related to tax
compliance, tax planning, and tax advice.
21
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) LIST OF DOCUMENTS FILED.
1. FINANCIAL STATEMENTS
The list of the financial statements filed as part of this Annual
Report on Form 10-K is set forth on page F-1 herein.
2. FINANCIAL STATEMENT SCHEDULES
None. See (d) below.
3. EXHIBITS
The list of exhibits filed as part of this Annual Report on Form
10-K is submitted in the Exhibit Index following the financial
statements in response to Item 601 of Regulation S-K.
(b) REPORTS ON FORM 8-K.
The Partnership did not file any Current Reports on Form 8-K filed during
the fourth quarter of 2003.
(c) EXHIBITS
The exhibits filed in response to Item 601 of Regulation S-K are listed
on the Exhibit Index attached hereto.
(d) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because the required
information of such schedules is not present, is not present in amounts
sufficient to require a schedule or is included in the financial
statements.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Behringer Harvard Mid-Term Value
Enhancement Fund I LP
March 30, 2004 By: /s/ Robert M. Behringer
-----------------------------------
Robert M. Behringer
Co-General Partner and Chief
Executive Officer of Co-General
Partner, Behringer Harvard Advisors
I LP
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 30, 2004 /s/ Robert M. Behringer
----------------------------------------
Robert M. Behringer
General Partner of the Registrant and
Co-General Partner and Chief Executive
Officer of Co-General Partner, Behringer
Harvard Advisors I LP
(Principal Executive Officer)
March 30, 2004 /s/ Gary S. Bresky
----------------------------------------
Gary S. Bresky
Chief Financial Officer and Treasurer of
Co-General Partner, Behringer Harvard
Advisors I LP (Principal Financial
Officer and Principal Accounting Officer)
23
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Balance Sheets as of December 31, 2003 and 2002 F-3
Statements of Operations for the Year ended December 31, 2003 and the periods
from September 20, 2002 (date of inception) through December 31, 2003 and
2002 F-4
Statements of Partners' Capital for the Year ended December 31, 2003 and the
period from September 20, 2002 (date of inception) through December 31, 2003
and 2002 F-5
Statements of Cash Flows for the Year Ended December 31, 2003 and the periods
from September 20, 2002 (date of inception) through December 31, 2003 and
2002 F-6
Notes to Financial Statements F-7
F-1
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Behringer Harvard Mid-Term Value Enhancement Fund I LP:
In our opinion, the accompanying balance sheets and the related statements of
operations, partners' capital and cash flows present fairly, in all material
respects, the financial position of Behringer Harvard Mid-Term Value Enhancement
Fund I LP (the "Partnership", a development stage partnership) at December 31,
2003 and 2002, and the results of its operations and its cash flows for the year
ended December 31, 2003 and the period from September 20, 2002 (date of
inception) through December 31, 2002 and cumulatively for the period from
September 20, 2002 (date of inception) through December 31, 2003 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 30, 2004
F-2
BEHRINGER HARVARD MID-TERM VALUE ENHANCEMENT FUND I LP
(A DEVELOPMENT STAGE TEXAS PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2003 2002
------------------ -----------------
ASSETS
Cash and cash equivalents $ 1,986,114 $ 600
Restricted cash 75,132 -
Prepaid expenses and other assets 31,590 -
------------------ -----------------
TOTAL ASSETS $ 2,092,836 $ 600
================== =================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Accounts payable $ 7,584 $ -
Payable to affiliate 85,521 -
Accrued liabilities 68,752 -
Subscriptions for limited partnership units 75,132 -
------------------ -----------------
TOTAL LIABILITIES 236,989 -
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL
Limited partners - 44,000,000 units authorized;
223,345 and 0 units issued and outstanding
as of December 31, 2003 and 2002, respectively 1,855,373 100
General partners 474 500
------------------ -----------------
TOTAL PARTNERS' CAPITAL 1,855,847 600
------------------ -----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 2,092,836 $ 600
================== =================
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
