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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, 2004
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: 333-91532
BEHRINGER HARVARD REIT I, INC.
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 68-0509956
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
15601 DALLAS PARKWAY, SUITE 600, ADDISON, TEXAS
(Address of principal executive offices)
75001
(Zip Code)
(866) 655-1605
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
NONE
Securities registered pursuant to section 12(g) of the Act:
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 the Registrant's common stock held by
nonaffiliates of the Registrant as of June 30, 2004 (the last business day of
the Registrant's most recently completed second fiscal quarter) was $41,194,810
and as of December 31, 2004 was $130,892,820, assuming a market value of $10.00
per share.
As of March 15, 2005, the Registrant had 17,112,143 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant incorporates by reference portions of its Definitive Proxy
Statement for the 2005 Annual Meeting of Stockholders, which shall be filed no
later than May 2, 2005, into Part III of this Form 10-K to the extent stated
herein.
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BEHRINGER HARVARD REIT I, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2004
PART I
PAGE
ITEM 1. BUSINESS............................................................4
ITEM 2. PROPERTIES.........................................................18
ITEM 3. LEGAL PROCEEDINGS..................................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES................20
ITEM 6. SELECTED FINANCIAL DATA............................................23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.........................................34
ITEM 9A. CONTROLS AND PROCEDURES............................................34
ITEM 9B. OTHER INFORMATION..................................................34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................35
ITEM 11. EXECUTIVE COMPENSATION.............................................35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.......................35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................35
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.............................35
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.........................36
SIGNATURES....................................................................37
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FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements, including
discussion and analysis of the financial condition of Behringer Harvard REIT I,
Inc. (which may be referred to as the "Company," "we," "us," or "our") and our
subsidiaries, our anticipated capital expenditures required to complete
projects, amounts of anticipated cash distributions to our stockholders in the
future and other matters. These forward-looking statements are not historical
facts but are the intent, belief or current expectations of our management based
on their knowledge and understanding of the business and industry. Words such as
"may," "will," "anticipates," "expects," "intends," "plans," "believes,"
"seeks," "estimates," "would," "could," "should" and variations of these words
and similar expressions are intended to identify forward-looking statements.
These statements are not guarantees of future performance and are subject to
risks, uncertainties and other factors, some of which are beyond our 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. We caution investors not to place
undue reliance on forward-looking statements, which reflect our management's
view only as of the date of this Annual Report on Form 10-K. We undertake no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to future
operating results. The forward-looking statements should be read in light of the
risk factors identified in the "Risk Factors" section of our Registration
Statement on Form S-3, as filed with the Securities and Exchange Commission as
well as the following selected risks and uncertainties that could cause our
actual results to differ materially from those presented in our forward-looking
statements:
RISKS RELATED TO INVESTMENTS IN REAL ESTATE
o Our operating results may be affected by economic and regulatory
changes that have an adverse impact on the real estate market in
general.
o Lease terminations could reduce the amount of revenue we receive
from tenants.
o We may be unable to sell a property if or when we decide to do
so.
o We may be subject to uninsured losses relating to real property
or excessively expensive premiums for insurance coverage.
o Properties that we purchase may be subject to development and
construction delays and resultant increased costs and risks.
o Competition with third parties in acquiring properties and other
investments may reduce our profitability.
o A concentration of our investments in any one property class may
leave our profitability vulnerable to a downturn in such sector.
o If we set aside insufficient working capital reserves, we may be
required to defer necessary property improvements.
o The costs of compliance with environmental laws and other
governmental laws and regulations could be significant.
o If we sell properties by providing financing to purchasers, we
will bear the risk of default by the purchaser.
RISKS ASSOCIATED WITH DEBT FINANCING
o We will incur mortgage indebtedness and other borrowings, which
will increase our business risks.
o We may be unable to secure mortgage debt at reasonable rates.
o Lenders may require us to enter into restrictive covenants
relating to our operations.
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o Increases in interest rates could increase the amount of our
debt payments.
RISKS RELATED TO CONFLICTS OF INTEREST
o Our affiliated advisor will face conflicts of interest relating
to the purchase and leasing of properties.
o Actions by a co-venturer, co-tenant or partner might have the
result of subjecting a property to additional liabilities.
o Our affiliated advisor and its officers and employees and
certain of our key personnel will face competing demands
relating to their time.
OTHER OPERATIONAL RISKS
o Failure to qualify as a REIT would adversely affect our
operations and our ability to make distributions.
o Adverse economic conditions would materially affect our returns
and profitability.
o We may have to make expedited decisions on whether to invest in
certain properties, including prior to receipt of detailed
information on the property.
o If we lose or are unable to obtain key personnel, our ability to
implement our investment strategies could be delayed or
hindered.
o We may have increased exposure to liabilities from litigation as
a result of our participation by us in Section 1031
Tenant-in-Common Transactions ("TIC Transactions").
o Our participation in Section 1031 TIC Transactions may limit our
ability to borrow funds in the future, which could adversely
affect the value of our investments.
PART I
ITEM 1. BUSINESS.
FORMATION
Behringer Harvard REIT I, Inc. is a Maryland corporation formed in 2002,
which has elected to qualify as a real estate investment trust ("REIT")
beginning with the year ended December 31, 2004. We were organized to invest in
commercial real estate properties (generally institutional quality office
buildings and other commercial properties) and lease such properties to one or
more tenants. In addition, we may make or purchase mortgage loans secured by the
types of properties we may acquire directly.
Substantially all of our business is conducted through Behringer Harvard
Operating Partnership I LP, a Texas limited partnership organized in 2002
("Behringer OP I"). We own a 0.1% interest in Behringer OP I as its general
partner. The remaining 99.9% of Behringer OP I is held as a limited partner's
interest by BHR Partners, LLC, a Delaware limited liability company which is our
wholly-owned subsidiary.
Our advisor is Behringer Advisors LP ("Behringer Advisors"), a Texas
limited partnership formed in 2002. Behringer Advisors is our affiliate
responsible for managing our affairs on a day-to-day basis and for identifying
and making acquisitions and investments on our behalf.
On February 19, 2003, we commenced a public offering (the "Initial
Offering") of up to 80,000,000 shares of common stock offered at a price of
$10.00 per share pursuant to a Registration Statement on Form S-11 filed under
the Securities Act of 1933. The Registration Statement also covered up to
8,000,000 shares available pursuant to a distribution reinvestment plan and up
to 3,520,000 shares issuable to broker-dealers pursuant to warrants whereby
participating broker-dealers would have the right to purchase one share for
every 25 shares they sell pursuant to the Initial Offering. The Initial Offering
ended on February 19, 2005.
On October 25, 2004, we filed a Registration Statement on Form S-3 under
the Securities Act of 1933 in respect of a second public offering of our common
stock (the "Current Offering"). The Registration Statement
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was declared effective by the Securities and Exchange Commission on February 11,
2005 and extends until February 11, 2007, unless earlier terminated or fully
subscribed.
The Registration Statement relating to the Current Offering covers
80,000,000 shares of our common stock plus an additional 16,000,000 shares of
common stock available pursuant to a distribution reinvestment plan.
As of December 31, 2004, we had accepted subscriptions for 13,109,282
shares of our common stock, including 20,000 shares owned by Behringer Harvard
Holdings, LLC ("Behringer Holdings"). As of December 31, 2004, we had no shares
of preferred stock issued and outstanding. On May 27, 2004, the independent
members of the Board of Directors were granted options to purchase a total of
9,000 shares of our common stock at an exercise price of $12.00 per share under
our Non-Employee Director Option Plan. These options vest on May 27, 2005 and
expire on May 27, 2009. As of December 31, 2004, all 9,000 stock options were
outstanding and none had been exercised.
We admit new stockholders pursuant to the Current Offering at least
monthly. All subscription proceeds are held in a separate account until the
subscribing investors are admitted as stockholders. Upon admission of new
stockholders, subscription proceeds are released to us and may 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.
Our common stock is not currently listed on a national exchange.
However, management anticipates listing the common stock on a national exchange
or liquidation of our assets on or before February 20, 2017. Depending upon then
prevailing market conditions, it is the intention of our management to consider
beginning the process of listing (or liquidation) prior to February 20, 2013. In
the event we do not obtain listing prior to February 20, 2017, unless a majority
of the board of directors and a majority of the independent directors extend
such date, our charter requires us to begin the sale of our properties and
liquidation of our assets.
INVESTMENT OBJECTIVES AND CRITERIA
Our objective is to invest in commercial real estate properties,
including properties that have been constructed and have operating histories,
are newly constructed or are under development or construction. We may also
invest in mortgage loans or other investments related to real property or
entities or joint ventures that make similar investments. Our investment
objectives are:
o to preserve, protect and return investors' capital
contributions;
o to maximize cash distributions paid to investors;
o to realize growth in the value of our properties upon the
ultimate sale of such properties; and
o to list the shares for trading on a national securities exchange
or for quotation on The Nasdaq Stock Market or, if we do not
list the shares by February 20, 2017, to make an orderly
disposition of our investments and distribute the cash to
investors, unless a majority of the board of directors and a
majority of the independent directors approve otherwise.
We cannot assure investors that we will attain these objectives or that
our capital will not decrease. Pursuant to our advisory agreement, our advisor
will be indemnified for claims relating to any failure to succeed in achieving
these objectives, including for any reason identified in the description of risk
of our business set forth in the prospectus promulgated in connection with our
public offering of common stock.
We may not materially change our investment objectives, except upon
approval of stockholders holding a majority of our shares. Our independent
directors will review our investment objectives at least annually to determine
that our policies are in the best interests of our stockholders. Each such
determination will be set forth in the minutes of the meetings of our board of
directors.
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Decisions relating to the purchase or sale of our investments are made
by our advisor, Behringer Advisors subject to approval by our board of
directors, including a majority of our independent directors.
ACQUISITION AND INVESTMENT POLICIES
We primarily invest in institutional 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 high quality
tenants. We intend to hold our properties for a period of time consistent with
our planned fund life or eight to twelve years from the termination of the
Initial Offering, which was February 19, 2005. Our intention is that the holding
period of properties we acquire be consistent with maximizing their potential
for increased income and capital appreciation during this time. However,
economic or market conditions may influence us to hold our investments for
different periods of time. Our management believes that a portfolio consisting
of a preponderance of this type of property enhances our liquidity opportunities
for investors by making the sale of individual properties, multiple properties
or our investment portfolio as a whole attractive to institutional investors and
by making a possible listing of our shares attractive to the public investment
community. Also, it is our management's belief that targeting this type of
property for investment will enhance our ability to enter into joint ventures
with other institutional real property investors (such as pension funds, public
REITs and other large institutional real estate investors), thus allowing
greater diversity of investment by increasing the number of properties in which
we invest.
Although our investments to date have been strictly institutional
quality office properties, we are not limited to such investments. We 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
our advisor determines that it would be advantageous to do so. For example, we
may invest in commercial properties adjacent to properties we already own or we
may acquire mixed-use properties that otherwise meet our investment criteria. In
addition, our advisor 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. Further, to the extent that our advisor determines it is in our
best interest, due to the state of the real estate market or in order to
diversify our investment portfolio or otherwise, we will make or invest in
mortgage loans secured by the same types of institutional quality office and
other commercial properties in which we intend to invest.
We will continue to seek to invest in properties that will satisfy our
objective of providing cash distributions to our stockholders. However, because
a significant factor in the valuation of income-producing real properties is
their potential for future appreciation in value, we anticipate that the
majority of properties we acquire will have the potential for both capital
appreciation and the ability to provide cash distributions to stockholders. To
the extent feasible, we will invest in a diversified portfolio of properties in
terms of geography, type of property and industry of our tenants that will
satisfy our investment objectives of maximizing cash available for payment of
distributions, preserving our capital and realizing capital appreciation upon
the ultimate sale of our properties.
Furthermore, although our sponsor generally seeks to reduce conflicts
that may arise between its various programs by avoiding simultaneous offerings
of funds that have a substantially similar mix of fund characteristics,
including targeted investment types, investment objectives and criteria, and
anticipated fund terms, there may be periods during which one or more Behringer
Harvard sponsored programs are seeking to invest in similar properties or are
otherwise potentially subject to a conflict of interest.
We will not invest more than 10% of the net offering proceeds available
for investment in properties in unimproved or non-income producing properties or
in mortgage loans secured by such properties. If a property is expected to
produce income within two years of its acquisition, we will not consider it a
non-income producing property.
6
Our investment in real estate generally will continue to take the form
of holding fee title or a long-term leasehold estate. We will acquire such
interests either directly through Behringer Harvard OP I LP or indirectly
through limited liability companies or through investments in joint ventures,
partnerships, co-tenancies or other co-ownership arrangements with the
developers of the properties, affiliates of Behringer Advisors or other persons.
In addition, we may purchase properties and lease them back to the sellers of
such properties. While we will use our best efforts to structure any such
sale-leaseback transaction such that the lease will be characterized as a "true
lease" so that we will be treated as the owner of the property for federal
income tax purposes, we cannot assure investors that the Internal Revenue
Service will not challenge such characterization. In the event that any such
sale-leaseback transaction is recharacterized as a financing transaction for
federal income tax purposes, deductions for depreciation and cost recovery
relating to such property would be disallowed.
We intend that our investments will include properties located in
central business districts of major metropolitan cities where barriers to entry
are judged to be high and selected suburban markets with identified barriers to
entry. Although we are not limited as to the geographic area where we may
conduct our operations, we intend to invest in properties located in the United
States.
We are not specifically limited in the number or size of properties we
may acquire or on the percentage of net proceeds of the Current Offering or the
Initial Offering that we may invest in a single property. The number and mix of
properties we acquire will depend upon real estate and market conditions and
other circumstances existing at the time we acquire our properties and the
amount of proceeds we raise in our public offerings of common stock.
Our advisor has developed and uses proprietary modeling tools that our
management believes help them 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 our overall strategies, including individual
market monitoring and ongoing analysis of macro- and micro-regional economic
cycles, we expect to be better able to identify favorable acquisition targets,
increase current returns and resultant current distributions to investors,
maintain higher relative portfolio property values, conduct appropriate
development or redevelopment activities, and execute timely dispositions at
appropriate sales prices to enhance capital gains distributable to our
investors.
In making investment decisions for us, Behringer Advisors considers
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, Behringer Advisors
has substantial discretion with respect to the selection of specific
investments.
Our obligation to purchase any property generally will be conditioned
upon the delivery and verification of certain documents from the seller or
developer, including, where appropriate:
o plans and specifications;
o environmental reports;
o surveys;
o evidence of marketable title subject to such liens and
encumbrances as are acceptable to Behringer Advisors;
o audited financial statements covering recent operations of
properties having operating histories; and
o title and liability insurance policies.
We will not purchase any property unless and until we obtain what is
generally referred to as a "Phase I" environmental site assessment and are
generally satisfied with the environmental status of the
7
property. A Phase I environmental site assessment basically consists of a visual
survey of the building and the property in an attempt to identify areas of
potential environmental concerns, visually observing neighboring properties to
assess surface conditions or activities that may have an adverse environmental
impact on the property, and contacting local governmental agency personnel and
performing a regulatory agency file search in an attempt to determine any known
environmental concerns in the immediate vicinity of the property. A Phase I
environmental site assessment does not generally include any sampling or testing
of soil, groundwater or building materials from the property.
We also may enter into arrangements with the seller or developer of a
property whereby the seller or developer agrees that, if during a stated period
the property does not generate a specified cash flow, the seller or developer
will pay in cash to us a sum necessary to reach the specified cash flow level,
subject in some cases to negotiated dollar limitations.
In determining whether to purchase a particular property, we may, in
accordance with customary practices, obtain an option on such property. The
amount paid for an option, if any, is normally surrendered if the property is
not purchased and is normally credited against the purchase price if the
property is purchased.
In purchasing, leasing and developing properties, we will be subject to
risks generally incident to the ownership of real estate, including but not
limited to, the following:
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.
ACQUISITION OF PROPERTIES FROM BEHRINGER DEVELOPMENT
We may acquire properties, directly or through joint ventures,
tenant-in-common investments or other co-ownership arrangements, with
unaffiliated third parties or with affiliated entities, including Behringer
Development Company LP ("Behringer Development"), a wholly owned subsidiary of
Behringer Harvard Partners, LLC, which is a wholly owned subsidiary of Behringer
Holdings, and BHD, LLC, which is a wholly owned subsidiary of Behringer
Holdings. Behringer Development was formed to (i) acquire existing
income-producing commercial real estate properties, and (ii) acquire land,
develop commercial real properties, secure tenants for such properties and sell
such properties upon completion to us or other Behringer Harvard sponsored
programs. In the case of properties to be developed by Behringer Development and
sold to us, we anticipate that Behringer Development will:
o acquire a parcel of land;
o enter into contracts for the construction and development of a
commercial building thereon;
o enter into an agreement with one or more tenants to lease all or
a majority of the property upon its completion;
o secure an earnest money deposit from us, which may be used for
acquisition and development expenses;
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o secure a financing commitment from a commercial bank or other
institutional lender to finance the remaining acquisition and
development expenses;
o complete the development and allow the tenant or tenants to take
possession of the property; and
o provide for the acquisition of the property by us.
We will be required to pay a substantial sum to Behringer Development at
the time of entering into the contract as a refundable earnest money deposit to
be credited against the purchase price at closing, which Behringer Development
will apply to the cost of acquiring the land and initial development costs. We
expect that the earnest money deposit will represent approximately 20% to 30% of
the purchase price of the developed property set forth in the purchase contract.
Generally, the purchase price that we will pay for any property will be
based on the fair market value of the property as determined by our advisor with
approval by a majority of our directors. In the cases where a majority of our
independent directors require, we will obtain an appraisal of fair market value
by an independent expert selected by our independent directors. In addition, in
the case of properties we acquire from Behringer Development that have already
been developed, Behringer Development will be required to obtain an appraisal
for the property from an independent expert selected by our independent
directors. The purchase price we will pay under the purchase contract will not
exceed the fair market value of the property as determined by the appraisal. In
the case of properties we acquire from Behringer Development that have not been
constructed at the time of the contract, Behringer Development will be required
to obtain an independent "as built" appraisal for the property prior to our
contracting with them, and the purchase price we will pay under the purchase
contract will not exceed the anticipated fair market value of the developed
property as determined by the appraisal. We will not acquire any property from
Behringer Development unless a majority of our directors, including a majority
of our independent directors, not otherwise interested in the transaction,
determine that the transaction is fair and reasonable to us and at a price no
greater than the cost of the property to Behringer Development or, if the price
is in excess of such cost, that there is substantial justification for the
excess cost and that the excess cost is reasonable.
Our contract with Behringer Development will require it to deliver to us
at closing title to the property, as well as an assignment of leases. Behringer
Development will hold the title to the property on a temporary basis only for
the purpose of facilitating the acquisition and development of the property
prior to its resale to us and other affiliates of Behringer Advisors.
We may enter into a contract to acquire property from Behringer
Development even if we have not yet raised sufficient proceeds to enable us to
pay the full amount of the purchase price at closing. We may also elect to close
a purchase before the development of the property has been completed, in which
case we would obtain an assignment of the construction and development contracts
from Behringer Development and would complete the construction either directly
or through a joint venture with an affiliate. Any contract between us, directly
or indirectly through a joint venture with an affiliate, and Behringer
Development for the purchase of property to be developed by Behringer
Development will provide that we will be obligated to purchase the property only
if:
o Behringer Development completes the improvements, which
generally will include the completion of the development, in
accordance with the specifications of the contract;
o one or more approved tenants takes possession of the building
under a lease satisfactory to our advisor; and
o we have sufficient proceeds available for investment at closing
to pay the balance of the purchase price remaining after payment
of the earnest money deposit.
Behringer Advisors will not cause us to enter into a contract to acquire
property from Behringer Development if it does not reasonably anticipate that
funds will be available to purchase the property at the time of closing. If we
enter into a contract to acquire property from Behringer Development and, at the
time for
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closing, are unable to purchase the property because we do not have sufficient
proceeds available for investment, we will not be required to close the purchase
of the property and will be entitled to a refund of our earnest money deposit
from Behringer Development. Because Behringer Development is an entity without
substantial assets or operations, Behringer Development's obligation to refund
our earnest money deposit will be guaranteed by HPT Management Services LP, our
property manager, which will enter into contracts to provide property management
and leasing services to various Behringer Harvard sponsored programs, including
us, for substantial monthly fees. As of the time HPT Management Services LP may
be required to perform under any guaranty, there is no assurance that HPT
Management Services LP will have sufficient assets to refund all of our earnest
money deposit in a lump sum payment. In such a case, we would be required to
accept installment payments over time payable out of the revenues of the
operations of HPT Management Services LP. There is no assurance that we would be
able to collect the entire amount of our earnest money deposit under such
circumstances.
JOINT VENTURE INVESTMENTS
We are likely to enter into joint ventures, tenant-in-common investments
or other co-ownership arrangements with third parties as well as affiliated
entities for the acquisition, development or improvement of properties for the
purpose of diversifying our portfolio of assets. In this connection, we may
enter into joint ventures with other Behringer Harvard sponsored programs. We
also may enter into joint ventures, partnerships, co-tenancies and other
co-ownership arrangements or participations with real estate developers, owners
and other third parties for the purpose of developing, owning and operating real
properties. In determining whether to invest in a particular joint venture,
Behringer Advisors will evaluate the real property that such joint venture owns
or is being formed to own under the same criteria as our other potential
investments.
We intend to enter into joint ventures with other Behringer Harvard
sponsored programs for the acquisition of properties, but we may only do so
provided that:
o a majority of our directors, including a majority of the
independent directors, approve the transaction as being fair and
reasonable to us and on substantially the same terms and
conditions as those received by other joint venturers; and
o we will have a right of first refusal to buy if such co-venturer
elects to sell its interest in the property held by the joint
venture.
In the event that the co-venturer elects to sell property held in any
such joint venture, however, we may not have sufficient funds to exercise our
right of first refusal. In the event that any joint venture with an affiliated
entity holds interests in more than one property, the interest in each such
property may be specially allocated based upon the respective proportion of
funds invested by each co-venturer in each such property. Entering into joint
ventures with other Behringer Harvard sponsored programs will result in certain
conflicts of interest.
We expect that from time to time our advisor will be presented with an
opportunity to purchase all or a portion of a mixed-use property. In such
instances, it is possible that we would work in concert with other Behringer
Harvard sponsored programs to apportion the assets within the property among us
and the other Behringer Harvard sponsored programs in accordance with the
investment objectives of the various programs. After such apportionment, the
mixed-use property would be owned by two or more Behringer Harvard sponsored
programs or joint ventures comprised of Behringer Harvard sponsored programs.
The negotiation of how to divide the property among the various Behringer
Harvard sponsored programs will not be arm's-length and conflicts of interest
will arise in the process. It is possible that in connection with the purchase
of a mixed-use property or in the course of negotiations with other Behringer
Harvard sponsored programs to allocate portions of such mixed-use property, we
may be required to purchase a property that we would otherwise consider
inappropriate for our portfolio, in order to also purchase a property that our
advisor considers desirable. Although independent appraisals of the assets
comprising the mixed-use property will be conducted prior to
10
apportionment, it is possible that we could pay more for an asset in this type
of transaction than we would pay in an arm's-length transaction with an
unaffiliated third-party.
SECTION 1031 EXCHANGE TRANSACTIONS
Behringer Holdings or its affiliates sponsor private offerings of
tenant-in-common interests through special purpose entities (a "Behringer
Exchange LLC") for the purpose of facilitating the acquisition of real estate
properties to be owned in co-tenancy arrangements with persons, referred to
herein as "1031 Participants," who wish to invest the proceeds from a prior sale
of real estate in another real estate investment for purposes of qualifying for
like-kind exchange treatment under Section 1031 of the Internal Revenue Code. We
refer to these transactions as "Section 1031 TIC Transactions." Typically, in
such a transaction, a Behringer Exchange LLC (many times along with a Behringer
Harvard fund such as us) will purchase a property directly from a seller. The
Behringer Exchange LLC then will sell to the 1031 Participants its portion of
such purchase as tenant-in-common interests in the property. The price paid by
the 1031 Participants for such interests will be higher than that paid by the
Behringer Exchange LLC or by us.
The majority of our portfolio acquisitions made to date have been made
with Behringer Harvard Exchange Entities in Section 1031 TIC Transactions, and
we expect that many of our future acquisitions will be made in similar
transactions. Our management believes that there are benefits to the publicly
held Behringer Harvard sponsored programs in participating in the Section 1031
TIC Transactions sponsored by Behringer Holdings or its affiliates. The Section
1031 TIC Transactions provide opportunities for us to become co-investors in
properties at the sponsor's cost, in contrast to the higher prices paid to a
Behringer Harvard Exchange Entity by third-party tenant-in-common participants
for comparable tenant-in-common interests. Participation in these transactions
may permit us to (i) invest proceeds of public offerings of stock earlier than
we might otherwise be able to do if we were required to acquire the entire
property, (ii) obtain increased portfolio diversification by applying our
capital in lesser amounts over a greater number of properties, (iii) acquire
interests in properties that we would be unable to acquire using only our own
capital resources, and (iv) have opportunities to increase our interests in the
related properties pursuant to certain purchase options granted to us as a
result of our affiliation with the sponsor of the Section 1031 TIC Transaction.
Properties acquired by a Behringer Exchange LLC in connection with the
Section 1031 TIC Transactions generally are financed by obtaining a new first
mortgage secured by the property acquired. In order to finance the remainder of
the purchase price for properties to be acquired, a Behringer Exchange LLC may
obtain a short-term loan from an institutional lender for each property.
Following its acquisition of a property, the Behringer Exchange LLC seeks to
sell co-tenancy interests to 1031 Participants, the proceeds of which are used
to repay any short-term loan. At the closing of each property acquired by a
Behringer Exchange LLC, we may enter into a contractual arrangement, providing
that (i) in the event that the Behringer Exchange LLC is unable to sell all of
the co-tenancy interests in that property to 1031 Participants, we will
purchase, at the Behringer Exchange LLC's cost, any co-tenancy interests
remaining unsold; (ii) we will guarantee the short-term loan associated with the
purchase of the property; and/or (iii) we will provide security for the
guarantee of such loan. In connection with such transactions, we also may enter
into one or more contractual arrangements obligating us to purchase co-tenancy
interests in a particular property directly from the 1031 Participants. The
Behringer Exchange LLC will pay us a fee in consideration for our agreeing to do
(ii) or (iii) above. Generally, the amount of the fee will be equal to 1% of the
amount of the obligation to which we are exposed or the amount of the short-term
loan obtained by the Behringer Exchange LLC.
Our board of directors, including a majority of our independent
directors, must approve each property or tenant-in-common interest acquired by
us pursuant to any Section 1031 TIC Transaction. Accordingly, we will only
participate in a Section 1031 TIC Transaction where the property purchased meets
our investment objectives. Under any such program, we would not execute any
agreement providing for the potential purchase of any unsold co-tenancy
interests from a Behringer Exchange LLC or any co-tenancy interests directly
from the 1031 Participants until a majority of our directors, including a
majority of our independent directors not otherwise interested in the
transaction, approve of the transaction as being fair, competitive and
commercially
11
reasonable to us and at a price to us no greater than the cost of the co-tenancy
interests to the Behringer Exchange LLC. If the price to us would be in excess
of such cost, our directors must find substantial justification for such excess
and that such excess is reasonable. In addition, under any such program, we will
require that a fair market value appraisal for each property must be obtained
from an independent expert selected by our independent directors and in no event
would we purchase co-tenancy interests at a price that exceeds the current
appraised value of the property interests.
All purchasers of co-tenancy interests, including us, execute a
tenant-in-common agreement with the other purchasers of co-tenancy interests in
the property and a property management agreement providing for the property
management and leasing of the property by HPT Management Services LP, our
property manager, or its subsidiaries. The tenant-in-common agreement generally
would provide that all significant decisions, such as the sale, exchange, lease,
re-lease of the property, or any loans or modifications of any loans related to
the property, require unanimous approval of all tenant-in-common owners, subject
to the deemed consent for failure to respond to any request for consent prior to
the applicable deadline and our right to purchase the interests of owners who
fail to consent with the majority. The tenant-in-common agreement generally also
would provide a first purchase right to us and options for us to purchase the
interests of the other owners at any time within the last year of any mortgage
loan on the related property or after we announce our intention to liquidate our
portfolio or list our equity on a stock exchange. In addition, the
tenant-in-common agreement would provide for the payment of property management
fees to HPT Management of up to 4.5% of gross revenues plus leasing commissions
based upon the customary leasing commission applicable to the geographic
location of the property. Accordingly, in the event that we purchase co-tenancy
interests pursuant to one or more of these contractual arrangements, we would be
subject to various risks associated with co-tenancy arrangements that are not
otherwise present in real estate investments, such as the risk that the
interests of the 1031 Participants will become adverse to our interests.
MAKING LOANS AND INVESTMENTS IN MORTGAGES
We may, from time to time, make mortgage loans, short-term loans in
connection with Section 1031 TIC Transactions, and other loans relating to real
property, including loans in connection with the acquisition of investments in
entities that own real property. Although we do not have a formal policy, our
criteria for investing in loans will be substantially the same as those involved
in our investment in properties. We may invest in mortgage loans (including but
not limited to investments in first, second and third mortgage loans, wraparound
mortgage loans, construction mortgage loans on real property, and loans on
leasehold interest mortgages). We also may invest in participations in mortgage
loans. Further, we may invest in unsecured loans or loans secured by assets
other than real estate. We currently do not expect to make significant
investments in loans, although we are not limited as to the amount of gross
offering proceeds that we may apply to our loan investments. We will not make
unsecured loans or loans not secured by mortgages unless such loans are approved
by a majority of our independent directors. We will not make or invest in
mortgage loans unless we obtain an appraisal concerning the underlying property
from a certified independent appraiser except for mortgage loans insured or
guaranteed by a government or government agency. We will maintain each appraisal
in our records for at least five years, and will make it available during normal
business hours for inspection and duplication by any stockholder at such
stockholder's expense. In addition to the appraisal, we will seek to obtain a
customary lender's title insurance policy or commitment as to the priority of
the mortgage or condition of the title.
We will not make or invest in mortgage loans on any one property if the
aggregate amount of all mortgage loans outstanding on the property, including
our borrowings, would exceed an amount equal to 85% of the appraised value of
the property, unless we find substantial justification due to the presence of
other underwriting criteria.
12
BORROWING POLICIES
We intend to use debt secured by real estate as a means of providing
additional funds for the acquisition of properties and the diversification of
our portfolio. By operating on a leveraged basis, management expects that we
will have more funds available for investment in properties and other
investments. This will enable us to make more investments than would otherwise
be possible, resulting in a more diversified portfolio. Although management
expects the liability for the repayment of indebtedness to be limited to the
value of the property securing the liability and to the rents or profits derived
therefrom, there can be no assurance that lender recourse will be limited to the
property financed by that lender. Furthermore, the use of leverage increases the
risk of default on the mortgage payments and a subsequent foreclosure of a
particular property. To the extent that we do not obtain mortgage loans on our
properties, our ability to acquire additional properties will be restricted.
When interest rates on mortgage loans are high or financing is otherwise
unavailable on a timely basis, we may purchase certain properties for cash with
the intention of obtaining a mortgage loan for a portion of the purchase price
at a later time. From time to time, when interest rates are deemed to be
favorably low, we may enter into rate lock agreements that allow us to fix an
interest rate for future loans during a specified period of time. We will incur
certain costs associated with such rate lock agreements and, if we fail to enter
into a loan during the specified time, may forfeit certain deposits made to
secure such arrangements.
There is no limitation on the amount we may invest in any single
improved property or other asset or on the amount we can borrow for the purchase
of any individual property or other investment. Under our charter, the maximum
amount of our indebtedness may not exceed 300% of our net assets as of the date
of any borrowing unless any excess is approved by a majority of our independent
directors, in which case we will disclose the excess borrowing to our
stockholders in our next quarterly report, including the justification for such
excess.
We expect to borrow up to 55% of the aggregate value of our assets if
interest rates and loan terms are favorable. Our board of directors has adopted
a policy that we will generally limit our aggregate borrowings to approximately
55% of the aggregate value of our assets as of the date of any borrowing, unless
substantial justification exists that borrowing a greater amount is in our best
interests. Our policy limitation does not apply to individual properties and
only will apply once we have invested most of the capital from our offerings of
common stock. As a result, it can be expected that, with respect to the
acquisition of one or more of our properties, we may incur indebtedness of more
than 55% of the asset value of the property acquired, and that our debt levels
likely will be higher until we have invested most of the capital from our
offerings of common stock. Our board of directors must review our aggregate
borrowings at least quarterly. As of December 31, 2004, we had an aggregate debt
leverage ratio of 42% of the value of our total assets.
We may not borrow money from any of our directors or from Behringer
Advisors and its affiliates unless such loan is approved by a majority of the
directors, including a majority of the independent directors not otherwise
interested in the transaction upon a determination by such directors that the
transaction is fair, competitive and commercially reasonable and no less
favorable to us than a comparable loan between unaffiliated parties.
For services in connection with the origination or refinancing of any
debt financing obtained by or for us, we will pay our advisor a debt financing
fee equal to 1% of the amount available under such financing. Debt financing
fees payable from loan proceeds from permanent financing will be paid to our
advisor as we acquire such permanent financing. In the event our advisor
subcontracts with a third-party for the provision of financing coordination
services with respect to a particular financing or financings, the advisor will
compensate the third-party through the debt financing fee.
CONFLICTS OF INTEREST
We are subject to various conflicts of interest arising out of our
relationship with Behringer Advisors, our advisor, and our other affiliates,
including conflicts related to the arrangements pursuant to which Behringer
13
Advisors and its affiliates are compensated by us. Our agreements and
arrangements with our advisor and its affiliates, including those relating to
compensation, are not the result of arm's-length negotiations.
Our advisor and its affiliates try to balance our interests with their
duties to other Behringer Harvard sponsored programs. However, to the extent
that our advisor or its affiliates take actions that are more favorable to other
entities than to us, these actions could have a negative impact on our financial
performance and, consequently, on distributions to investors and the value of
our stock. In addition, our directors, officers and certain of our stockholders
may engage for their own account in business activities of the types conducted
or to be conducted by us and our subsidiaries.
Every transaction that we enter into with Behringer Advisors or its
affiliates is subject to an inherent conflict of interest. Certain of these
conflicts of interest are mentioned below or in the prospectus for the Current
Offering. Our board of directors may encounter conflicts of interest in
enforcing our rights against any affiliate in the event of a default by or
disagreement with an affiliate or in invoking powers, rights or options pursuant
to any agreement between us and Behringer Advisors or any of its affiliates. A
majority of the independent directors who are otherwise disinterested in the
transaction must approve each transaction between us and Behringer Advisors or
any of its affiliates as being fair and reasonable to us and on terms and
conditions no less favorable to us than those available from unaffiliated third
parties.
INTERESTS IN OTHER REAL ESTATE PROGRAMS
Behringer Advisors and its partners, officers, employees or affiliates
are advisors or general partners of other Behringer Harvard programs, including
partnerships and other programs that have investment objectives similar to ours,
and we expect that they will organize other such programs in the future.
Behringer Advisors and such officers, employees or affiliates have legal and
financial obligations with respect to these programs that are similar to their
obligations to us. As general partners, they may have contingent liability for
the obligations of programs structured as partnerships, which, if such
obligations were enforced against them, could result in substantial reduction of
their net worth.
Currently, affiliates of Behringer Advisors recently sponsored two
public real estate programs with similar investment objectives as ours,
Behringer Harvard Mid-Term Value Enhancement Fund I LP and Behringer Harvard
Short-Term Opportunity Fund I LP. The public offerings with respect to those
programs terminated on February 19, 2005. In addition, affiliates of Behringer
Advisors are sponsoring a public offering by a newly formed entity, Behringer
Harvard Opportunity REIT I, Inc. In addition, affiliates of Behringer Advisors
are sponsoring private offerings of real estate programs that have investment
objectives similar to ours. Robert M. Behringer, our founder, President, Chief
Executive Officer and Chief Investment Officer, and his affiliates also have
sponsored other privately offered real estate programs that have a mix of fund
characteristics, including targeted investment types, investment objectives and
criteria, and anticipated fund terms, that are substantially similar to ours,
and which are still operating and may acquire additional properties in the
future. Behringer Advisors and its affiliates will likely experience conflicts
of interest as they simultaneously perform services for us and other Behringer
Harvard sponsored programs. However, to date, the investment strategies of the
various Behringer Harvard sponsored programs have differed enough that there has
not been a significant conflict of interest in the allocation of properties.
In the event that we, or any other Behringer Harvard program or other
entity formed or managed by Behringer Advisors or its affiliates, are in the
market for investments similar to those we intend to make, Behringer Advisors
will review the investment portfolio of each such affiliated entity prior to
making a decision as to which Behringer Harvard program will purchase such
properties or make or invest in such mortgage loans.