BEHRINGER HARVARD MID-TERM VALUE ENHANCEMENT FUND I LP
(A DEVELOPMENT STAGE TEXAS PARTNERSHIP)
STATEMENTS OF OPERATIONS
FROM INCEPTION FROM INCEPTION
YEAR (SEPTEMBER 20, 2002) (SEPTEMBER 20, 2002)
ENDED THROUGH THROUGH
DECEMBER 31, 2003 DECEMBER 31, 2003 DECEMBER 31, 2002
------------------ ---------------------- ----------------------
TOTAL REVENUES $ - $ - $ -
EXPENSES
General and administrative 103,724 103,724 -
------------------ ---------------------- ----------------------
TOTAL EXPENSES 103,724 103,724 -
OTHER INCOME
Interest income 84 84 -
------------------ ---------------------- ----------------------
TOTAL OTHER INCOME 84 84 -
------------------ ---------------------- ----------------------
NET LOSS $ (103,640) $ (103,640) $ -
================== ====================== ======================
ALLOCATION OF NET LOSS:
Net loss allocated to general partners $ (26) $ (26) $ -
================== ====================== ======================
Net loss allocated to limited partners $ (103,614) $ (103,614) $ -
================== ====================== ======================
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 5,000 3,900 -
================== ====================== ======================
LOSS PER LIMITED PARTNERSHIP UNIT $ (20.73) $ (26.57) $ -
================== ====================== ======================
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
BEHRINGER HARVARD MID-TERM VALUE ENHANCEMENT FUND I LP
(A DEVELOPMENT STAGE TEXAS PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL
General Partners Limited Partners
------------------------------- -----------------------------------
Losses Losses
Accumulated Accumulated
During the During the
Development Development
Contributions Stage Contributions Stage Total
---------------- -------------- ----------------- ----------------- --------------
Beginning balance on September 20, 2002 $ - $ - $ - $ - $ -
Capital contributions on
September 20, 2002 500 100 - 600
---------------- -------------- ----------------- ----------------- --------------
Balance as of December 31, 2002 500 - 100 - 600
---------------- -------------- ----------------- ----------------- --------------
Issuance of units of limited
partnership interest, net - 1,958,887 1,958,887
Net loss (26) (103,614) (103,640)
---------------- -------------- ----------------- ----------------- --------------
Balance as of December 31, 2003 $ 500 $ (26) $ 1,958,987 $ (103,614) $1,855,847
================ ============== ================= ================= ==============
SEE NOTES TO FINANCIAL STATEMENTS.
F-5
BEHRINGER HARVARD MID-TERM VALUE ENHANCEMENT FUND I LP
(A DEVELOPMENT STAGE TEXAS PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FROM INCEPTION FROM INCEPTION
YEAR (SEPTEMBER 20, 2002) (SEPTEMBER 20, 2002)
ENDED THROUGH THROUGH
DECEMBER 31, 2003 DECEMBER 31, 2003 DECEMBER 31, 2002
--------------------- ------------------------ -------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (103,640) $ (103,640) $ -
Adjustments to reconcile net loss to
net cash flows used in operating activities
Change in prepaid expenses and other assets (31,590) (31,590) -
Change in accounts payable 7,584 7,584 -
Change in accrued liabilities 68,752 68,752 -
--------------------- ------------------------ -------------------------
CASH USED IN OPERATING ACTIVITIES (58,894) (58,894) -
--------------------- ------------------------ -------------------------
CASH FLOWS FROM INVESTING ACTIVITIES - - -
--------------------- ------------------------ -------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
General partners' contributions - 500 500
Limited partners' contributions 2,224,115 2,224,215 100
Offering costs (265,228) (265,228) -
Change in limited partners' subscriptions (75,132) (75,132) -
Change in restricted cash 75,132 75,132 -
Change in payables to affiliates 85,521 85,521 -
--------------------- ------------------------ -------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 2,044,408 2,045,008 600
--------------------- ------------------------ -------------------------
Net change in cash and cash equivalents 1,985,514 1,986,114 600
Cash and cash equivalents at beginning of period 600 - -
--------------------- ------------------------ -------------------------
Cash and cash equivalents at end of period $ 1,986,114 $ 1,986,114 $ 600
===================== ======================== =========================
SEE NOTES TO FINANCIAL STATEMENTS.