Behringer Advisors or its affiliates may acquire, for its own account or
for private placement, properties that it deems not suitable for purchase by us,
whether because of the greater degree of risk, the complexity of structuring
inherent in such transactions, financing considerations or for other reasons,
including properties with potential for attractive investment returns.
14
OTHER ACTIVITIES OF BEHRINGER ADVISORS AND ITS AFFILIATES
We rely on Behringer Advisors for the day-to-day operation of our
business. As a result of the interests of members of its management in other
Behringer Harvard sponsored programs and the fact that they have also engaged
and will continue to engage in other business activities, Behringer Advisors and
its affiliates will have conflicts of interest in allocating their time between
us and other Behringer Harvard sponsored programs and other activities in which
they are involved. However, Behringer Advisors believes that it and its
affiliates have sufficient personnel to discharge fully their responsibilities
to all of the Behringer Harvard sponsored programs and other ventures in which
they are involved.
In addition, each of our executive officers, including Robert M.
Behringer, who also serves as the chairman of our board of directors, are also
officers of our advisor, our property manager, our dealer manager and other
affiliated entities. As a result, these individuals owe fiduciary duties to
these other entities, which may conflict with the fiduciary duties that they owe
to us and our stockholders.
Behringer Advisors or any of its affiliates may temporarily enter into
contracts relating to investment in properties, all or a portion of which is to
be assigned to us prior to closing, or may purchase property in their own name
and temporarily hold title for us provided that such property or applicable
portion thereof is purchased by us at a price no greater than the cost of such
property, including acquisition and carrying costs, to Behringer Advisors or its
affiliate. Further, Behringer Advisors or such affiliate may not have held title
to any such property on our behalf for more than twelve months prior to the
commencement of the Current Offering; Behringer Advisors or its affiliates will
not sell property to us if the cost of the property exceeds the funds reasonably
anticipated to be available for us to purchase any such property; and all
profits and losses during the period any such property is held by Behringer
Advisors or its affiliates will accrue to us. In no event may we loan funds to
Behringer Advisors or any of its affiliates (other than in connection with
certain mortgage loans approved by a majority of our independent directors), or
enter into agreements with Behringer Advisors or its affiliates for the
provision of insurance covering us or any of our properties.
COMPETITION IN ACQUIRING PROPERTIES, FINDING TENANTS AND SELLING PROPERTIES
Conflicts of interest will exist to the extent that we may acquire
properties in the same geographic areas where properties owned by other
Behringer Harvard sponsored programs are located. In such a case, a conflict
could arise in the leasing of properties in the event that we and another
Behringer Harvard program were to compete for the same tenants in negotiating
leases, or a conflict could arise in connection with the resale of properties in
the event that we and another Behringer Harvard program were to attempt to sell
similar properties at the same time, including in particular in the event
another Behringer Harvard sponsored program liquidates at the same time we do.
Conflicts of interest may also exist at such time as we or our affiliates
managing property on our behalf seek to employ developers, contractors or
building managers as well as under other circumstances. Our executive officers
and the executive officers of our advisor also are the executive officers of
other advisors of Behringer Harvard sponsored REITs, the general partners of
limited partnerships and/or the advisors or fiduciaries of other Behringer
Harvard sponsored programs, and these entities are and will be under common
ownership. Additionally, the executive officers of our advisor are executive
officers of HPT Management Services LP, our property manager. There is a risk
that a potential investment would be suitable for one or more other Behringer
Harvard sponsored programs, in which case the executive officers of our advisor
will have a conflict of interest in allocation of the investment to us or
another program. There is a risk that our advisor will choose a property that
provides lower returns to us than a property purchased by another Behringer
Harvard sponsored program. Additionally, our property manager may cause a
prospective tenant to enter into a lease for property owned by another Behringer
Harvard sponsored program. In the event these conflicts arise, we cannot assure
our stockholders that our best interests will be met when officers and employees
acting on behalf of our advisor or property manager and on behalf of managers of
other Behringer Harvard sponsored programs decide whether to allocate any
particular property to us or to another Behringer Harvard sponsored program or
affiliate. Our advisor will seek to reduce conflicts relating to the employment
of developers, contractors or building managers by making prospective employees
aware of all such properties seeking to employ such persons. In
15
addition, our advisor will seek to reduce conflicts that may arise with respect
to properties available for sale or rent by making prospective purchasers or
tenants aware of all such properties. However, these conflicts cannot be fully
avoided in that there may be established differing compensation arrangements for
employees at different properties or differing terms for resales or leasing of
the various properties. Furthermore, although our sponsor generally seeks to
reduce conflicts that may arise between its various programs by avoiding
simultaneous offerings of funds that have a substantially similar mix of fund
characteristics, including targeted investment types, investment objectives and
criteria, and anticipated fund terms, there may be periods during which one or
more Behringer Harvard sponsored programs are seeking to invest in similar
properties or are otherwise potentially subject to a conflict of interest.
AFFILIATED PROPERTY MANAGER
Our properties are managed and leased by HPT Management Services LP, our
affiliated property manager. Our agreement with HPT Management Services LP has a
seven-year term ending February 14, 2010, and shall continue thereafter for
successive seven-year renewal periods unless terminated by HPT Management
Services LP by written notice at least 30 days prior to the expiration date of
such term. Notwithstanding the foregoing, we can terminate the agreement only in
the event of gross negligence or willful misconduct on the part of HPT
Management Services LP. HPT Management Services LP also serves as property
manager for properties owned by affiliated real estate programs, some of which
may be in competition with our properties. Management fees to be paid to our
property manager are based on a percentage of the rental income received by the
managed properties.
Every transaction that we enter into with Behringer Advisors or its
affiliates is subject to an inherent conflict of interest, certain of these
conflicts of interest are mentioned below or in the prospectus for the Current
Offering. Our board of directors may encounter conflicts of interest in
enforcing our rights against any affiliate in the event of a default by or
disagreement with an affiliate or in invoking powers, rights or options pursuant
to any agreement between us and Behringer Advisors or any of its affiliates. A
majority of the independent directors who are otherwise disinterested in the
transaction must approve each transaction between us and Behringer Advisors or
any of its affiliates as being fair and reasonable to us and on terms and
conditions no less favorable to us than those available from unaffiliated third
parties.
CERTAIN CONFLICT RESOLUTION PROCEDURES
In order to reduce or eliminate certain potential conflicts of interest,
our charter contains a number of restrictions relating to (1) transactions we
enter into with Behringer Advisors and its affiliates, (2) certain future
offerings, and (3) allocation of investment opportunities among affiliated
entities. These restrictions include, among others, the following:
o We will not purchase or lease properties in which Behringer
Advisors, any of our directors or any of their respective
affiliates has an interest without a determination by a majority
of the directors, including a majority of the independent
directors, not otherwise interested in such transaction that
such transaction is fair and reasonable to us and at a price to
us no greater than the cost of the property to the seller or
lessor unless there is substantial justification for any amount
that exceeds such cost and such excess amount is determined to
be reasonable. In no event will we acquire any such property at
an amount in excess of its appraised value. We will not sell or
lease properties to Behringer Advisors, any of our directors or
any of their respective affiliates unless a majority of the
directors, including a majority of the independent directors,
not otherwise interested in the transaction, determines the
transaction is fair and reasonable to us.
o We will not make any loans to Behringer Advisors, any of our
directors or any of their respective affiliates, except that we
may make or invest in mortgage loans involving Behringer
Advisors, our directors or their respective affiliates, provided
that an appraisal of the underlying property is obtained from an
independent appraiser and the transaction is approved as fair
and reasonable to us and on terms no less favorable to us than
those available from third parties. In addition, Behringer
16
Advisors, any of our directors and any of their respective
affiliates will not make loans to us or to joint ventures in
which we are a joint venture partner unless approved by a
majority of the directors, including a majority of the
independent directors, not otherwise interested in the
transaction as fair, competitive and commercially reasonable,
and no less favorable to us than comparable loans between
unaffiliated parties.
o Behringer Advisors and its affiliates shall be entitled to
reimbursement, at cost, for actual expenses incurred by them on
behalf of us or joint ventures in which we are a joint venture
partner, subject to the limitation that for any year in which we
qualify as a REIT, Behringer Advisors must reimburse us for the
amount, if any, by which our total operating expenses, including
the advisor asset management fee, paid during the previous
fiscal year exceeds the greater of: (i) 2% of our average
invested assets for that fiscal year, or (ii) 25% of our net
income, before any additions to reserves for depreciation, bad
debts or other similar non-cash reserves and before any gain
from the sale of our assets, for that fiscal year.
o In the event that an investment opportunity becomes available
that is suitable, under all of the factors considered by
Behringer Advisors, for both us and one or more other public or
private entities affiliated with Behringer Advisors and its
affiliates, and for which more than one of such entities has
sufficient uninvested funds, then the entity that has had the
longest period of time elapse since it was offered an investment
opportunity will first be offered such investment opportunity.
It shall be the duty of our board of directors, including the
independent directors, to insure that this method is applied
fairly to us. In determining whether or not an investment
opportunity is suitable for more than one program, Behringer
Advisors, subject to approval by our board of directors, shall
examine, among others, the following factors:
- the anticipated cash flow of the property to be acquired
and the cash requirements of each program;
- the effect of the acquisition both on diversification of
each program's investments by type of property and
geographic area and on diversification of the tenants of
its properties;
- the policy of each program relating to leverage of
properties;
- the income tax effects of the purchase to each program;
- the size of the investment; and
- the amount of funds available to each program and the
length of time such funds have been available for
investment.
o If a subsequent development, such as a delay in the closing of a
property or a delay in the construction of a property, causes
any such investment, in the opinion of our board of directors
and Behringer Advisors, to be more appropriate for a program
other than the program that committed to make the investment,
Behringer Advisors may determine that another program affiliated
with Behringer Advisors or its affiliates will make the
investment. Our board of directors has a duty to ensure that the
method used by Behringer Advisors for the allocation of the
acquisition of properties by two or more affiliated programs
seeking to acquire similar types of properties is applied fairly
to us.
o We will not accept goods or services from Behringer Advisors or
its affiliates or enter into any other transaction with
Behringer Advisors or its affiliates unless a majority of our
directors, including a majority of the independent directors,
not otherwise interested in the transaction approve such
transaction as fair and reasonable to us and on terms and
conditions not less favorable to us than those available from
unaffiliated third parties.
Our performance is subject to additional risks as have been listed in
the "Risk Factors" section of our Registration Statement on Form S-3, as filed
with the Securities and Exchange Commission, in connection with
17
our sale of common stock in the Current Offering. Some of these risks are listed
in the "Forward-Looking Statements" section of this Annual Report.
COMPETITION
Our properties are all located in areas that include highly competitive
properties. The number of competitive properties in a particular area could have
a material adverse effect on both our ability to lease space at any of our
properties or at newly acquired (or developed) properties, and the amount of
rent we can charge at our properties. We compete with many property owners, such
as corporations, limited partnerships, individual owners, other real estate
investment trusts, insurance companies and pension funds. We also compete with
properties owned by other Behringer Harvard programs. Many of our competitors
have greater financial and other resources than we have and may have
substantially more operating experience than either us or Behringer Advisors.
EMPLOYEES
We have no direct employees. The employees of Behringer Advisors and
other affiliates of ours perform a full range of real estate services for us,
including acquisitions, property management, accounting and asset management.
Employees of Behringer Securities, our affiliated dealer manager, perform
wholesale brokerage and investor relations services.
We are dependent on our affiliates for services that are essential to
us, including the sale of shares of our common stock, asset acquisition
decisions, property management and other general administrative
responsibilities. In the event that these companies were unable to provide these
services to us, we would be required to obtain such services from other sources.
AVAILABLE INFORMATION
We electronically file an 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"). We have also filed a
registrant statement in connection with our Current Offering with the SEC.
Copies of our filings with the SEC may be obtained from our 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.
ITEM 2. PROPERTIES.
GENERAL
Our investments in real estate generally will take the form of holding
fee title or a long-term leasehold estate. We will acquire such interests either
directly through Behringer OP I or indirectly through limited liability
companies or through investments in joint ventures, partnerships, co-tenancies
or other co-ownership arrangements with the developers of the properties,
affiliates of Behringer Advisors or other persons. We are not limited in the
number or size of properties we may acquire or on the percentage of net proceeds
of our public offerings of common stock that we may invest in a single property.
The number and mix of properties we acquire will depend upon real estate and
market conditions and other circumstances existing at the time we acquire
properties and the amount of proceeds raised our public offering.
PROPERTIES
As of December 31, 2004, we owned the following property:
Approx. Rentable
Property Name Location Square Footage Description
------------------ --------------------- ------------------ ----------------------------
Cyprus Building Englewood, Colorado 153,048 4-story office building
18
As of December 31, 2004, we owned tenant-in-common interests in the
following properties:
Approx. Rentable Tenant-in-Common
Property Name Location Square Footage Description Interest
- ------------------------ ------------------------ --------------------- ---------------------------- ------------------
Minnesota Center Bloomington, Minnesota 276,425 14-story office building 14.467600%
Enclave on the Lake Houston, Texas 171,090 6-story office building 36.312760%
St. Louis Place St. Louis, Missouri 337,088 20-story office building 35.709251%
Colorado Building Washington, D.C. 121,701 11-story office building 79.475200%
Travis Tower Houston, Texas 507,470 21-story office building 60.430229%
Pratt Building Baltimore, Maryland 368,194 24-story office building 50.679950%
Pursuant to the SEC's rules, for each subsequent property acquisition
for which we are required to file a current report, we will file a current
report on Form 8-K containing information regarding the property acquired, the
financial statements related thereto and other pertinent information related to
such property.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION
There is no established trading market for our common stock. Therefore,
there is a risk that a stockholder may not be able to sell our stock at a time
or price acceptable to the stockholder. Pursuant to the Current Offering, we are
selling shares of our common stock to the public at a price of $10.00 per share
and at a maximum price of $9.50 per share pursuant to our distribution
reinvestment plan.
Unless and until our shares are listed on a national securities exchange
or are included for quotation on The Nasdaq Stock Market, it is not expected
that a public market for the shares will develop. To assist fiduciaries of
tax-qualified pension, stock bonus or profit-sharing plans, employee benefit
plans and annuities described in Section 403(a) or (b) of the Internal Revenue
Code or an individual retirement account or annuity described in Section 408 of
the Internal Revenue Code subject to the annual reporting requirements of ERISA
and IRA trustees or custodians in preparation of reports relating to an
investment in the shares, we intend to provide reports of the quarterly and
annual determinations of the current value of the net assets per outstanding
share to those fiduciaries who request such reports. Until three full fiscal
years after the later of the completion of the Current Offering and any
subsequent offering of shares, we intend to use the offering price of shares in
the most recent offering as the per share net asset value. Beginning three full
fiscal years after the completion of the last offering of shares, the value of
the properties and other assets will be based on valuations of either our
properties or us as a whole, whichever valuation method our board of directors
determines to be appropriate. Persons independent of us and independent of our
advisor will perform such valuations.
SHARE REDEMPTION PROGRAM
Our board of directors has authorized a common share redemption program
for our investors. Our share redemption program is described in detail in the
prospectus, as supplemented, for the Current Offering. Under the terms of the
plan, during any calendar year, we will not redeem in excess of 5% of the
weighted average number of shares outstanding during the prior calendar year. In
addition, our board of directors will determine whether we have sufficient cash
from operations to repurchase shares, and such purchases will generally be
limited to 1% of operating cash flow for the previous fiscal year plus proceeds
of our distribution reinvestment plan.
Our share redemption program is available only for stockholders who
purchase their shares directly from us or certain transferees, and is not
intended to provide liquidity to any stockholder who acquired his shares by
purchase from another stockholder. Our share redemption program is only intended
to provide interim liquidity for our stockholders until a secondary market
develops for the shares. No such market presently exists, and there is no
assurance that a market for our shares will ever develop. Neither our advisor,
any member of our board of directors nor any of their affiliates will receive
any fee on the repurchase of shares by us pursuant to the share redemption
program.
The shares we purchase under the share redemption program will be
cancelled, and will have the status of authorized but unissued shares. We will
not reissue such shares unless they are first registered with the Securities and
Exchange Commission under the Securities Act and under appropriate state
securities laws or otherwise issued in compliance with or exemption from such
laws.
Our share redemption program in no way limits our ability to repurchase
shares from stockholders by any other legally available means for any reason
that the advisor, in its discretion, deems to be in our best interest.
20
HOLDERS
As of March 15, 2005, we had 17,112,143 shares of common stock
outstanding held by a total of approximately 4,848 stockholders.
DISTRIBUTIONS
We are making an election to qualify as a REIT for federal income tax
purposes commencing with our taxable year ending December 31, 2004. As a REIT,
we are required to distribute at least 90% of our annual taxable income to our
stockholders. We currently declare distributions on a daily basis and pay them
on a monthly basis and intend to continue doing so. This daily declaration
process results in investors being eligible to earn distributions immediately
upon admittance as stockholders. Until proceeds from our offerings are invested
and generating operating cash flow sufficient to make distributions to
stockholders, we intend to pay all or a substantial portion of our distributions
from the proceeds of such offerings or from borrowings in anticipation of future
cash flow. Of the amounts distributed by us in 2004, 91.3% represented a return
of capital and 8.7% were ordinary distributions. The following table shows the
distributions declared and paid for the fiscal years ended December 31, 2004 and
December 31, 2003:
Distributions Distributions
2004 Declared Paid
------------------ ------------------ ---------------
First Quarter $ 265,859 $ 194,807
Second Quarter 554,010 442,117
Third Quarter 1,089,066 888,658
Fourth Quarter 1,875,120 1,560,535
------------------ ---------------
$ 3,784,055 $ 3,086,117
================== ===============
Distributions Distributions
2004 Declared Paid
------------------ ------------------ ---------------
First Quarter $ - $ -
Second Quarter - -
Third Quarter - -
Fourth Quarter 91,408 49,414
------------------ ---------------
$ 91,408 $ 49,414
================== ===============
There were no distributions declared or paid during the fiscal year
ended December 31, 2002.
RECENT SALES OF UNREGISTERED SECURITIES
We issued 20,000 shares of our common stock to Behringer Holdings in
conjunction with our inception in 2002. These shares 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 REGISTERED SECURITIES
As of December 31, 2004, we had sold the following securities pursuant
to the Initial Offering (declared effective February 19, 2003, SEC Registration
No. 333-91532) for the following aggregate offering prices:
o 12,954,522 shares on a best efforts basis for $129,248,538; and
o 134,760 shares pursuant to our distribution reinvestment plan
for $1,345,940.