F-6
BEHRINGER HARVARD MID-TERM VALUE ENHANCEMENT FUND I LP
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
BUSINESS
Behringer Harvard Mid-Term Value Enhancement Fund I LP (the
"Partnership") is a limited partnership formed in Texas on July 30, 2002. The
general partners of the Partnership are Behringer Harvard Advisors I LP and
Robert M. Behringer (the "General Partners"). The Partnership was funded through
capital contributions from its General Partners and initial limited partner on
September 20, 2002 (date of inception) and is currently offering its limited
partnership units pursuant to the public offering which commenced on February
19, 2003 ("the Offering") and is described below. The Partnership intends to use
the proceeds from the Offering, after deducting offering expenses, primarily to
acquire institutional quality office and office service center properties, in
highly desirable locations in markets with barriers to entry and limited
potential for new development.
The Partnership is not limited to investments in institutional quality
office properties. It may invest in other commercial properties such as shopping
centers, business and industrial parks, manufacturing facilities, warehouse and
distribution facilities in order to reduce overall portfolio risk or enhance
overall portfolio returns if our general partners determine that it would be
advantageous to do so. In addition, its general partners may determine that it
would be advantageous to acquire commercial properties other than institutional
quality office properties in order to diversify our portfolio or in order to
respond to changes in the real estate market. It may also invest in commercial
properties that are not preleased to such tenants or in other types of
commercial properties such as hotels or motels.
The Partnership may purchase properties that have been constructed and
have operating histories, are newly constructed or are under development or
construction. An advisory board has been established to provide the General
Partners with advice and guidance with respect to (i) the identification of
assets for acquisition; (ii) general economic and market conditions, general
business principles, specific business principles relating to the Partnership's
business plan; (iii) inroads to establishing beneficial strategic partners,
customers, and suppliers; (iv) opportunities within and related to the industry;
and (v) other assistance as may be determined by the General Partners or their
representatives from time to time. The Partnership Agreement provides that it
will continue in existence until the earlier of December 31, 2022 or termination
of the Partnership by written consent of all the Partners.
ORGANIZATION
On February 19, 2003, the Partnership commenced the Offering of up to
40,000,000 units of limited partnership interest to be offered at a price of $10
per unit pursuant to a Registration Statement on Form S-11 filed under the
Securities Act of 1933. The Registration Statement also covers up to 4,000,000
units available pursuant to the Partnership's distribution reinvestment plan at
$10 per unit.
On December 22, 2003, the Partnership satisfied the minimum offering
requirement of $2,000,000 established for its Offering and accepted
subscriptions for 202,781 partnership units, from which gross proceeds of
$2,023,365 were distributed to the Partnership. In addition, special escrow
accounts were established for subscriptions from residents of New York, Nebraska
and Pennsylvania. The minimum offering requirement of $2,500,000 for the New
York escrow account was satisfied on January 26, 2004 and the Partnership
accepted subscriptions from the New York residents on February 1, 2004. All
additional subscription proceeds will be held in escrow until investors are
admitted as limited partners. The Partnership intends to admit new investors at
least monthly. At that time, subscription proceeds may be released to the
Partnership from escrow and utilized as consideration for investments and the
payment or reimbursement of
F-7
dealer manager fees, selling commissions, organization and offering expenses and
operating expenses. Until required for such purposes, net offering proceeds will
be held in short-term, liquid investments.