The total of shares sold and gross offering proceeds realized pursuant
to the Initial Offering as of December 31, 2004 were 13,089,282 shares for
$130,594,477. The above-stated number of shares sold and the gross offering
proceeds received from such sales does not include 20,000 shares of common stock
purchased by Behringer Holdings in a private placement in 2002, prior to the
commencement of the Initial Offering.
21
From the commencement of the Initial Offering through December 31, 2004,
we incurred the following expenses in connection with the issuance and
distribution of the registered securities pursuant to the Initial Offering:
TYPE OF EXPENSE AMOUNT
------------------------ ---------------------
Other expenses to affiliates * $ 15,387,758
Other expenses to non-affiliates 14,386
---------------------
Total expenses $ 15,402,144
=====================
- -----------------------
*Other expenses to affiliates above include commissions and dealer manager fees
paid to Behringer Securities, our affiliate, which reallowed all or a portion of
the commissions and fees to soliciting dealers.
From the commencement of the Initial Offering through December 31, 2004,
the net offering proceeds to us from the Initial Offering, after deducting the
total expenses paid and accrued described above, were $115,192,333.
From the commencement of the Initial Offering through December 31, 2004,
we had used $73,663,759 of such net offering proceeds to purchase real estate,
including tenant-in-common interests, net of the mortgages payable. Of the
amount used for the purchase of these investments, $5,323,226 was paid to
Behringer Advisors, our affiliate, as acquisition and advisory fees and
acquisition expense reimbursement.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information regarding our equity
compensation plans as of December 31, 2004:
- -------------------------- ---------------------------- ------------------------- ---------------------------------
Number of securities to be Weighted-average
issued upon exercise of exercise price of Number of securities remaining
outstanding options, outstanding options, available for future issuance
Plan Category warrants and rights warrants and rights under equity compensation plans
- -------------------------- ---------------------------- ------------------------- ---------------------------------
Equity compensation 9,000 $12.00 11,991,000*
plans approved by
security holders
- -------------------------- ---------------------------- ------------------------- ---------------------------------
Equity compensation
plans not approved by
security holders N/A N/A N/A
- -------------------------- ---------------------------- ------------------------- ---------------------------------
Total 9,000 $12.00 11,991,000*
- -------------------------- ---------------------------- ------------------------- ---------------------------------
- -----------------------
* Includes 10,000,000 shares authorized for issuance pursuant to options not yet
granted under our 2002 Employee Stock Option Plan, 991,000 shares authorized for
issuance pursuant to options not yet granted under our Non-Employee Director
Stock Option Plan, and 1,000,000 shares authorized under our Non-Employee
Director Warrant Plan.
22
ITEM 6. SELECTED FINANCIAL DATA.
We were formed in June 2002, and did not commence operations until
October 2003, when we accepted the minimum amount of subscriptions pursuant to
the Initial Offering and made our first real estate investment. Accordingly, the
following selected financial data for the year ended December 31, 2004 is not
comparable to the year ended December 31, 2003 or the period from inception
(June 28, 2002) through December 31, 2002. The following data should be read in
conjunction with our consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Annual Report on Form 10-K. The selected
financial data presented below has been derived from our consolidated financial
statements.
From inception
(June 28, 2002)
Year ended Year ended through
December 31, 2004 December 31, 2003 December 31, 2002
-----------------------------------------------------------------------
Total assets $ 198,888,433 $ 11,684,541 $ 197,295
===================== ===================== =====================
Long-term debt obligations $ 82,353,955 $ 4,332,656 $ -
Other liabilities 6,613,140 280,514 -
Stockholders' equity 109,921,338 7,071,371 197,295
--------------------- --------------------- ---------------------
Total liabilities and stockholders' equity $ 198,888,433 $ 11,684,541 $ 197,295
===================== ===================== =====================
Rental revenues (1) $ 129,981 $ - $ -
Property operating expense (1) 1,959 - -
Interest (2) 1,689,994 60,833 -
Rate lock extension expense (3) 525,000 - -
Real estate taxes (1) 19,967 - -
Property management fees (4) 205,515 7,148 -
Asset management fees (4) 89,596 3,072 -
Organization expenses 217,897 17,575 -
General and administrative 711,603 222,648 3,805
--------------------- --------------------- ---------------------
Total expenses 3,461,531 311,276 3,805
Interest income 389,737 3,767 1,100
Equity in investments of tenant-in-common interests (5) 1,402,847 18,176 -
--------------------- --------------------- ---------------------
Net loss $ (1,538,966) $ (289,333) $ (2,705)
===================== ===================== =====================
Loss per share $ (0.29) $ (2.03) $ (0.14)
- ------------------------------
(1) Rental revenues, property operating expense, and real estate taxes for the
year ended December 31,2004 are from our 100% direct ownership of the
Cyprus Building, acquired on December 16, 2004.
(2) Interest includes our proportionate share of mortgage interest expense and
deferred financing fees from our six tenant-in-common-interest investments.
(3) Rate lock extension expense represents $525,000 of non-refundable fees
related to interest rate lock deposits on future borrowings for future
acquisitions.
(4) Property and asset management fees includes our proportionate share of
these fees from our six tenant-in-common interest investments and our
directly owned property.
(5) In 2004, we recorded $1,402,847 of equity in earnings from our undivided
tenant-in-common interest investments. Our equity in earnings from these
tenant-in-common interest investments is our proportionate share of the
following earnings from our tenant-in-common properties for the year ended
December 31, 2004:
23
MINNESOTA ENCLAVE ON ST. LOUIS COLORADO TRAVIS PRATT
CENTER THE LAKE PLACE BUILDING TOWER BUILDING TOTAL
------------- ------------ ------------ ------------ ------------ ------------- -------------
Revenue $6,857,468 $3,049,976 $2,698,909 $1,649,088 $2,247,989 $ 308,917 $16,812,347
Operating expenses:
Operating expenses 1,899,743 639,202 809,355 455,957 601,285 130,910 4,536,452
Property taxes 1,175,329 442,535 196,544 247,267 266,394 - 2,328,069
------------- ------------ ------------ ------------ ------------ ------------- -------------
Total operating expenses 3,075,072 1,081,737 1,005,899 703,224 867,679 130,910 6,864,521
------------- ------------ ------------ ------------ ------------ ------------- -------------
Operating income $3,782,396 $1,968,239 $1,693,010 $ 945,864 $1,380,310 $ 178,007 $ 9,947,826
------------- ------------ ------------ ------------ ------------ ------------- -------------
Non-operating (income) expenses
Depreciation and amortization 2,704,898 1,100,893 888,922 643,906 850,812 - 6,189,431
(Interest income)/bank fees, net (9,716) 26,977 (5,108) (14) (5,210) - 6,929
------------- ------------ ------------ ------------ ------------ ------------- -------------
Total non-operating (income) expenses 2,695,182 1,127,870 883,814 643,892 845,602 - 6,196,360
Net income $1,087,214 $ 840,369 $ 809,196 $ 301,972 $ 534,708 $ 178,007 $ 3,751,466
============= ============ ============ ============ ============ ============= =============
Company's share of net income $ 157,294 $ 305,161 $ 288,958 $ 239,994 $ 321,226 $ 90,214 $ 1,402,847
============= ============ ============ ============ ============ ============= =============
Company's share of depreciation
and amortization (1) $ 433,363 $ 399,765 $ 339,438 $ 472,923 $ 479,234 $ - $ 2,124,723
Weighted average shares outstanding 5,358,697
- ------------------------------
(1) Our share of depreciation and amortization includes above and below market
lease amortization which is recorded as an adjustment to revenue.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the accompanying consolidated financial statements and the notes thereto.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of financial condition and results
of operations are based upon our consolidated 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
our management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On a regular basis, we evaluate these
estimates, including investment impairment. These estimates are 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.
INVESTMENTS IN TENANT-IN-COMMON INTERESTS
As of December 31, 2004, the "Investments in tenant-in-common interests"
on our balance sheet consists of our undivided tenant-in-common interests in
various office buildings. Consolidation of these investments is not required as
they do not qualify as variable interest entities as defined in FIN No. 46R and
do not meet the voting interest requirements required for consolidation under
the American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP 78-9") "Accounting for Investments in Real Estate Ventures."
We account for these investments using the equity method of accounting
in accordance with SOP 78-9. The equity method of accounting requires these
investments to be initially recorded at cost and subsequently increased
(decreased) for our share of net income (loss), including eliminations for our
share of inter-company transactions and reduced when distributions are received.
24
INVESTMENT IMPAIRMENTS
For real estate we own directly, we monitor events and changes in
circumstances indicating that the carrying amounts of the real estate assets may
not be recoverable. When such events or changes in circumstances are present, we
assess potential impairment by comparing estimated future undiscounted operating
cash flows expected to be generated over the life of the asset and from its
eventual disposition, to the carrying amount of the asset. In the event that the
carrying amount exceeds the estimated future undiscounted operating cash flows,
we recognize an impairment loss to adjust the carrying amount of the asset to
estimated fair value.
For real estate we own through an investment in a joint venture,
tenant-in-common interest or other similar investment structure, at each
reporting date we will compare the estimated fair value of our investment to the
carrying value. An impairment charge is recorded to the extent the fair value of
our investment is less than the carrying amount and the decline in value is
determined to be other than a temporary decline. No impairment charges have been
taken in 2003 or 2004.
REAL ESTATE
Upon the acquisition of real estate properties, we allocate the purchase
price of those properties to the tangible assets acquired, consisting of land
and buildings, and identified intangible assets based on their fair values in
accordance with Statement of Financial Accounting Standards No. 141, "Business
Combinations." Identified intangible assets 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, is determined by valuing the property as if it were vacant, and the
"as-if-vacant" value is then allocated to land and buildings. Land values are
derived from appraisals, and building values are calculated as replacement cost
less depreciation or management's estimates of the relative fair value of these
assets using discounted cash flow analyses or similar methods. The value of the
building is depreciated over the estimated useful life of 25 years using the
straight-line method.
We determine the value of above-market and below-market in-place leases
for acquired properties based on the present value (using an interest rate that
reflects the risks associated with the leases acquired) of the difference
between (i) the contractual amounts to be 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. We record the fair value of
above-market and below-market leases as intangible assets or intangible
liabilities, respectively, and amortize them as an adjustment to rental income
over the remaining non-cancelable terms of the respective leases.
The total value of identified real estate intangible assets acquired is
further allocated to in-place lease values, in-place tenant improvements,
in-place leasing commissions and tenant relationships based on our evaluation of
the specific characteristics of each tenant's lease and our overall relationship
with that respective tenant. The aggregate value for tenant improvements and
leasing commissions is based on estimates of these costs incurred at inception
of the acquired leases, amortized through the date of acquisition. The aggregate
value of in-place leases acquired and tenant relationships is determined by
applying a fair value model. The estimates of fair value of in-place leases
includes an estimate of carrying costs during the expected lease-up periods for
the respective spaces considering current market conditions. In estimating the
carrying costs that would have otherwise been incurred had the leases not been
in place, we include such items as real estate taxes, insurance and other
operating expenses as well as lost rental revenue during the expected lease-up
period based on current market conditions. The estimates of the fair value of
tenant relationships also include costs to execute similar leases including
leasing commissions, legal and tenant improvements as well as an estimate of the
likelihood of renewal as determined by management on a tenant-by-tenant basis.
We amortize the value of in-place leases and in-place tenant
improvements 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 anticipated renewal periods, but in no event does the
amortization period for intangible
25
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.
OVERVIEW
We are organized to invest in commercial real estate properties
(generally institutional quality office buildings and other commercial
properties) and lease each property to one or more tenants. In addition, we may
make or purchase mortgage loans secured by the types of properties we may
acquire directly. We operate as a real estate investment trust, or REIT, for
federal and state income tax purposes.
In the year ended December 31, 2004, we purchased one real estate
property and tenant-in-common interests in five other properties. As of December
31, 2004, we owned, through direct ownership or tenant-in-common interests, a
portfolio of seven properties located in Minnesota, Missouri, Texas, Colorado,
Maryland and Washington, D.C.
In February 2005, we completed our initial offering of common stock with
gross offering proceeds as of December 31, 2004 of $130,594,477. On February 11,
2005, our second public offering was declared effective for up to 80,000,000
shares of common stock at $10.00 per share and the issuance of up to 16,000,000
shares of common stock at $9.50 per share which may be distributed pursuant to
our distribution reinvestment program.
RESULTS OF OPERATIONS
At December 31, 2004, we had a 100% direct ownership of one property
(the Cyprus Building) and tenant-in-common interests in six additional
properties. At December 31, 2003, we owned a tenant-in-common interest in only
one property. Accordingly, our results of operations for the fiscal year ended
December 31, 2004, as compared to the fiscal year ended December 31, 2003,
reflect significant increases in all categories.
FISCAL YEAR ENDED DECEMBER 31, 2004 AS COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 2003
REVENUE. Rental revenue for the year ended December 31, 2004 of $129,981
was from the Cyprus Building, a 100% directly owned property, which we acquired
on December 16, 2004. During the year ended December 31, 2003, we did not have
any rental revenue. Management expects increases in rental revenue in the future
as we purchase additional real estate properties. Under the accounting policies
described above, rents from properties in which we own a tenant-in-common
interest are not recorded as revenue to us.
OPERATING EXPENSE. Property operating expenses for the year ended
December 31, 2004 were $1,959 and were comprised of operating expenses from the
Cyprus Building, a 100% directly owned property, that we acquired on December
16, 2004. During the year ended December 31, 2003, we did not have any property
operating expenses. Management expects increases in property operating expenses
in the future as we purchase additional real estate properties. Under the
accounting policies described above, operating expenses of properties in which
we own a tenant-in-common interest are not recorded as operating expenses to us.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2004
was $1,689,994 and was comprised of interest expense and amortization of
deferred financing fees related to our mortgages associated with all six of our
tenant-in-common interest investments. During the year ended December 31, 2003,
interest expense was $60,833 and was comprised of interest expense and
amortization of deferred financing fees related to our mortgage associated with
our tenant-in-common interest in the Minnesota Center. Management expects
increases in interest expense in the future as we purchase and invest in
additional real estate properties.
RATE LOCK EXTENSION EXPENSE. Rate lock extension expense for the year
ended December 31, 2004 was $525,000 and represented non-refundable fees related
to interest rate lock deposits on future borrowings for future acquisitions.
There was no rate lock extension expense for the year ended December 31, 2003.
We may or may not enter into similar rate lock agreements with such fees in the
future.
PROPERTY MANAGEMENT FEES. Property management fees for the year ended
December 31, 2004 were $205,515 and were comprised of property management fees
associated with the Cyprus Building and all six of our tenant-in-common interest
investments. During the year ended December 31, 2003, property management fees
were $7,148 and were comprised of property management fees related to our
tenant-in-common interest in
26
the Minnesota Center. Management expects increases in property management fees
in the future as we invest in additional real estate properties.
ASSET MANAGEMENT FEES. Asset management fees for the year ended December
31, 2004 were $89,596 and were comprised of asset management fees associated
with the Cyprus Building and all six of our tenant-in-common interest
investments. During the year ended December 31, 2003, asset management fees were
$3,072 and were comprised of asset management fees related to our
tenant-in-common interest in the Minnesota Center. Management expects increases
in asset management fees in the future as we invest in additional real estate
properties.
ORGANIZATION EXPENSE. Organization expense for the year ended December
31, 2004 was $217,897 and was comprised of reimbursements to our advisor in
fiscal year 2004 related to organizational costs our advisor paid on our behalf.
This represents a portion of the 2.5% of gross offering proceeds paid to our
advisor for reimbursement of organization and offering expenses incurred in
connection with the Initial Offering. During the year ended December 31, 2003,
organization expense was $17,575. As of December 31, 2004, all organization
expenses incurred by our advisor have been reimbursed by us. Therefore,
management does not expect for this expense to recur in the future.
GENERAL & ADMINISTRATIVE EXPENSE. General and administrative expense for
the year ended December 31, 2004 was $711,603 and was comprised of corporate
general and administrative expenses including directors' and officers' insurance
premiums, transfer agent fees, auditing fees, legal fees and other
administrative expenses. During the year ended December 31, 2003, these expenses
totaled $222,648. The lower amount in 2003 was due to less corporate activity in
that fiscal year.
INTEREST INCOME. Interest income for the year ended December 31, 2004
was $389,737 and was comprised of interest income associated with funds on
deposits with banks. As we admit new stockholders, subscription proceeds are
released to us and may be utilized as consideration for investments in real
properties 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 and earn interest income. During the year ended December 31, 2003,
we earned $3,767 in interest income, a significantly lower amount than in 2004
due to the lower cash balances on deposit with banks.
EQUITY IN EARNINGS OF INVESTMENTS IN TENANT-IN-COMMON INTERESTS. Equity
in earnings of investments in tenant-in-common interests for the year ended
December 31, 2004 were $1,402,847 and were comprised of our share of equity in
the earnings of all six of our tenant-in-common interests. During the year ended
December 31, 2003, we owned only one tenant-in-common interest in the Minnesota
Center, resulting in equity in earnings of investments in tenant-in-common
interests of $18,176.
FISCAL YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE PERIOD OF JUNE 28, 2002
(DATE OF INCEPTION) THROUGH DECEMBER 31, 2002
We commenced active operations when we received and accepted
subscriptions for a minimum of $2,500,000 pursuant to the Initial Offering on
October 1, 2003 and made our first real estate acquisition on October 15, 2003
with the purchase of an undivided 14.4676% tenant-in-common interest in the
Minnesota Center. As a result, our consolidated financial results for the year
ended December 31, 2003 are not comparable to results for the period from June
28, 2002 (date of inception) through December 31, 2002.
Results of operations for the year ended December 31, 2003 consisted
primarily of the following:
INTEREST EXPENSE. Interest expense of $60,833, including amortization of
financing fees of $2,730, related to our acquisition in October 2003 of a
tenant-in-common interest investment in the Minnesota Center.
PROPERTY MANAGEMENT FEES. Property management fees of $7,148 consisted
of property management and leasing fees incurred in relation to our acquisition
in October 2003 of a tenant-in-common interest investment in the Minnesota
Center.
27
ASSET MANAGEMENT FEES. Asset management fees of $3,072 consisted of
asset management fees incurred in relation to our acquisition in October 2003 of
a tenant-in-common interest investment in the Minnesota Center.
ORGANIZATION EXPENSE. Organization expense for the year ended December
31, 2003 was $17,575 and was comprised of reimbursements to our advisor related
to organizational costs it paid on our behalf. This represents a portion of the
2.5% of gross offering proceeds paid to our advisor for reimbursement of
organization and offering expenses incurred in connection with the Initial
Offering.
GENERAL & ADMINISTRATIVE EXPENSES. General and administrative expense of
$222,648 included a full year of corporate overhead and administrative start-up
expenses.