As of December 31, 2003, the Partnership was in the development stage and
had not commenced real estate operations. On March 12, 2004, the Partnership
commenced operations with its acquisition of a property in Hopkins, Minnesota, a
suburb of Minneapolis, Minnesota.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect (i) the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and (ii) the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and highly liquid
investments purchased with original maturities of three months or less.
Short-term investments are stated at cost, which approximates fair value, and
consists of investments in money market accounts.
RESTRICTED CASH
Subscription proceeds are held in escrow until investors are admitted as
limited partners. The Partnership admits new limited partners at least monthly.
Upon acceptance of limited partners, partnership units are issued and
subscription proceeds are released to the Partnership from escrow. Subscription
proceeds may then be utilized as consideration for investments and the payment
or reimbursement of dealer manager fees, selling commissions, organization and
offering expenses and operating expenses. Until required for such purposes, net
offering proceeds are held in short-term, liquid investments.
PURCHASE PRICE ALLOCATIONS
Upon the acquisition of real estate properties, the Partnership will
allocate the purchase price of those properties to the tangible assets acquired,
consisting of land and buildings, and identified intangible assets. Identified
intangible assets may consist of the fair value of above-market and below-market
leases, in-place leases, in-place tenant improvements and tenant relationships.
The fair value of the tangible assets acquired, consisting of land and
buildings, will be determined by valuing the property as if it were vacant, and
the "as-if-vacant" value will then be allocated to land and buildings based on
management's determination of the relative fair value of these assets.
Management's estimates of value are made using discounted cash flow analyses or
similar methods. Factors considered by management in its analysis include an
estimate of carrying costs during hypothetical expected lease-up periods
considering current market conditions, and costs to execute similar leases.
Management also considers information obtained about each property as a result
of pre-acquisition due diligence, marketing and leasing activities in estimating
the fair value of the tangible and intangible assets acquired. In estimating
carrying costs, management also includes real estate taxes, insurance and other
operating expenses and estimates of lost rentals at market rates during the
expected lease-up periods. Management also estimates costs to execute similar
leases including leasing commissions, legal and other related expenses to the
extent that such costs are not already incurred in connection with a new lease
origination as part of the transaction.
The Partnership will determine the value of above-market and below-market
in-place leases for acquired properties based on the present value (using an
interest rate which reflects the risks associated with the leases acquired) of
the difference between (i) the contractual amounts paid pursuant to the in-place
leases and (ii) management's estimate of current market lease rates
F-8
for the corresponding in-place leases, measured over a period equal to the
remaining non-cancelable terms of the respective leases. The fair value of
above-market and below-market leases will recorded by the Partnership as
intangible assets and amortized as an adjustment to rental income over the
remaining non-cancelable terms of the respective leases.
The total value of identified real estate intangible assets acquired will
further allocated to in-place lease values, in-place tenant improvements and
tenant relationships based on management's evaluation of the specific
characteristics of each tenant's lease and the Partnership's overall
relationship with that respective tenant. Characteristics to be considered by
management in allocating these values will include the nature and extent of
existing business relationships with the tenant, growth prospects for developing
new business with the tenant, the tenant's credit quality and expectations of
lease renewals (including those existing under the terms of the lease
agreement), among other factors.
The Partnership will amortize the value of in-place leases to expense
over the initial term of the respective leases. The value of tenant relationship
intangibles are amortized to expense over the initial term and any assumed
renewal periods, but in no event will the amortization period for intangible
assets exceed the remaining depreciable life of the building. Should a tenant
terminate its lease, the unamortized portion of the in-place lease value and
tenant relationship intangibles would be charged to expense.
DEFERRED PROJECT COSTS
The General Partner will be paid an acquisition and advisory fee of 3.0%
of the contract price of each investment. In addition, the Partnership will
reimburse its General Partners for investment acquisition expenses in an amount
of up to 0.5% of the contract price of the Partnership's investments. Pending
such reimbursement, the General Partners will fund all such expenses and the
General Partners will bear such expense to the extent they exceed 0.5% of the
contract price of the Partnership's investments. These costs will be capitalized
to real estate assets, either directly or through contributions to joint
ventures.
DEFERRED OFFERING COSTS
The General Partner funds all of the organization and offering costs on
the Partnership's behalf and are reimbursed for such organization and offering
costs up to 2.5% of cumulative capital raised by the Partnership in its current
public offering. Organization and offering costs include items such as legal and
accounting fees, marketing, promotional and printing costs, and specifically
exclude selling commissions and dealer manager fees. The Partnership is required
to repay the General Partners, at an amount equal to the lesser of 2.5% of the
cumulative capital raised or actual costs incurred by third parties less
previous reimbursements paid to the General Partners. All offering costs are
recorded as an offset to partners' capital, and all organization costs are
recorded as an expense at the time the Partnership becomes liable for the
payment of these amounts.
CASH FLOW DISTRIBUTIONS
Net cash distributions, as defined in the Partnership Agreement, are to
be distributed to the partners as follows:
a) To the limited partners, on a per unit basis, until each of such
Limited Partners have received distributions of net cash from
operations with respect to such fiscal year, or applicable portion
thereof, equal to eight percent (8.0%) per annum of their net
capital contribution;
b) Then to the limited partners, on a per unit basis, until each
limited partner has received or has been deemed to have received
one hundred percent (100.0%) of their net capital contribution;
and
c) Thereafter, eighty-five percent (85.0%) to the limited partners,
on a per unit basis, and fifteen percent (15.0%) to the General
Partners to be apportioned in such percentages as they may from
time to time agree upon among themselves.
F-9
Other limitations of allocated or received distributions are defined
within the Partnership Agreement.
INCOME (LOSS) ALLOCATIONS
Net income for each applicable accounting period shall be allocated to
the Partners as follows:
a) To the Partners to the extent of and in proportion to allocations
of net loss as noted below; and
b) Then, so as to cause the capital accounts of all Partners to
permit liquidating distributions to be made in the same manner and
priority as set forth in the Partnership Agreement with respect to
net cash distributions.
Net loss for each applicable accounting period shall be allocated to the
Partners as follows:
a) To the Partners having positive balances in their capital accounts
(in proportion to the aggregate positive balances in all capital
accounts) in an amount not to exceed such positive balance as of
the last day of the fiscal year; and
b) Then, eighty-five percent (85.0%) to the limited partners and
fifteen percent (15.0%) to the General Partners to be apportioned
in such percentages as they may from time to time agree upon among
themselves.
INCOME TAXES
The Partnership is not a taxpaying entity and, accordingly, records no
income taxes. The Partners are individually responsible for reporting their
share of the Partnership's taxable income or loss on their income tax returns.
Certain transactions of the Partnership may be subject to accounting
methods for income tax purposes which differ from the accounting methods used in
preparing these financial statements in accordance with generally accepted
accounting principles. Accordingly, the net income or loss of the Partnership
and the resulting balances in the Partners' capital accounts reported for income
tax purposes may differ from the balances reported for those same items in the
accompanying financial statements.
CONCENTRATION OF CREDIT RISK
At December 31, 2003, the Partnership had cash and cash equivalents and
restricted cash on deposit in three financial institutions in excess of
federally insured levels. The Partnership regularly monitors the financial
stability of these financial institutions and believes that it is not exposed to
any significant credit risk in cash and cash equivalents or restricted cash.
NEW ACCOUNTING PRONOUNCEMENTS
FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51" was issued in January 2003. In December
2003, FIN No. 46R was issued, which replaced FIN No. 46 and clarified ARB 51.