INTEREST INCOME. Interest income of $3,767 included a full year of
interest income on funds on deposit.
EQUITY IN EARNINGS OF INVESTMENTS IN TENANT-IN-COMMON INTERESTS. Equity
in earnings of investments in tenant-in-common interests of $18,176 represented
our interest in the operations of the Minnesota Center for 2.5 months.
Results in the period from June 28, 2002 (date of inception) through
December 31, 2002 consisted of general and administrative start-up expenses and
interest income on funds held by us.
CASH FLOW ANALYSIS
At December 31, 2004, we owned one property and tenant-in-common
interests in six properties. At December 31, 2003, we owned a tenant-in-common
interest in only one property. As a result, our cash flows for the year ended
December 31, 2004 are not comparable to the cash flows for the year ended
December 31, 2003.
Cash flows used in operating activities for the year ended December 31,
2004 were $(148,147) and were primarily comprised of the net loss of
$(1,538,966) adjusted for equity in earnings of investments in tenant-in-common
interests of $(1,402,847) partially offset by distributions from our investment
in tenant-in-common interests of $1,586,299 and changes in working capital
accounts of $1,154,986 . During the year ended December 31, 2003, cash flows
used in operating activities were $(129,857). The lesser amount in 2003 is
primarily due to fewer real estate investments and less corporate activity in
that fiscal year.
Cash flows used in investing activities for the year ended December 31,
2004 were $(157,864,996) and were comprised of purchases of tenant-in-common
interests in five properties totaling $(127,526,286), purchase of the Cyprus
Building for $(20,645,160) and deposits totaling $(9,693,550) made in connection
with the acquisition of a tenant-in-common interest in an office building
located in Atlanta, Georgia that closed on January 6, 2005, the acquisition of
an office building in Denver, Colorado that closed on February 24, 2005 and rate
lock deposits on future borrowings for future acquisitions. During the year
ended December 31, 2003, cash flows from investing activities were $(6,441,466)
and were comprised primarily of the purchase of a tenant-in-common interest in
the Minnesota Center.
Cash flows from financing activities for the year ended December 31,
2004 were $178,933,430 and were comprised primarily of funds received from the
issuance of stock, net of offering costs of $106,851,838 and proceeds from
mortgage notes of $78,065,060. During the year ended December 31, 2003, cash
flows from financing activities were $11,521,889 and were comprised primarily of
funds received from the issuance of stock and proceeds from the mortgage note
associated with our tenant-in-common interest in the Minnesota Center.
LIQUIDITY AND CAPITAL RESOURCES
Our principal demands for funds will continue to be for property
acquisitions, either directly or through investment interests, for mortgage loan
investments, for the payment of operating expenses and distributions, and for
the payment of interest on our outstanding indebtedness. Generally, cash needs
for items other than property acquisitions and mortgage loan investments are
expected to be met from operations, and cash needs for property acquisitions are
expected to be met from the net proceeds of the Current Offering and other
offerings of our securities. However, there may be a delay between the sale of
our shares and our purchase of properties or mortgage loan investments and
receipt of income from such purchase, which could result in a delay in the
28
benefits to our stockholders of returns generated from our operations. We expect
that at least 87.1% of the money that stockholders invest in the Current
Offering will be used to buy real estate, make or invest in mortgage loans or
make other investments and approximately 3.5% of the gross proceeds of the
Current Offering will be used for payment of fees and expenses related to the
selection and acquisition of the investments and for initial working capital
reserves for such properties. The remaining 9.4% will be used to pay acquisition
and advisory fees and acquisition expenses. Our advisor evaluates potential
property acquisitions and mortgage loan investments and engages in negotiations
with sellers and borrowers on our behalf. After a contract for the purchase of a
property is executed, the property will not be purchased until the substantial
completion of due diligence. During this period, we may decide to temporarily
invest any unused proceeds from the Current Offering in investments that could
yield lower returns than the properties. These lower returns may affect our
ability to make distributions.
The amount of distributions to be distributed to our stockholders will
be determined by our board of directors and is dependent on a number of factors,
including funds available for payment of distributions, financial condition,
capital expenditure requirements and annual distribution requirements needed to
maintain our status as a REIT under the Internal Revenue Code. Until proceeds
from our offerings are invested and generating operating cash flow sufficient to
make distributions to stockholders, we intend to pay all or a substantial
portion of our distributions from the proceeds of such offerings or from
borrowings in anticipation of future cash flow. Of the amounts distributed by us
in 2004, 91.3% represented a return of capital and 8.7% were ordinary
distributions.
We used borrowings of $4,340,280 (the "Minnesota Center Loan") under a
non-recourse loan agreement with Greenwich Capital Financial Products, Inc (the
"Minnesota Center Loan Agreement") to pay a portion of our 14.4676%
tenant-in-common interest in the Minnesota Center. The remaining
tenant-in-common interests in the Minnesota Center were acquired by various
investors who purchased their interests in a private offering sponsored by our
affiliate, Behringer Holdings. Each tenant-in-common investor, including us, is
a borrower under the Minnesota Center Loan Agreement. The original total
borrowings of all tenant-in-common interest holders under the Minnesota Center
Loan Agreement were $30,000,000. The Minnesota Center Loan accrues interest at
6.181%, and requires principal and interest payments monthly based on a 30-year
amortization period, with any unamortized principal due at maturity on November
1, 2010. The Minnesota Center Loan Agreement requires a minimum debt coverage
ratio of not less than 1.10 and permits no prepayment until the earlier of (i)
42 months following inception of the Minnesota Center Loan or (ii) two years
after securitization ("Minnesota Center Lockout Period"). Certain obligations
under the Minnesota Center Loan are guaranteed by Robert M. Behringer and
Behringer Holdings. The Minnesota Center Loan may only be prepaid after the
Minnesota Center Lockout Period. As of December 31, 2004, our outstanding
principal balance under the Minnesota Center Loan was $4,288,896.
We used borrowings of $7,262,552 (the "Enclave Loan") under a loan
agreement (the "Enclave Loan Agreement") with State Farm Life Insurance Company
to pay a portion of the purchase price for our undivided 36.31276%
tenant-in-common interest in Enclave on the Lake. The remaining tenant-in-common
interests in Enclave on the Lake were acquired by various investors who
purchased their interests in a private offering sponsored by our affiliate,
Behringer Holdings. Each tenant-in-common investor, including us, is a borrower
under the Enclave Loan Agreement. The original total borrowings of all
tenant-in-common interest holders under the Enclave Loan Agreement were
$20,000,000. The interest rate under the Enclave Loan is fixed at 5.45% per
annum and requires principal and interest payments monthly based on a 30-year
amortization period, with any unamortized principal due at maturity. Certain
obligations under the Enclave Loan are guaranteed by Robert M. Behringer and
Behringer Holdings. The Enclave Loan Agreement allows for prepayment of the
entire outstanding principal after 42 months from the date of the Enclave Loan
Agreement subject to the payment of a prepayment penalty. No prepayment penalty
is due after 81 months from the date of the Enclave Loan Agreement. The Enclave
Loan has a seven-year term. As of December 31, 2004, our outstanding principal
balance under the Enclave Loan was $7,208,922.
We used borrowings of $7,141,850 (the "St. Louis Place Loan") under a
loan agreement (the "St. Louis Place Loan Agreement") with Greenwich Capital
Financial Products, Inc. to pay a portion of our undivided
29
35.709251% tenant-in-common interest in St. Louis Place. The remaining
tenant-in-common interests in St. Louis Place were acquired by various investors
who purchased their interests in a private offering sponsored by our affiliate,
Behringer Holdings. Each tenant-in-common investor, including us, is a borrower
under the St. Louis Place Loan Agreement. The original total borrowings of all
tenant-in-common interest holders under the St. Louis Place Loan Agreement were
$20,000,000. The interest rate under the St. Louis Place Loan is fixed at 6.078%
per annum and requires principal and interest payments monthly based on a
30-year amortization period, with any unamortized principal due at maturity.
Certain obligations under the St. Louis Place Loan are guaranteed by Robert M.
Behringer and Behringer Holdings. The St. Louis Place Loan Agreement requires a
minimum debt coverage ratio of not less than 1.10 and prohibits prepayment until
the earlier of (i) 42 months or (ii) two years after securitization, after which
and prior to month 81, it may be defeased. The St. Louis Place Loan Agreement
has a seven-year term. As of December 31, 2004, our outstanding principal
balance under the St. Louis Place Loan was $7,110,134.
We used borrowings of $19,868,791 (the "Colorado Property Loan") under a
loan agreement (the "Colorado Property Loan Agreement") with Greenwich Capital
Financial Products, Inc. to pay a portion of our undivided 79.4752%
tenant-in-common interest in the Colorado Building. Additional borrowings of
$2,384,255 have been made by us under this loan for tenant improvements. The
remaining tenant-in-common interests in the Colorado Building were acquired by
various investors who purchased their interests in a private offering sponsored
by our affiliate, Behringer Holdings. Each tenant-in-common investor, including
us, is a borrower under the Colorado Property Loan Agreement. The original total
borrowings of all tenant-in-common interest holders under the Colorado Property
Loan Agreement were $25,000,000. Total additional borrowings of $3,000,000 were
available under this loan agreement for tenant improvements and all $3,000,000
had been borrowed as of December 31, 2004. The interest rate under the Colorado
Property Loan is fixed at 6.075% per annum. The Colorado Property Loan Agreement
requires monthly payments of interest based on a 30-year amortization period,
with monthly payments of principal and interest required beginning October 2009
and any unamortized principal due at maturity. Certain obligations under the
Colorado Property Loan are guaranteed by Robert M. Behringer and Behringer
Holdings. The Colorado Property Loan Agreement requires a minimum debt coverage
ratio of not less than 1.10 and allows for prepayment of the entire outstanding
principal with no prepayment fee from and after the third payment prior to
maturity, with at least 15 days prior notice. The Colorado Property Loan
Agreement has a ten-year term. As of December 31, 2004, our outstanding
principal balance under the Colorado Property Loan was $22,253,046.
We used borrowings of $22,812,411 (the "Travis Tower Loan") under a loan
agreement (the "Travis Tower Loan Agreement") with Bear Stearns Commercial
Mortgage, Inc. to pay a portion of our undivided 60.430229% tenant-in-common
interest in the Travis Tower. The remaining tenant-in-common interests in the
Travis Tower were acquired by various investors who purchased their interests in
a private offering sponsored by our affiliate, Behringer Holdings. Each
tenant-in-common investor, including us, is a party to the Travis Tower Loan
Agreement. The total borrowings of all tenant-in-common interest holders under
the Travis Tower Loan Agreement were $37,750,000. The interest rate under the
Travis Tower Loan Agreement is fixed at 5.434% per annum. Certain obligations
under the Travis Tower Loan are guaranteed by Robert M. Behringer and Behringer
Holdings. The Travis Tower Loan Agreement requires a minimum debt coverage ratio
of not less than 1.65 and allows for prepayment of the entire outstanding
principal with no prepayment fee during the last three months prior to maturity.
The Travis Tower Loan Agreement has a ten-year term. As of December 31, 2004,
our outstanding principal balance under the Travis Tower Loan was $22,741,375.
We used borrowings of $18,751,582 (the "Pratt Loan") under a loan
agreement (the "Pratt Loan Agreement") with Citigroup Global Markets Realty
Corporation to pay a portion of our undivided 50.67995% tenant-in-common
interest in the Pratt Building. The remaining tenant-in-common interests in the
Pratt Building were acquired by various investors who purchased their interests
in a private offering sponsored by our affiliate, Behringer Holdings. Each
tenant-in-common investor, including us, is a party to the Pratt Loan Agreement.
The total borrowings of all tenant-in-common interest holders under the Pratt
Loan Agreement were $37,000,000. The interest rate under the Pratt Loan
Agreement is fixed at 5.285% per annum. Certain obligations under the Pratt Loan
are guaranteed by Robert M. Behringer and Behringer Holdings. The Pratt Loan
Agreement requires a minimum debt coverage ratio of not less than 1.10 and
allows for prepayment of the
30
entire outstanding principal with no prepayment fee during the last three months
prior to maturity. The Pratt Loan Agreement has a ten-year term. As of December
31, 2004, our outstanding principal balance under the Pratt Loan was
$18,751,582.
On December 30, 2004, we entered into a Revolving Credit Agreement with
Bank of America, N.A. for up to $12,000,000 of available borrowings ("the
"Revolver"). The Revolver has a two-year term with the option to extend for one
additional year. The Cyprus Building, which we acquired on December 16, 2004, is
subject to a deed of trust to secure payment of the revolver. We can borrow,
repay and reborrow again up to the available borrowing limit. As of December 31,
2004, we had no outstanding borrowings under the Revolver.
We expect to meet our future short-term operating liquidity requirements
through net cash provided by our current property operations and the operations
of properties to be acquired in the future. Management also expects that our
properties will generate sufficient cash flow to cover operating expenses plus
pay a monthly distribution. Currently, a portion of the distributions are paid
from cash provided by operations and a portion is paid from sales of securities.
Of the distributions declared in 2004, 91.3% represented a return of capital and
8.7% was ordinary distributions. Operating cash flows are expected to increase
as additional properties are added to the portfolio. 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, we may use financings or other sources of
capital in the event of unforeseen significant capital expenditures.
FUNDS FROM OPERATIONS
Funds from operations ("FFO") is a non-GAAP financial measure that is
widely recognized as a measure of REIT operating performance. Funds from
operations is defined by the National Association of Real Estate Investment
Trusts as net income, computed in accordance with GAAP excluding extraordinary
items, as defined by GAAP, and gains (or losses) from sales of property, plus
depreciation and amortization on real estate assets, and after adjustments for
unconsolidated partnerships, joint ventures and subsidiaries. We believe that
funds from operations is helpful to investors and our management as a measure of
operating performance because it excludes depreciation and amortization, gains
and losses from property dispositions, and extraordinary items, and as a result,
when compared year to year, reflects the impact on operations from trends in
occupancy rates, rental rates, operating costs, development activities, general
and administrative expenses, and interest costs, which is not immediately
apparent from net income. Historical cost accounting for real estate assets in
accordance with GAAP implicitly assumes that the value of real estate diminishes
predictability over time. Since real estate values have historically risen or
fallen with market conditions, many industry investors and analysts have
considered the presentation of operating results for real estate companies that
use historical cost accounting alone to be insufficient. As a result, our
management believes that the use of FFO, together with the required GAAP
presentations, provide a more complete understanding of our performance and a
more informed and appropriate basis on which to make decisions involving
operating, financing and investing activities. Factors that impact FFO include
start-up costs, fixed costs, delay in buying assets as offering proceeds become
available, income from portfolio properties and other portfolio assets, interest
rates on acquisition financing and operating expenses. FFO should not be
considered as an alternative to net income, as an indication of our liquidity,
nor is it indicative of funds available to fund our cash needs, including our
ability to make distributions. Our calculation of FFO for the year ended
December 31, 2004 is presented below:
31
Year ended
December 31, 2004
--------------------------
Net loss $ (1,538,966)
Preferred stock dividends -
--------------------------
Net loss allocable to common stock (1,538,966)
Real estate depreciation (1) 1,097,355
Real estate amortization (1) 1,027,368
Gain (loss) on sale of properties -
Impairment of long-lived assets -
Extraordinary loss -
--------------------------
Funds from operations (FFO) $ 585,757
==========================
Distributions paid $ 3,086,117
Distributions declared $ 3,784,055
- -----------------------
(1) This represents our proportionate share of the depreciation and amortization
expense of the properties in which we own tenant-in-common interests. These
expenses are reflected in our equity in earnings from these tenant-in-common
investments for the year ended December 31, 2004.
During 2004, although we made substantial progress in the growth of FFO,
our FFO was impacted by start-up costs, fixed costs being a substantial amount
in relation to our income, and dilution caused by normal delay in applying the
net proceeds of our Initial Offering to the acquisition of assets. In addition,
we incurred a one-time charge of $525,000 related to the securing of an interest
rate lock for future long-term borrowings. Although this charge impacted FFO in
2004, the rate locked funds are expected to enhance FFO over a 10-year period
through the provision of long-term financing at favorable rates to us for future
property acquisition. We believe FFO during our ongoing offering of common stock
will be positively affected if we are able to promptly apply the net proceeds of
such raise to property acquisitions. Conversely, we expect that FFO during our
ongoing offering of common stock may suffer to the extent that we are not
promptly able to identify and acquire assets that satisfy our investment
parameters.
During 2004, we declared and paid distributions in excess of FFO and
expect to continue to do so in the near-term during 2005. However, over the
long-term we expect that we will make distributions out of FFO (except to the
extent of distributions from the sale of our assets). However, given the
uncertainty arising from numerous factors, including both the raising and
placing of capital in the current real estate environment, ultimate FFO
performance cannot be predicted with certainty. For example, if we are not able
to timely invest net proceeds of our offering at favorable yields, future
distributions declared and paid may exceed FFO and may result in a significant
portion of distributions continuing to represent a return of capital rather than
distributions from the results of real estate operations.
OFF-BALANCE SHEET ARRANGEMENTS
On January 28, 2004, we entered into an agreement with Behringer
Holdings (the "Accommodation Agreement") whereby we would provide loan
guarantees to Behringer Holdings, so that Behringer Holdings may use such loan
guarantees to secure short-term loans from lenders to fund acquisition and
syndication costs related to acquiring real estate projects for tenant-in-common
syndication. Each guaranty will be for a period not to exceed six months and
shall be limited to no more than $1,000,000. Behringer Holdings must pay us a 1%
fee of any loan we guarantee for each six-month period. During February 2004, we
placed $2,500,000 in restricted money market accounts with lenders as security
for funds advanced to Behringer Holdings.
On August 9, 2004, the Accommodation Agreement was amended and restated
to include (1) options to extend the six month guaranty period for one or more
additional six-month periods, with an additional 1% fee payable on the date of
each extension; and (2) the option for our guarantees to include the guarantee
of bridge loans. A bridge loan, as defined in the Amended and Restated
Accommodation Agreement, is any loan pursuant to which Behringer Holdings
acquires an interest in respect of a project, which interest is intended to be
sold in a tenant-in-common offering. Each bridge guaranty is limited to no more
than the obligations under the bridge loan. The term and fees associated with
the bridge guarantees are the same as those of the other guarantees allowed
under this agreement. We or our affiliates have the right, but not an
obligation, to purchase at least a 5% interest in each project with respect to
which we make a guaranty. Our purchase price for each 1% interest in a project
will equal the price paid by Behringer Holdings, plus a pro rata share of the
closing costs. As of December 31, 2004, we had no loan guarantees outstanding on
borrowings by Behringer Holdings.
We have no other off-balance sheet arrangements that are reasonably
likely to have a current or future material effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
32
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of
December 31, 2004:
Principal Payments due by period
------------------------------------------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
-------------------------------------------------------------------------------------------------
Mortgage notes payable
Minnesota Center $ 4,288,896 $ 51,035 $ 112,158 $ 126,305 $ 3,999,398
Enclave on the Lake 7,208,922 101,916 221,236 246,654 6,639,116
St. Louis Place 7,110,134 82,295 180,572 202,908 6,644,359
Colorado Property 22,253,046 - - 62,072 22,190,974
Travis Tower 22,741,375 297,600 646,600 718,104 21,079,071
Pratt Building 18,751,582 - 229,201 534,064 17,988,317
-------------------------------------------------------------------------------------------------
$ 82,353,955 $ 532,846 $ 1,389,767 $ 1,890,107 $ 78,541,235
=================================================================================================
Interest Payments due by period
------------------------------------------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
-------------------------------------------------------------------------------------------------
Mortgage notes payable
Minnesota Center $ 1,530,636 $ 267,317 $ 524,547 $ 510,401 $ 228,371
Enclave on the Lake 2,392,858 390,185 762,966 737,549 502,158
St. Louis Place 2,763,968 435,838 855,695 833,359 639,076
Colorado Property 13,135,201 1,370,649 2,741,297 2,744,735 6,278,520
Travis Tower 11,317,070 1,245,400 2,439,399 2,367,895 5,264,376
Pratt Building 9,571,613 988,268 2,004,414 1,960,827 4,618,104
-------------------------------------------------------------------------------------------------
$ 40,711,346 $ 4,697,657 $ 9,328,318 $ 9,154,766 $ 17,530,605
=================================================================================================
NEW ACCOUNTING PRONOUNCEMENTS
FASB No. 123R, "Share-Based Payment," a revision to FASB No. 123
"Accounting for Stock-Based Compensation" was issued in December 2004. The
Statement supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related implementation guidance. This statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions and requires the measurement and
recognition of the cost of the employee services received in exchange for an
award of equity instruments for goods or services. The Statement, which is
effective as of the beginning of the first interim or annual reporting period
that begins after June 15, 2005, is not expected to have a material effect on
our financial condition, results of operations, or liquidity.
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 our leases 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.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to interest rate changes primarily as a result of
long-term debt used to acquire properties. Our interest rate risk management
objectives will be to limit the impact of interest rate changes on earnings and
cash flows and to lower overall borrowing costs. To achieve these objectives, we
borrow primarily at fixed rates or variable rates with the lowest margins
available and in some cases, the ability to convert variable rates to fixed
rates. With regard to variable rate financing, we will assess interest rate cash
flow risk by continually identifying and monitoring changes in interest rate
exposures that may adversely impact expected future cash flows and by evaluating
hedging opportunities.
We do not have any foreign operations and thus we are 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 our Consolidated Financial Statements beginning on page F-1 of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Within the 90-day period prior to the filing of this report, our
management evaluated, with the participation of our principal executive officer
and principal financial officer, the effectiveness of our disclosure controls
and procedures as of December 31, 2004. Based on that evaluation, our principal
executive officer and principal financial officer have concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report. To these officers' knowledge, there were no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
ITEM 9B. OTHER INFORMATION.
None.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item will be presented in our
definitive proxy statement for the annual meeting of stockholders to be held on
May 31, 2005, which will be filed with the Securities and Exchange Commission on
or about May 2, 2005, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item will be presented in our
definitive proxy statement for the annual meeting of stockholders to be held on
May 31, 2005, which will be filed with the Securities and Exchange Commission on
or about May 2, 2005, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required by this Item will be presented in our
definitive proxy statement for the annual meeting of stockholders to be held on
May 31, 2005, which will be filed with the Securities and Exchange Commission on
or about May 2, 2005, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be presented in our
definitive proxy statement for the annual meeting of stockholders to be held on
May 31, 2005, which will be filed with the Securities and Exchange Commission on
or about May 2, 2005, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item will be presented in our
definitive proxy statement for the annual meeting of stockholders to be held on
May 31, 2005, which will be filed with the Securities and Exchange Commission on
or about May 2, 2005, and is incorporated herein by reference.
35
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(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
Report of Independent Registered Public Accounting Firm
Schedule III Real Estate and Accumulated Depreciation
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) EXHIBITS.
The exhibits filed in response to Item 601 of Regulation S-K are listed
on the Exhibit Index attached hereto.
(c) FINANCIAL STATEMENT SCHEDULES.
We are required to file the following separte audited financial
statements of our unconsolidated subsidiary which is filed as part of
this report:
The Colorado Building
All financial statement schedules, except for Schedule III (see (a) 2.
above), 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.
36
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 REIT I, INC.
Dated: March 31, 2005 By: /s/ Robert M. Behringer
--------------------------------
Robert M. Behringer
President, Chief Investment
Officer, Chief Executive
Officer and Chairman of the
Board of Directors
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 31, 2005 /s/ Robert M. Behringer
--------------------------------
Robert M. Behringer
President, Chief Investment
Officer, Chief Executive Officer
and Chairman of the Board of
Directors (Principal Executive
Officer)
March 31, 2005 /s/ Robert S. Aisner
--------------------------------
Robert S. Aisner
Chief Operating Officer and
Director
March 31, 2005 /s/ Gary S. Bresky
--------------------------------
Gary S. Bresky
Chief Financial Officer and
Treasurer (Principal Financial
Officer)
March 31, 2005 /s/ Kimberly Arianpour
--------------------------------
Kimberly Arianpour
Chief Accounting Officer
(Principal Accounting Officer)
March 31, 2005 /s/ Charles G. Dannis
--------------------------------
Charles G. Dannis
Director
March 31, 2005 /s/ Steven W. Partridge
--------------------------------
Steven W. Partridge
Director
March 31, 2005 /s/ G. Ronald Witten
--------------------------------
G. Ronald Witten
Director
37
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-3
Consolidated Statements of Operations for the Years ended
December 31, 2004 and 2003 and for the period from
June 28, 2002 (date of inception) through December 31, 2002 F-4
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 2004 and 2003 and for the period from
June 28, 2002 (date of inception) through December 31, 2002 F-5
Consolidated Statements of Cash Flows for the Years ended
December 31, 2004 and 2003 and for the period from June 28, 2002
(date of inception) through December 31, 2002 F-6
Notes to Consolidated Financial Statements F-7
FINANCIAL STATEMENTS OF THE COLORADO BUILDING
Report of Independent Auditors on Financial Statements of the
Colorado Building F-24
The Colorado Building Combined Balance Sheet as of December 31, 2004 F-25
The Colorado Building Combined Statement of Operations for the period
from August 10, 2004 (date of acquisition) through December 31, 2004 F-26
The Colorado Building Combined Statement of Tenant-in-Common interests
for the period from August 10, 2004 (date of acquisition) through
December 31, 2004 F-27
The Colorado Building Statement of Combined Cash Flows for the period
from August 10, 2004 (date of acquisition) through December 31, 2004 F-28
Notes to Combined Financial Statements F-29
FINANCIAL STATEMENT SCHEDULES
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedules F-35
Schedule III - Real Estate and Accumulated Depreciation F-36
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Behringer Harvard REIT I, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Behringer Harvard REIT I, Inc. and its subsidiaries at December 31, 2004 and
2003, and the results of their operations and their cash flows for the years
ended December 31, 2004 and 2003 and for the period from June 28, 2002 (date of
inception) through December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company'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 the standards of the
Public Company Accounting Oversight Board (United States). Those standards
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 31, 2005
F-2
BEHRINGER HARVARD REIT I, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2004 2003
------------- -------------
ASSETS
REAL ESTATE
Land $ 2,056,361 $ -
Buildings 15,500,115 -
Acquired in-place lease intangibles 4,431,302 -
------------- -------------
TOTAL REAL ESTATE 21,987,778 -
Cash and cash equivalents 26,067,143 5,146,856
Restricted cash 5,446,643 10,492
Prepaid expenses and other assets 155,473 77,837
Escrow deposits 9,693,550 -
Investments in tenant-in-common interests 133,702,656 6,359,823
Deferred financing fees, net of accumulated amortization of
$55,111 and $2,730, respectively 1,634,443 89,533
Receivables from affiliates 200,747 -
------------- -------------
TOTAL ASSETS $ 198,888,433 $ 11,684,541
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgages payable $ 82,353,955 $ 4,332,656
Accounts payable 881,296 18,068
Payables to affiliates - 76,608
Acquired below market leases 1,236,682 -
Dividends payable 739,932 41,994
Accrued liabilities 809,196 133,867
Subscriptions for common stock 2,946,034 9,977
------------- -------------
TOTAL LIABILITIES 88,967,095 4,613,170
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value per share;
50,000,000 shares authorized, none outstanding - -
Common stock, $.0001 par value per share;
350,000,000 shares authorized, 13,109,282 and
843,878 shares issued and outstanding at December 31,
2004 and December 31, 2003, respectively 1,311 84
Additional paid-in capital 115,626,494 7,454,733
Cumulative distributions and net loss (5,706,467) (383,446)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 109,921,338 7,071,371
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 198,888,433 $ 11,684,541
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
BEHRINGER HARVARD REIT I, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FROM INCEPTION
YEAR YEAR (JUNE 28, 2002)
ENDED ENDED THROUGH
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
------------------- ------------------- -------------------
Revenues
Rental revenue $ 129,981 $ - $ -
------------------- ------------------- -------------------
Total revenues 129,981 -
Expenses
Property operating expense 1,959 - -
Interest 1,689,994 60,833 -
Rate lock extension expense 525,000 - -
Real estate taxes 19,967 - -
Property management fees 205,515 7,148 -
Asset management fees 89,596 3,072 -
Organization expenses 217,897 17,575 -
General and administrative 711,603 222,648 3,805
------------------- ------------------- -------------------
Total expenses 3,461,531 311,276 3,805
------------------- ------------------- -------------------
Operating loss (3,331,550) (311,276) (3,805)
Other income
Interest income 389,737 3,767 1,100
Equity in earnings of investments
in tenant-in-common interests 1,402,847 18,176 -
------------------- ------------------- -------------------
Total other income 1,792,584 21,943 1,100
------------------- ------------------- -------------------
Net loss $ (1,538,966) $ (289,333) $ (2,705)
=================== =================== ===================
Basic and diluted weighted
average shares outstanding 5,358,697 142,430 20,000
Basic and diluted loss per share $ (0.29) $ (2.03) $ (0.14)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
BEHRINGER HARVARD REIT I, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Peferred Stock Common Stock Cumulative
------------------- --------------------- Additional Distributions Total
Number Par Number Par Paid-in and Stockholders'
of Shares Value of Shares Value Capital Net Loss Equity
--------- --------- ----------- --------- ------------ ------------ ------------
Balance at June 28, 2002 (date of incept-on) - $ - - $ - $ - $ - $ -
Common stock issued to -
Behringer Harvard Holdings, LLC - - 20,000 2 199,998 - 200,000
Net loss (2,705) (2,705)
--------- --------- ----------- --------- ------------ ------------ ------------
Balance at December 31, 2002 - - 20,000 2 199,998 (2,705) 197,295
Issuance of common stock, net - - 821,399 82 7,229,945 - 7,230,027
Distributions declared on common stock
($0.18 per share) - - - - - (91,408) (91,408)
Shares issued pursuant to Distribution
Reinvestment Plan - - 2,479 - 24,790 - 24,790
Net loss (289,333) (289,333)
--------- --------- ----------- --------- ------------ ------------ ------------
Balance at December 31, 2003 - - 843,878 84 7,454,733 (383,446) 7,071,371
Issuance of common stock, net - - 12,133,123 1,214 106,850,624 - 106,851,838
Distributions declared on common stock
($0.70 per share) - - - - - (3,784,055) (3,784,055)
Shares issued pursuant to Distribution
Reinvestment Plan - - 132,281 13 1,321,137 - 1,321,150
Net loss (1,538,966) (1,538,966)
--------- --------- ----------- --------- ------------ ------------ ------------
Balance at December 31, 2004 - $ - 13,109,282 $ 1,311 $115,626,494 $ (5,706,467) $109,921,338
========= ========= =========== ========= ============ ============ ============
See Notes to Consolidated Financial Statements.
F-5
BEHRINGER HARVARD REIT I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FROM INCEPTION
(JUNE 28, 2002)
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
------------------- ------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,538,966) $ (289,333) $ (2,705)
Adjustments to reconcile net loss to net cash
flows used in operating activities
Amortization of deferred financing fees 52,381 2,730 -
Equity in earnings of investments in
tenant-in-common interests (1,402,847) (18,176) -
Distributions from investments 1,586,299 99,819 -
Change in prepaid expenses and other assets 122,363 (76,832) (1,005)
Change in accounts payable 863,228 18,068 -
Change in accrued liabilities 369,395 133,867 -
Change in receivables or payables to affiliates (200,000) - -
------------------- ------------------- ------------------
CASH USED IN OPERATING ACTIVITIES (148,147) (129,857) (3,710)
------------------- ------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of tenant-in-common interests (127,526,286) (6,441,466) -
Purchase of property (20,645,160) - -
Escrow deposits on properties to be acquired (9,693,550) - -
------------------- ------------------- ------------------
CASH USED IN INVESTING ACTIVITIES (157,864,996) (6,441,466) -
------------------- ------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Financing costs (1,597,291) (92,263) -
Proceeds from mortgage notes 78,065,060 4,340,280 -
Payments on mortgage notes (43,761) (7,624) -
Issuance of common stock 121,053,024 8,195,512 -
Offering costs (14,201,186) (965,485) -
Distributions (1,764,967) (24,624) -
Change in subscriptions for common stock 2,936,057 9,977 -
Change in restricted cash (5,436,151) (10,492) -
Change in receivables or payables to affiliates (77,355) 76,608 -
------------------- ------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES 178,933,430 11,521,889 -
------------------- ------------------- ------------------
Net change in cash and cash equivalents 20,920,287 4,950,566 (3,710)
Cash and cash equivalents at beginning of period 5,146,856 196,290 200,000
------------------- ------------------- ------------------
Cash and cash equivalents at end of period $ 26,067,143 $ 5,146,856 $ 196,290
=================== =================== ==================
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 2,162,612 $ 58,103 $ -
NON-CASH FINANCING ACTIVITIES:
Common stock issued in distribution reinvestment plan $ 1,321,150 $ 24,790 $ -
Distributions payable in common stock under
distribution reinvestment plan $ 335,760 $ 22,403 $ -
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
BEHRINGER HARVARD REIT I, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
BUSINESS
Behringer Harvard REIT I, Inc. is a Maryland corporation formed in June
2002, which is making an election to qualify as a real estate investment trust
("REIT") for the tax year ended December 31, 2004. We were organized to invest
in commercial real estate properties (generally institutional quality office
buildings and other commercial properties) and lease each such property to one
or more tenants. We are currently offering our common stock pursuant to a public
offering that commenced on February 19, 2005 (the "Current Offering") and is
described below.
We commenced our initial public offering of shares of our common stock
(the "Initial Offering") on February 19, 2003 and commenced operations in
October 2003 upon our acceptance of initial subscriptions for 280,423 shares of
common stock, which satisfied the minimum offering requirement of $2,500,000
established for the Initial Offering. Prior to October 2003, we were considered
a development stage entity.
Substantially all of our business is conducted through Behringer Harvard
Operating Partnership I LP, a Texas limited partnership organized in 2002
("Behringer OP I"). We own a 0.1% interest in Behringer OP I as its general
partner. The remaining 99.9% of Behringer OP I is held as a limited partner's
interest by BHR Partners, LLC ("BHR Partners"), a Delaware limited liability
company which is our wholly-owned subsidiary.
Our advisor is Behringer Advisors LP ("Behringer Advisors"), a Texas
limited partnership formed in 2002. Behringer Advisors is our affiliate
responsible for managing our affairs on a day-to-day basis and for identifying
and making acquisitions and investments on our behalf.
ORGANIZATION
On February 19, 2003, we commenced our Initial Offering of up to
80,000,000 shares of common stock offered at a price of $10.00 per share
pursuant to a Registration Statement on Form S-11 filed under the Securities Act
of 1933. The Registration Statement also covered up to 8,000,000 shares
available pursuant to our distribution reinvestment plan and up to 3,520,000
shares issuable to broker-dealers pursuant to warrants whereby participating
broker-dealers would have the right to purchase one share for every 25 shares
they sell pursuant to the Initial Offering. The Initial Offering ended on
February 19, 2005.
On October 25, 2004, we filed a Registration Statement on Form S-3 under
the Securities Act of 1933 in respect to the Current Offering. The Registration
Statement was declared effective by the Securities and Exchange Commission on
February 11, 2005 and extends until February 11, 2007, unless earlier terminated
or fully subscribed.
The Registration Statement relating to the Current Offering covers
80,000,000 shares of our common stock plus an additional 16,000,000 shares of
common stock available pursuant to our distribution reinvestment plan.
As of December 31, 2004, we had accepted subscriptions for 13,109,282
shares of our common stock, including 20,000 shares owned by Behringer Harvard
Holdings, LLC ("Behringer Holdings"). As of December 31, 2004, we had no shares
of preferred stock issued and outstanding. On May 27, 2004, the independent
members of the Board of Directors were granted options to purchase a total of
9,000 shares of our common stock at an exercise price of $12.00 per share under
our Non-Employee Director Option Plan. These options vest on May 27, 2005 and
expire on May 27, 2009. As of December 31, 2004, all 9,000 stock options were
outstanding and none had been exercised.
We admit new stockholders pursuant to the Current Offering at least
monthly. All subscription proceeds are held in a separate account until the
subscribing investors are admitted as stockholders. Upon admission of new
stockholders, subscription proceeds are released to us and may 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.
F-7
Our common stock is not currently listed on a national exchange.
However, management anticipates listing the common stock on a national exchange
or liquidation of our assets on or before February 20, 2017. Depending upon then
prevailing market conditions, it is the intention of our management to consider
beginning the process of listing (or liquidation) prior to February 20, 2013. In
the event we do not obtain listing prior to February 20, 2017, unless a majority
of the board of directors and a majority of the independent directors extend
such date, our charter requires us to begin the sale of our properties and
liquidation of our assets.