This FIN requires the consolidation of results of variable interest entities in
which the Partnership is deemed to be the primary beneficiary, as defined. As of
December 31, 2003, the Partnership did not own an interest in a variable
interest entity and the adoption of FIN No. 46R did not have a material effect
on the financial condition, results of operations, or liquidity of the
Partnership. Interests in entities acquired or created after December 31, 2003
will be evaluated based on FIN No. 46R criteria and consolidation of these
interests may be required.
3. PARTNERS' CAPITAL
The Partnership Agreement includes a unit redemption program. Limited
partners who have held their units for a least one year may receive the benefit
of limited liquidity by presenting for redemption all or a portion of their
units to the Partnership at any time in accordance with the procedures described
below. At that time, the Partnership may, subject to the conditions and
limitations below, redeem the units presented for redemption for cash to the
extent that sufficient funds from operations are available to fund such
redemption. The purchase price for the redeemed units for the period beginning
after a limited partner has held the units for a period of one year and ending
after the first three full fiscal years following termination of the Offering
will generally be the lesser of (1) $8.50 per unit or (2) the price the limited
partner actually paid for the units. Thereafter, the purchase price will be the
lesser of (1) 90.0% of the fair value per unit, or (2) the price the limited
partner actually paid for the units. The fair value utilized for purposes of
establishing the purchase price per unit will be the estimated value of units
determined annually for ERISA purposes. The fair value will be based on annual
appraisals of the Partnership's properties performed by the General Partners and
not by an independent appraiser. The General Partners will, however, obtain
annually an opinion of an independent third party that its estimate of the fair
value of each unit for such year is reasonable and was prepared in accordance
with appropriate methods for valuing real estate. The General Partners reserve
the right in their sole discretion at any time and from time to time to (1)
waive the one-year holding period in the event of the death or bankruptcy of a
limited partner or other exigent circumstances, (2) reject any request for
redemption, (3) change the purchase price for redemptions, or (4) terminate,
suspend and/or reestablish the unit redemption program. In addition, for
redemptions of units upon the death of a limited partner, the purchase price for
units until after the first three full fiscal years following termination of the
Offering will be equal to the price the limited partner actually paid for the
units. Thereafter, the purchase price will be the fair value of the units as
determined by estimated unit valuations. Under the terms of the plan, during any
calendar year the Partnership will not redeem in excess of 3.0% of the weighted
average number of units outstanding during the prior calendar year. In addition,
the General Partners will determine whether the Partnership has sufficient cash
from operations to repurchase units, and such purchases will generally be
limited to 1.0% of operating cash flow for the previous fiscal year plus
proceeds of the Partnership's distribution reinvestment plan.
4. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the year ended December 31, 2003
consisted of the following:
F-10
Auditing expense $ 42,867
Transfer agent fees 19,605
D & O insurance 15,795
Tax preparation fees 15,350
Advisory board fees 9,000
Organizational expense 1,023
Other 84
---------------
$ 103,724
===============
Of the $103,724 of general and administrative expenses incurred in the
year ended December 31, 2003, $1,023 was paid to Behringer Advisors I for
organizational expenses.
5. RELATED PARTY ARRANGEMENTS
The General Partners and certain of their affiliates receive fees and
compensation in connection with the Offering, and will receive fees and
compensation in connection with the acquisition, management and sale of the
assets of the Partnership.
Behringer Securities LP ("Behringer Securities"), the affiliated dealer
manager, receives commissions of up to 7.0% of gross offering proceeds before
reallowance of commissions earned by participating broker-dealers. In addition,
up to 2.5% of gross proceeds before reallowance to participating broker-dealers
is paid to Behringer Securities as a dealer manager fee; except that this dealer
manager fee will be reduced to 1.0% of the gross proceeds of purchases made
pursuant to the Partnership's distribution reinvestment plan. Behringer
Securities reallows all of its commissions of up to 7.0% of gross offering
proceeds to participating broker-dealers and may reallow a portion of its dealer
manager fee of up to 1.5% of the gross offering proceeds to be paid to such
participating broker-dealers as marketing fees, including bona fide conference
fees incurred, and due diligence expense reimbursement. In 2003, Behringer
Securities commissions and dealer management fees totaled $147,008 and $55,603,
respectively and were capitalized as offering costs in "Additional paid-in
capital" on the Partnership's balance sheet.