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 the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. These estimates include such items as
purchase price allocation for real estate acquisitions, impairment of long-lived
assets, depreciation and amortization and allowance for doubtful accounts.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
Our consolidated financial statements include our accounts and the
accounts of our subsidiaries. All inter-company transactions, balances and
profits have been eliminated in consolidation. Interests in entities acquired
are evaluated based on Financial Accounting Standards Board Interpretation
("FIN") No. 46R "Consolidation of Variable Interest Entities", which requires
the consolidation of variable interest entities in which we are deemed to be the
primary beneficiary. If the interest in the entity is determined to not be a
variable interest entity under FIN No. 46R, then the entities are evaluated for
consolidation under the American Institute of Certified Public Accountants
("AICPA") Statement of Position 78-9 ("SOP 78-9") "Accounting for Investments in
Real Estate Ventures."
REAL ESTATE
Upon the acquisition of real estate properties, we allocate the purchase
price of those properties to the tangible assets acquired, consisting of land
and buildings, and identified intangible assets based on their fair values in
accordance with Statement of Financial Accounting Standards No. 141, "Business
Combinations." Identified intangible assets 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, is determined by valuing the property as if it were vacant, and the
"as-if-vacant" value is then allocated to land and buildings. Land values are
derived from appraisals, and building values are calculated as replacement cost
less depreciation or management's estimates of the relative fair value of these
assets using discounted cash flow analyses or similar methods. The value of the
building is depreciated over the estimated useful life of 25 years using the
straight-line method.
We determine the value of above-market and below-market in-place leases
for acquired properties based on the present value (using an interest rate that
reflects the risks associated with the leases acquired) of the difference
between (i) the contractual amounts to be 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. We record the fair value of
above-market and below-market leases as intangible assets or intangible
liabilities, respectively, and amortize them as an adjustment to rental income
over the remaining non-cancelable terms of the respective leases.
The total value of identified real estate intangible assets acquired is
further allocated to in-place lease values, in-place leasing commissions,
in-place tenant improvements and tenant relationships based on management's
evaluation of the specific characteristics of each tenant's lease and our
overall relationship with that respective tenant. The aggregate value for tenant
improvements and leasing commissions is based on estimates of these costs
incurred at inception of the acquired leases, amortized through the date of
acquisition. The aggregate value of in-place leases acquired and tenant
relationships is determined by applying a fair value model. The estimates of
fair
F-8
value of in-place leases includes an estimate of carrying costs during the
expected lease-up periods for the respective spaces considering current market
conditions. In estimating the carrying costs that would have otherwise been
incurred had the leases not been in place, management includes such items as
real estate taxes, insurance and other operating expenses as well as lost rental
revenue during the expected lease-up period based on current market conditions.
The estimates of the fair value of tenant relationships also include costs to
execute similar leases including leasing commissions, legal and tenant
improvements as well as an estimate of the likelihood of renewal as determined
by management on a tenant-by-tenant basis.
We amortize the value of in-place leases and in-place tenant
improvements 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 anticipated renewal periods, but in no event does the
amortization period for intangible assets exceed the remaining depreciable life
of the building. Should a tenant terminate its lease, the unamortized portion of
the in-place lease value and tenant relationship intangibles would be charged to
expense.
CASH AND CASH EQUIVALENTS
We consider investments in highly-liquid money market funds with
maturities of three months or less to be cash equivalents. The carrying amount
of cash and cash equivalents reported on the balance sheet approximates fair
value.
RESTRICTED CASH
Restricted cash includes subscription proceeds that are held in escrow
until investors are admitted as stockholders. We admit new stockholders at least
monthly. Upon acceptance of stockholders, shares of stock are issued and
subscription proceeds are released to us. Restricted cash as of December 31,
2004 also includes $2,500,000 held in restricted money market accounts as
security for our guarantee of funds borrowed by Behringer Holdings.
PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets includes prepaid directors and
officers insurance.
ESCROW DEPOSITS
Escrow deposits on properties to be acquired include deposits for the
purchase of properties that we have contracted to acquire and rate lock deposits
on future borrowings for future acquisitions.
INVESTMENTS IN TENANT-IN-COMMON INTERESTS
Investments in tenant-in-common interests consist of our undivided
tenant-in-common interests in various office buildings located in Minnesota,
Texas, Colorado, Missouri, Washington D.C., and Maryland. Consolidation of these
investments is not required as they do not qualify as variable interest entities
as defined in FIN No. 46R and do not meet the voting interest requirements
required for consolidation under SOP 78-9.
We account for these investments using the equity method of accounting
in accordance with SOP 78-9. The equity method of accounting requires these
investments to be initially recorded at cost and subsequently increased
(decreased) for our share of net income (loss), including eliminations for our
share of inter-company transactions and reduced when distributions are received.
We use the equity method of accounting because the shared decision-making
involved in a tenant-in-common interest investment creates an opportunity for us
to have some influence on the operating and financial decisions of these
investments and thereby creates some responsibility by us for a return on our
investment. Therefore, it is appropriate to include our proportionate share of
the results of operations of these investments in our earnings or losses.
INVESTMENT IMPAIRMENTS
For real estate we own directly, our management monitors events and
changes in circumstances indicating that the carrying amounts of the real estate
assets may not be recoverable. When such events or changes in circumstances are
present, we assess potential impairment by comparing estimated future
undiscounted operating cash flows expected to be generated over the life of the
asset and from its eventual disposition, to the carrying amount of the asset. In
the event that the carrying amount exceeds the estimated
future undiscounted operating cash flows, we recognize an impairment loss to
adjust the carrying amount of the asset to estimated fair value.
For real estate we own through an investment in a joint venture,
tenant-in-common interest or other similar investment structure, at each
reporting date management will compare the estimated fair value of our
investment to the carrying value. An impairment charge is recorded to the extent
the fair value of our investment is less than the carrying amount and the
decline in value is determined to be other than a temporary decline. No
impairment charges have been taken in 2003 or 2004.
DEFERRED FINANCING FEES
Deferred financing fees are recorded at cost and are amortized using the
effective interest method over the life of the related debt.
REVENUE RECOGNITION
We recognize rental income generated from all leases on real estate
assets in which we have an ownership interest, either directly or through
investments in joint ventures, on a straight-line basis over the terms of the
respective leases. Some leases contain provisions for the tenant's payment of
additional rent after certain tenant sales revenue thresholds are met. Such
contingent rent is recognized as revenue after the related revenue threshold is
met.
OFFERING COSTS
Our advisor funds all of the organization and offering costs on our
behalf. We are required to reimburse them for such organization and offering
costs up to 2.0% of the cumulative capital raised in the Current Offering (2.5%
of the cumulative capital raised in the Initial Offering). Organization and
offering costs include items such as legal and accounting fees, marketing,
promotional and printing costs, and specifically exclude internal salaries. All
offering costs are recorded as an offset to additional paid-in capital, and all
organization costs are recorded as an expense at the time we become liable for
the payment of these amounts.
INCOME TAXES
We have elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code, effective for our taxable year ending December 31,
2004. To qualify as a REIT, we must meet a number of organizational and
operational requirements, including a requirement that we distribute at least
90% of our taxable income to our stockholders. As a REIT, we generally will not
be subject to federal corporate income we distribute to our stockholders. We are
organized and operate in such a manner as to qualify for taxation as a REIT
under the Internal Revenue Code, and we intend to continue to operate in such a
manner, but no assurance can be given that we will operate in a manner so as to
qualify or remain qualified as a REIT.
STOCK BASED COMPENSATION
We have three stock-based employee and director compensation plans. We
account for these plans under the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," and related interpretations.
CONCENTRATION OF CREDIT RISK
At December 31, 2004, we had cash and cash equivalents and restricted
cash in excess of federally insured levels on deposit in four financial
institutions. We regularly monitor the financial stability of these financial
institutions and believe that we are not exposed to any significant credit risk
in cash and cash equivalents or restricted cash.
EARNINGS PER SHARE
Earnings per share are calculated based on the weighted average number
of common shares outstanding during each period. As of December 31, 2004, we had
issued to the independent members of the Board of Directors options to purchase
9,000 shares of our common stock at $12.00 per share. These options were
anti-dilutive for the year ended December 31, 2004.
F-10
3. NEW ACCOUNTING PRONOUNCEMENTS
FASB No. 123R, "Share-Based Payment," a revision to FASB No. 123
"Accounting for Stock-Based Compensation" was issued in December 2004. The
Statement supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related implementation guidance. This statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions and requires the measurement and
recognition of the cost of the employee services received in exchange for an
award of equity instruments for goods or services. The Statement, which is
effective as of the beginning of the first interim or annual reporting period
that begins after June 15, 2005, is not expected to have a material effect on
our financial condition, results of operations, or liquidity.
4. ACQUISITIONS
On April 12, 2004, we acquired an undivided 36.31276% tenant-in-common
interest in Enclave on the Lake, a 6-story office building containing
approximately 171,090 rentable square feet, located on approximately 6.75 acres
of land in Houston, Texas. The purchase price for our 36.31276% tenant-in-common
interest in Enclave on the Lake was approximately $10,600,000.
On June 30, 2004, we acquired an undivided 35.709251% tenant-in-common
interest in St. Louis Place, a 20-story office building containing approximately
337,088 rentable square feet and located on approximately 0.68 acres of land in
St. Louis, Missouri. The purchase price for our 35.709251% tenant-in-common
interest in St. Louis Place was approximately $12,100,000.
On August 10, 2004, we acquired an undivided 79.4752% tenant-in-common
interest in the Colorado Building, an 11-story office building containing
approximately 121,701 rentable square feet, located on approximately 0.31 acres
of land in Washington, D.C. The purchase price for our 79.4752% tenant-in-common
interest in the Colorado Building was approximately $37,400,000.
On October 1, 2004, we acquired an undivided 60.0% tenant-in-common
interest in Travis Tower, a 21-story office building containing approximately
507,470 rentable square feet, located on approximately 1.1079 acres of land in
Houston, Texas. In December 2004, we purchased an additional 0.430229% interest
in Travis Tower. The purchase price for our 60.430229% tenant-in-common interest
in Travis Tower was approximately $35,300,000.
On December 16, 2004, we acquired the Cyprus Building, a four-story
office building containing approximately 153,048 rentable square feet, located
on approximately 8.2 acres of land in Englewood, Colorado. The purchase price
for the Cyprus Building was approximately $20,600,000.
On December 17, 2004, we acquired an undivided 50.67995%
tenant-in-common interest in the Pratt Building, a 24-story office building
containing approximately 368,194 rentable square feet, located on approximately
0.75 acres of land in Baltimore, Maryland. The purchase price for our 50.67995%
tenant-in-common interest in the Pratt Building was approximately $31,300,000.
5. INVESTMENTS IN TENANT-IN-COMMON INTERESTS
The following is a summary of our tenant-in-common interest investments
as of December 31, 2004:
Tenant in Carrying
Date Common Value of Mortgage
Property Name Acquired Interest Investment Payable
- ---------------------- ------------ ----------------- --------------- --------------
Minnesota Center 10/15/03 14.467600% $ 5,954,408 $ 4,288,896
Enclave on the Lake 4/12/04 36.312760% 10,293,452 7,208,922
St. Louis Place 6/30/04 35.709251% 11,936,586 7,110,134
Colorado Building 8/10/04 79.475200% 39,190,180 22,253,046
Travis Tower 10/1/04 60.430229% 34,935,478 22,741,375
Pratt Building 12/17/04 50.679950% 31,392,552 18,751,582
--------------- --------------
Total $ 133,702,656 $ 82,353,955
=============== ==============
F-11
Our undivided tenant-in-common interest investments as of December 31,
2004 consisted of our proportionate share of the following assets and
liabilities:
MINNESOTA ENCLAVE ON ST. LOUIS
(unaudited) CENTER THE LAKE PLACE
------------- ------------- -------------
Land $ 3,500,000 $ 1,791,446 $ 1,529,501
Buildings, net 30,795,841 19,782,774 23,740,442
Real estate asset intangibles, net 5,603,337 6,358,881 7,040,634
Cash and cash equivalents (411) 696,690 77,034
Restricted cash 2,341,082 740,869 2,066,461
Accounts receivable and other assets 294,139 476,346 417,174
------------- ------------- -------------
Total assets $ 42,533,988 $ 29,847,006 $ 34,871,246
============= ============= =============
Acquired below market lease
intangibles, net 245,050 - 721,458
Other liabilities 1,132,092 1,503,874 722,636
------------- ------------- -------------
Total liabilities $ 1,377,142 $ 1,503,874 $ 1,444,094
Equity 41,156,846 28,343,132 33,427,152
------------- ------------- -------------
Total liabilities and equity $ 42,533,988 $ 29,847,006 $ 34,871,246
============= ============= =============
COLORADO TRAVIS PRATT
(unaudited) BUILDING TOWER BUILDING
------------- ------------- -------------
Land $ 13,328,000 $ 6,230,000 $ 6,700,000
Buildings, net 28,847,371 38,122,939 38,110,888
Real estate asset intangibles, net 5,676,228 10,524,692 10,470,214
Cash and cash equivalents 60,080 217,007 150,000
Restricted cash 3,629,494 5,625,758 6,519,339
Accounts receivable and other assets 321,025 304,111 637,658
------------- ------------- -------------
Total assets $ 51,862,198 $ 61,024,507 $ 62,588,099
============= ============= =============
Acquired below market lease
intangibles, net 1,745,107 1,546,178 413,968
Other liabilities 806,029 1,672,910 231,388
------------- ------------- -------------
Total liabilities $ 2,551,136 $ 3,219,088 $ 645,356
Equity 49,311,062 57,805,419 61,942,743
------------- ------------- -------------
Total liabilities and equity $ 51,862,198 $ 61,024,507 $ 62,588,099
============= ============= =============
F-12
In 2004, we recorded $1,402,847 of equity in earnings and $1,586,299 of
distributions from our undivided tenant-in-common interest investments. Our
equity in earnings from these tenant-in-common investments is our proportionate
share of the following earnings of the following properties for the year ended
December 31, 2004:
MINNESOTA ENCLAVE ON ST. LOUIS
(unaudited) CENTER THE LAKE PLACE
------------- ------------- -------------
Revenue $ 6,857,468 $ 3,049,976 $ 2,698,909
Operating expenses:
Operating expenses 1,899,743 639,202 809,355
Property taxes 1,175,329 442,535 196,544
------------- ------------- -------------
Total operating expenses 3,075,072 1,081,737 1,005,899
------------- ------------- -------------
Operating income 3,782,396 1,968,239 1,693,010
------------- ------------- -------------
Non-operating (income) expenses
Depreciation and amortization 2,704,898 1,100,893 888,922
(Interest income)/bank fees, net (9,716) 26,977 (5,108)
------------- ------------- -------------
Total non-operating (income) expenses 2,695,182 1,127,870 883,814
Net income $ 1,087,214 $ 840,369 $ 809,196
============= ============= =============
Company's share of net income $ 157,294 $ 305,161 $ 288,958
============= ============= =============
Company's share of distributions $ 270,885 $ 280,797 $ 239,520
============= ============= =============
COLORADO TRAVIS PRATT
(unaudited) BUILDING TOWER BUILDING
------------- ------------- -------------
Revenue $ 1,649,088 $ 2,247,989 $ 308,917
Operating expenses:
Operating expenses 455,957 601,285 130,910
Property taxes 247,267 266,394 -
------------- ------------- -------------
Total operating expenses 703,224 867,679 130,910
------------- ------------- -------------
Operating income 945,864 1,380,310 178,007
------------- ------------- -------------
Non-operating (income) expenses
Depreciation and amortization 643,906 850,812 -
(Interest income)/bank fees, net (14) (5,210) -
------------- ------------- -------------
Total non-operating (income) expenses 643,892 845,602 -
Net income $ 301,972 $ 534,708 $ 178,007
============= ============= =============
Company's share of net income (1) $ 239,994 $ 321,227 $ 90,214
============= ============= =============
Company's share of distributions (1) $ 443,063 $ 343,137 $ 8,897
============= ============= =============
(1) We increased our undivided tenant-in-common interest in Travis Tower
from 60.00% to 60.430229% in December 2004.
F-13
6. REAL ESTATE
ACQUISITION
On December 16, 2004, we acquired the Cyprus Building, a 4-story office
building containing approximately 153,048 rentable square feet, located on
approximately 8.2 acres of land in Englewood, Colorado. The purchase price for
the Cyprus Building was $20,645,160. The purchase price has been allocated to
the assets acquired and liabilities assumed as follows:
DESCRIPTION ALLOCATION ESTIMATED USEFUL LIFE
----------- ---------- ---------------------
Land 2,056,361 -
Building 15,500,115 25 years
Below market leases (1,236,682) 3.75 years
Tenant improvements, leasing
commissions & legal fees 595,624 3.75 years
In-place leases 3,835,678 3.75 years
Tenant relationships - -
Deferred rental revenue (105,306) -
Other accruals (630) -
-----------
$20,645,160
===========
PRO-FORMA RESULTS OF OPERATIONS
The following summary presents the results of operations for the year
ended December 31, 2004 and 2003, on an unaudited pro-forma basis, as if the
acquisition of the Cyprus Building had occurred as of January 1 of the
respective years. The pro-forma results are for illustrative purposes only and
do not purport to be indicative of the actual results that would have occurred
had the transaction occurred on January 1 of the respective years, nor are they
indicative of results of operations that may occur in the future.