Behringer Advisors I, a general partner of and advisor to the
Partnership, or its affiliates may receive up to 2.5% of gross offering proceeds
for reimbursement of organization and offering expenses. In 2003, $1,588,964 of
organization and offering expenses had been incurred by Behringer Advisors I on
behalf of the Partnership, of which $55,603 had been reimbursed by the
Partnership and $1,533,361 will be reimbursed at a rate of 2.5% of future equity
raised. Of the $55,603 of organization and offering costs reimbursed by the
Partnership through December 31, 2003, $54,580 was capitalized as offering costs
in "Additional paid-in capital" on the Partnership's balance sheet and $1,023
was expensed as organizational costs. Behringer Advisors I or its affiliates
determine the amount of organization and offering expenses owed, based on
specific invoice identification as well as an allocation of costs to the
Partnership, Behringer Harvard Short-Term Opportunity Fund I LP and Behringer
Harvard REIT I, Inc., affiliates of the Partnership, based on anticipated
respective equity offering sizes of those entities. Behringer Advisors I or its
affiliates will receive acquisition and advisory fees of up to 3.0% of the
contract purchase price of each asset for the acquisition, development or
construction of real property or, with respect to any mortgage loan, up to 3.0%
of the funds advanced for the making or purchase of a mortgage loan. Behringer
Advisors I or its affiliates may also receive up to 0.5% of the contract
purchase price of each asset or, with respect to the making or purchase of a
mortgage loan, up to 0.5% of the funds advanced, for reimbursement of expenses
related to making investments. The Partnership made no investments in 2003, and
consequently, Behringer Advisors I received no acquisition and advisory fees or
reimbursements for related expenses.
For the management and leasing of its properties, the Partnership pays
HPT Management, its property manager, property management and leasing fees equal
to the lesser of: (A) the amounts charged by unaffiliated persons rendering
comparable services in the same geographic area or (B)(1) for commercial
properties that are not leased on a long-term net lease basis, 4.0% of gross
revenues, plus separate leasing fees of up to 1.5% of gross revenues based upon
the customary leasing fees applicable to the geographic location of the
properties, and (2) in the case of commercial properties that are leased on a
long-term (10 or more years) net lease basis, 1.0% of gross revenues plus a
one-time initial leasing fee of 3.0% of gross revenues payable over the first
five years of the lease term. The Partnership will reimburse the costs and
expenses incurred by HPT Management on the Partnership's behalf, including the
wages and salaries and other employee-related expenses of all on-site employees
of HPT Management who are engaged in the operation, management, maintenance and
leasing or access control of Partnership properties, including taxes, insurance
and benefits relating to such employees, and legal, travel and other
out-of-pocket expenses that are directly related to the management of specific
properties. The Partnership did not pay any property management and leasing fees
in the year ended December 31, 2003.
F-11
The Partnership will pay Behringer Advisors I or its affiliates an annual
advisor asset management fee of 0.5% of the aggregate asset value. Any portion
of the asset management fee may be deferred and paid in a subsequent year. In
2003, the Partnership paid no such fees to Behringer Advisors I.
The Partnership distributes to its General Partners a share of net cash
from operations, a 15% distribution after the limited partners have received
distributions equal to their net capital contributions plus an 8.0% annual
cumulative (noncompounded) return on their net capital contributions; provided,
however, that in no event will the General Partners receive more than 10.0% of
cash available for distribution.
In connection with the sale of the properties of the Partnership, the
Partnership will pay to the General Partners or their affiliates a real estate
commission in an amount not exceeding the lesser of: (A) 50.0% of the
reasonable, customary and competitive real estate brokerage commissions
customarily paid for the sale of a comparable property in light of the size,
type and location of the property, or (B) 3.0% of the gross sales price of each
property, subordinated to distributions to Limited Partners from the sale
proceeds of an amount which, together with prior distributions to the Limited
Partners, will equal (1) 100.0% of their capital contributions plus (2) a 8.0%
annual cumulative (noncompounded) return of their net capital contributions.
Subordinated real estate commissions that are not payable at the date of sale,
because Limited Partners have not yet received their required minimum
distributions, will be deferred and paid at such time as these subordination
conditions have been satisfied. In addition, after the limited partners have
received a return of their net capital contributions and an 8.0% annual
cumulative (noncompounded) return on their net capital contributions, then the
General Partners are entitled to receive 15.0% of the remaining residual
proceeds available for distribution (a subordinated participation in net sale
proceeds and distributions); provided, however, that in no event will the
General Partners receive in the aggregate more than 15.0% of sale proceeds
remaining after the limited partners have received a return of their net capital
contributions.
The Partnership is dependent on Behringer Advisors I, Behringer
Securities and HPT Management for certain services that are essential to the
Partnership, including the sale of the Partnership's shares of limited
partnership units, asset acquisition and disposition decisions, property
management and leasing services and other general administrative
responsibilities. In the event that these companies were unable to provide the
respective services to the Partnership, the Partnership would be required to
obtain such services from other sources.
6. INCOME TAX BASIS NET INCOME
The Partnership's income tax basis net income for the year ended December
31, 2003 is recalculated as follows:
Net loss for financial statement purposes $ (103,640)
Start-up and organizational costs expensed
for financial reporting purposes and
capitalized and expensed over 5 years for
income tax purposes 103,724
------------
Net income for income tax purposes $ 84
============
7. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected unaudited quarterly financial data
for each full quarter during the year ended December 31, 2003. There is no data
to present for the year ended December 31, 2002.
F-12
2003 Quarters Ended
------------------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------------------
Revenues $ - $ - $ - $ -
Net loss $ - $ - $ - $ (103,640)
8. SUBSEQUENT EVENTS
On March 12, 2004, the Partnership acquired a one-story office building
containing approximately 29,660 of rentable square feet, located on
approximately 2.5 acres of land (the "Hopkins Property"). The Hopkins Property
is located in Hopkins, Minnesota, a suburb of Minneapolis, Minnesota. The
purchase price of the Hopkins Property was $2,925,000 plus preliminary closing
costs of approximately $144,925. The Partnership used proceeds from the Offering
to pay the entire purchase price and all closing costs of the acquisition. The
Hopkins Property is held by Behringer Harvard Hopkins, LLC, a wholly-owned
subsidiary of the Partnership.
The General Partners have announced their intention to initiate a distribution
to the Partnership's limited partners at an annual rate of 6.0% per year to
initially be paid on or about April 30, 2004.
F-13
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
1.1** Form of Dealer Manager Distribution Agreement between the
Partnership and Behringer Securities LP
3.1** Form of Agreement of Limited Partnership of the Partnership
3.2** Certificate of Limited Partnership of the Partnership
4.1** Form of Subscription Agreement and Subscription Agreement
Signature Page
10.1** Form of Advisory Agreement
10.2** Form of Property Management and Leasing Agreement between the
Partnership and HPT Management Services LP
10.3** Form of Escrow Agreement between the Partnership and Wells
Fargo Bank, Iowa, N.A.
10.4** Distribution Reinvestment Plan
23.1* Consent of PricewaterhouseCoopers LLP with respect to the
financial statements of Behringer Harvard Mid-Term Opportunity
Fund I LP
31.1* Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1* Certification of Chief Executive and Financial Officers
* Filed herewith.
** Previously filed.