December 31, 2004 Pro Forma December 31, 2004
as Reported Adjustment Pro Forma
------------------- ------------------- -------------------
Total revenues $ 129,981 $ 3,096,314 $ 3,226,295
Expenses:
Property operating expense 1,959 29,739 31,698
Interest 2,214,994 - 2,214,994
Real estate taxes 19,967 457,958 477,925
Property and asset management fees 295,111 168,594 463,705
Organization expenses 217,897 - 217,897
General and administrative expense 711,603 2,243 713,846
Depreciation and amortization - 1,801,685 1,801,685
------------------- ------------------- -------------------
Total expenses 3,461,531 2,460,219 5,921,750
Interest income 389,737 - 389,737
Equity in investments 1,402,847 - 1,402,847
------------------- ------------------- -------------------
Net income (loss) $ (1,538,966) $ 636,095 $ (902,871)
=================== =================== ===================
Basic and diluted weighted average shares outstanding 5,358,697 4,644,046 10,002,743
Basic and diluted loss per share $ (0.29) $ (0.09)
F-14
December 31, 2003 Pro Forma December 31, 2003
as Reported Adjustment Pro Forma
------------------- ------------------- -------------------
Total revenues $ - $ 3,228,852 $ 3,228,852
Expenses:
Property operating expense - 28,512 28,512
Interest 60,833 - 60,833
Real estate taxes - 479,217 479,217
Property and asset management fees 10,220 175,822 186,042
Organization expenses 17,575 - 17,575
General and administrative expense 222,648 15,164 237,812
Depreciation and amortization - 1,801,685 1,801,685
------------------- ------------------- -------------------
Total expenses 311,276 2,500,400 2,811,676
Interest income 3,767 - 3,767
Equity in investments 18,176 - 18,176
------------------- ------------------- -------------------
Net income (loss) $ (289,333) $ 728,452 $ 439,119
=================== =================== ===================
Basic and diluted weighted average shares outstanding 142,430 8,108,510 8,250,940
Basic and diluted loss per share $ (2.03) $ 0.05
7. LEASING ACTIVITY
Future minimum base rental payments due to us under non-cancelable
leases in effect as of December 31, 2004, for our 100%-owned property, the
Cyprus Building, were as follows:
2005 $ 2,408,885
2006 2,408,885
2007 2,408,885
2008 1,806,664
2009 -
-----------------
Total $ 9,033,319
=================
8. MORTGAGES PAYABLE
The following table summarizes our contractual obligations as of
December 31, 2004:
Principal Payments due by period
---------------------------------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
-------------------------------------------------------------------------------------
Mortgage notes payable
Minnesota Center $ 4,288,896 $ 51,035 $ 112,158 $ 126,305 $ 3,999,398
Enclave on the Lake 7,208,922 101,916 221,236 246,654 6,639,116
St. Louis Place 7,110,134 82,295 180,572 202,908 6,644,359
Colorado Property 22,253,046 - - 62,072 22,190,974
Travis Tower 22,741,375 297,600 646,600 718,104 21,079,071
Pratt Building 18,751,582 - 229,201 534,064 17,988,317
-------------------------------------------------------------------------------------
$ 82,353,955 $ 532,846 $ 1,389,767 $1,890,107 $ 78,541,235
=====================================================================================
We used borrowings of $4,340,280 (the "Minnesota Center Loan") under a
non-recourse loan agreement with Greenwich Capital Financial Products, Inc (the
"Minnesota Center Loan Agreement") to pay a portion of our 14.4676%
tenant-in-common interest in the Minnesota Center. The remaining
tenant-in-common interests in the Minnesota Center were acquired by various
investors who purchased their interests in a private offering sponsored by our
affiliate, Behringer Holdings. Each tenant-in-common investor, including us, is
a borrower under the Minnesota Center Loan Agreement. The original total
borrowings of all tenant-in-common
F-15
interest holders under the Minnesota Center Loan Agreement were $30,000,000. The
Minnesota Center Loan accrues interest at 6.181%, and requires principal and
interest payments monthly based on a 30-year amortization period, with any
unamortized principal due at maturity on November 1, 2010. The Minnesota Center
Loan Agreement requires a minimum debt coverage ratio of not less than 1.10 and
permits no prepayment until the earlier of (i) 42 months following inception of
the Minnesota Center Loan or (ii) two years after securitization ("Minnesota
Center Lockout Period"). The Minnesota Center is held as collateral for the
Minnesota Center Loan. Certain obligations under the Minnesota Center Loan are
guaranteed by Robert M. Behringer and Behringer Holdings. The Minnesota Center
Loan may only be prepaid after the Minnesota Center Lockout Period. As of
December 31, 2004, our outstanding principal balance under the Minnesota Center
Loan was $4,288,896.
We used borrowings of $7,262,552 (the "Enclave Loan") under a loan
agreement (the "Enclave Loan Agreement") with State Farm Life Insurance Company
to pay a portion of the purchase price for our undivided 36.31276%
tenant-in-common interest in Enclave on the Lake. The remaining tenant-in-common
interests in Enclave on the Lake were acquired by various investors who
purchased their interests in a private offering sponsored by our affiliate,
Behringer Holdings. Each tenant-in-common investor, including us, is a borrower
under the Enclave Loan Agreement. The original total borrowings of all
tenant-in-common interest holders under the Enclave Loan Agreement were
$20,000,000. The interest rate under the Enclave Loan is fixed at 5.45% per
annum, and requires principal and interest payments monthly based on a 30-year
amortization period, with any unamortized principal due at maturity. The Enclave
on the Lake is held as collateral for the Enclave Loan. Certain obligations
under the Enclave Loan are guaranteed by Robert M. Behringer and Behringer
Holdings. The Enclave Loan Agreement allows for prepayment of the entire
outstanding principal after 42 months from the date of the Enclave Loan
Agreement subject to the payment of a prepayment penalty. No prepayment penalty
is due after 81 months from the date of the Enclave Loan Agreement. The Enclave
Loan has a seven-year term. As of December 31, 2004, our outstanding principal
balance under the Enclave Loan was $7,208,922.
We used borrowings of $7,141,850 (the "St. Louis Place Loan") under a
loan agreement (the "St. Louis Place Loan Agreement") with Greenwich Capital
Financial Products, Inc. to pay a portion of our undivided 35.709251%
tenant-in-common interest in St. Louis Place. The remaining tenant-in-common
interests in St. Louis Place were acquired by various investors who purchased
their interests in a private offering sponsored by our affiliate, Behringer
Holdings. Each tenant-in-common investor, including us, is a borrower under the
St. Louis Place Loan Agreement. The original total borrowings of all
tenant-in-common interest holders under the St. Louis Place Loan Agreement were
$20,000,000. The interest rate under the St. Louis Place Loan is fixed at 6.078%
per annum, and requires principal and interest payments monthly based on a
30-year amortization period, with any unamortized principal due at maturity. St.
Louis Place is held as collateral for the St. Louis Place Loan. Certain
obligations under the St. Louis Place Loan are guaranteed by Robert M. Behringer
and Behringer Holdings. The St. Louis Place Loan Agreement requires a minimum
debt coverage ratio of not less than 1.10 and prohibits prepayment until the
earlier of (i) 42 months or (ii) 2 years after securitization after which and
prior to month 81 it may be defeased. The St. Louis Place Loan Agreement has a
seven-year term. As of December 31, 2004, our outstanding principal balance
under the St. Louis Place Loan was $7,110,134.
We used borrowings of $19,868,791 (the "Colorado Property Loan") under a
loan agreement (the "Colorado Property Loan Agreement") with Greenwich Capital
Financial Products, Inc. to pay a portion of our undivided 79.4752%
tenant-in-common interest in the Colorado Building. Additional borrowings of
$2,384,255 have been made under this loan for tenant improvements. The remaining
tenant-in-common interests in the Colorado Building were acquired by various
investors who purchased their interests in a private offering sponsored by our
affiliate, Behringer Holdings. Each tenant-in-common investor, including us, is
a borrower under the Colorado Property Loan Agreement. The original total
borrowings of all tenant-in-common interest holders under the Colorado Property
Loan Agreement were $25,000,000. Total additional borrowings of $3,000,000 were
available under this loan agreement for tenant improvements and all $3,000,000
had been borrowed as of December 31, 2004. The interest rate under the Colorado
Property Loan is fixed at 6.075% per annum. The Colorado Property is held as
collateral for the Colorado Property Loan. Certain obligations under the
Colorado Property Loan are guaranteed by Robert M. Behringer and Behringer
Holdings. The Colorado Property Loan Agreement requires a minimum debt coverage
ratio of not less than 1.10 and allows for
F-16
prepayment of the entire outstanding principal with no prepayment fee from and
after the third payment prior to maturity, with at least 15 days prior notice.
The Colorado Property Loan Agreement has a ten-year term. As of December 31,
2004, our outstanding principal balance under the Colorado Property Loan
Agreement was $22,253,046.
We used borrowings of $22,812,411 (the "Travis Tower Loan") under a loan
agreement (the "Travis Tower Loan Agreement") with Bear Stearns Commercial
Mortgage, Inc. to pay a portion of our undivided 60.430229% tenant-in-common
interest in the Travis Tower. The remaining tenant-in-common interests in the
Travis Tower were acquired by various investors who purchased their interests in
a private offering sponsored by our affiliate, Behringer Holdings. Each
tenant-in-common investor, including us, is a party to the Travis Tower Loan
Agreement. The total borrowings of all tenant-in-common interest holders under
the Travis Tower Loan Agreement were $37,750,000. The interest rate under the
Travis Tower Loan Agreement is fixed at 5.434% per annum. Travis Tower is held
as collateral for the Travis Tower Loan. Certain obligations under the Travis
Tower Loan are guaranteed by Robert M. Behringer and Behringer Holdings. The
Travis Tower Loan Agreement requires a minimum debt coverage ratio of not less
than 1.65 and allows for prepayment of the entire outstanding principal with no
prepayment fee during the last three months prior to maturity. The Travis Tower
Loan Agreement has a ten-year term. As of December 31, 2004, our outstanding
principal balance under the Travis Tower Loan was $22,741,375.
We used borrowings of $18,751,582 (the "Pratt Loan") under a loan
agreement (the "Pratt Loan Agreement") with Citigroup Global Markets Realty
Corporation to pay a portion of our undivided 50.67995% tenant-in-common
interest in the Pratt Building. The remaining tenant-in-common interests in the
Pratt Building were acquired by various investors who purchased their interests
in a private offering sponsored by our affiliate, Behringer Holdings. Each
tenant-in-common investor, including us, is a party to the Pratt Loan Agreement.
The total borrowings of all tenant-in-common interest holders under the Pratt
Property Loan Agreement were $37,000,000. The interest rate under the Pratt Loan
Agreement is fixed at 5.285% per annum. The Pratt Building is held as collateral
for the Pratt Loan. Certain obligations under the Pratt Loan are guaranteed by
Robert M. Behringer and Behringer Holdings. The Pratt Loan Agreement requires a
minimum debt coverage ratio of not less than 1.10 and allows for prepayment of
the entire outstanding principal with no prepayment fee during the last three
months prior to maturity. The Pratt Loan Agreement has a ten-year term. As of
December 31, 2004, our outstanding principal balance under the Pratt Loan was
$18,751,582.
On December 30, 2004, we entered into a Revolving Credit Agreement with
Bank of America, N.A. for up to $12,000,000 of available borrowings ("the
"Revolver"). The Revolver has a two-year term with the option to extend for one
additional year. The Cyprus Building, which we acquired on December 16, 2004, is
subject to a deed of trust to secure payment of the Revolver. We can borrow,
repay and reborrow again up to the available borrowing limit. As of December 31,
2004, we had no outstanding borrowings under the Revolver.
9. STOCKHOLDERS' EQUITY
CAPITALIZATION
As of December 31, 2004, we had accepted subscriptions for 13,109,282
shares of our common stock, including 20,000 shares owned by Behringer Holdings.
As of December 31, 2004, we had no shares of preferred stock issued and
outstanding. As of such date we had issued options to acquire 9,000 shares of
common stock to the independent members of our Board of Directors. As of
December 31, 2004, participating individual broker-dealers had the right to
acquire up to 523,571 offering warrants for a nominal fee; however none of the
offering warrants had been issued.
SHARE REDEMPTION PROGRAM
Our board of directors has authorized a share redemption program for
investors who hold their shares for more than one year. The purchase price for
the redeemed shares is set forth in the prospectus for our Current Offering of
common stock. Our board of directors reserves the right in its sole discretion
at any time, and from time to time, to (1) waive the one-year holding period in
the event of the death, disability or bankruptcy of a stockholder or other
exigent circumstances, (2) reject any request for redemption, (3) change the
purchase price for redemptions, or (4) terminate, suspend or amend the share
redemption program. Under the terms of the plan, during any calendar year, we
will not redeem in excess of 5% of the weighted average number of shares
F-17
outstanding during the prior calendar year. In addition, our board of directors
will determine whether we have sufficient cash from operations to repurchase
shares, and such purchases will generally be limited to 1% of operating cash
flow for the previous fiscal year plus proceeds of our distribution reinvestment
plan.
DISTRIBUTIONS
We initiated the payment of monthly distributions in November 2003 in
the amount of a 7% annualized rate of return, based on an investment in our
common stock of $10.00 per share and calculated on a daily record basis of
$0.0019178 per share. We have a distribution reinvestment plan ("DRIP") whereby
stockholders may elect to reinvest any cash distribution in additional shares of
common stock. We record all distributions when declared, except that the stock
issued through the DRIP is recorded when the shares are actually issued. The
following are the distributions declared during the years ended December 31,
2004 and 2003:
2004 Total Cash DRIP
------------ ------------ ------------ ------------
1st Quarter $ 265,859 $ 160,830 $ 105,029
2nd Quarter 554,010 327,485 226,525
3rd Quarter 1,089,066 620,118 468,948
4th Quarter 1,875,120 1,040,892 834,228
------------ ------------ ------------
$3,784,055 $2,149,325 $1,634,730
============ ============ ============
2003 Total Cash DRIP
------------ ------------ ------------ ------------
1st Quarter $ - $ - $ -
2nd Quarter - - -
3rd Quarter - - -
4th Quarter 91,418 44,215 47,193
------------ ------------ ------------
$ 91,418 $ 44,215 $ 47,193
============ ============ ============
10. STOCK PLANS
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
We adopted the Behringer Harvard REIT I, Inc. Non-Employee Director
Stock Option Plan ("Director Option Plan") in June 2002. A total of 1,000,000
shares of our common stock has been authorized and reserved for issuance under
the Non-Employee Director Stock Option Plan. On May 27, 2004, the independent
members of our Board of Directors were granted options to purchase a total of
9,000 shares of our common stock at an exercise price of $12.00 per share under
our Non-Employee Director Option Plan. These options vest on May 27, 2005 and
expire on May 27, 2009. As of December 31, 2004, all 9,000 stock options were
outstanding and none had been exercised. These options were anti-dilutive for
the year ended December 31, 2004.
NON-EMPLOYEE DIRECTOR WARRANT PLAN
We adopted the Behringer Harvard REIT I, Inc. Non-Employee Director
Warrant Plan ("Director Warrant Plan") in June 2002. A total of 1,000,000 shares
of our common stock has been authorized and reserved for issuance under the
Non-Employee Director Warrant Plan.
Under the Non-Employee Director Warrant Plan, each director who is not
an employee of ours or Behringer Advisors or their affiliates will automatically
receive a warrant to purchase one share of our common stock for every 25 shares
of our common stock that he or she purchases during the purchase period. The
exercise price of the warrants will initially be $12.00 per share, and
thereafter the exercise price will be equal to 120% of the fair market value of
our common stock.
As of December 31, 2004, no warrants have been granted under the
Director Warrant Plan.
F-18
2002 EMPLOYEE STOCK OPTION PLAN
We adopted the Behringer Harvard REIT I, Inc. 2002 Employee Stock Option
Plan ("Employee Option Plan") in June 2002 pursuant to which options may be
issued to our employees and certain of our affiliates. A total of 10,000,000
shares of our common stock have been authorized and reserved for issuance under
the Employee Option Plan. As of December 31, 2004, we have no employees and no
options have been granted under the Employee Option Plan.
The exercise price of options granted under the Employee Option Plan
will initially be $12.00 per share, and thereafter the exercise price of options
granted will be no less than 120% of the fair market value of our common stock.
11. RELATED PARTY TRANSACTIONS
Certain of our affiliates received fees and compensation in connection
with the Initial Offering, and in connection with the acquisition, management
and sale of our assets. The following is a summary of the related party fees and
compensation we incurred during the years ended December 31, 2004 and 2003.
Total Total capitalized
capitalized to investments in Total
Total to offering tenant in common capitalized Total
FOR THE YEAR ENDED DECMBER 31, 2004 incurred costs interests to real estate expensed
--------------------------------------------------------------------------------------
Behringer Securities commissions and
dealer manager fees 11,379,466 $ 11,379,466 $ - $ - $ -
Behringer Advisors, reimbursement of
organization and offering expenses 3,040,050 2,822,153 - - 217,897
Behringer Advisors, acquisition, advisory
fees and expenses 5,103,032 - 4,410,032 693,000 -
HPT Management LP, property management
and leasing fees 205,515 - - - 205,515
Behringer Advisors, asset management fee 89,596 - - - 89,596
---------------- --------------- --------------------- -------------- ---------------
Total 19,817,659 $ 14,201,619 $ 4,410,032 $ 693,000 $ 513,008
================ =============== ===================== ============== ===============
Total Total capitalized
capitalized to investments in Total
Total to offering tenant in common capitalized Total
FOR THE YEAR ENDED DECMBER 31, 2003 incurred costs interests to real estate expensed
--------------------------------------------------------------------------------------
Behringer Securities commissions and
dealer manager fees 763,354 $ 763,354 $ - $ - $ -
Behringer Advisors, reimbursement of
organization and offering expenses 204,887 187,312 - - 17,575
Behringer Advisors, acquisition,
advisory fees and expenses 220,193 - 220,193 - -
HPT Management LP, property management
and leasing fees 7,148 - - - 7,148
Behringer Advisors, asset management fee 3,072 - - - 3,072
---------------- --------------- --------------------- -------------- ---------------
Total 1,198,654 $ 950,666 $ 220,193 $ - $ 27,795
================ =============== ===================== ============== ===============
Behringer Securities LP ("Behringer Securities"), our affiliated dealer
manager for the Offering, receives commissions of up to 7.0% of gross offering
proceeds before reallowance of commissions earned by participating
broker-dealers. In connection with the Initial Offering, up to 2.5% of gross
proceeds before reallowance to participating broker-dealers were paid to
Behringer Securities as a dealer manager fee; except that this dealer manager
fee was reduced to 1.0% of the gross proceeds of purchases made pursuant to our
distribution reinvestment plan. In connection with the Current Offering, up to
2.0% of gross proceeds before reallowance to participating broker-dealers will
be paid to Behringer Securities as a dealer manager fee; except that no dealer
manager fee will be paid on purchases made pursuant to our distribution
reinvestment plan. Behringer Securities reallows all of its commissions of up to
7.0% of gross offering proceeds to participating
F-19
broker-dealers and reallows 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 the year ended December 31, 2004, Behringer
Securities' commissions and dealer manager fees totaled $8,335,419 and
$3,044,047, respectively and were capitalized as offering costs in "Additional
paid-in capital" on our balance sheet. In the year ended December 31, 2003,
Behringer Securities' commissions and dealer manager fees totaled $558,218 and
$205,136, respectively and were capitalized as offering costs in "Additional
paid-in capital" on our balance sheet.
Behringer Advisors, our affiliated advisor, or its affiliates, received
up to 2.5% of gross offering proceeds for reimbursement of organization and
offering expenses incurred in connection with the Initial Offering. As of
December 31, 2004, $5,580,496 of organization and offering expenses had been
incurred by Behringer Advisors on our behalf, of which $3,244,938 had been
reimbursed by us and the balance of $2,335,558 will be reimbursed at a rate of
2.5% of equity raised in the Initial Offering and 2.0% of equity raised in the
Current Offering. Reimbursement of organization and offering expenses incurred
in connection with the Current Offering will be made at the rate of 2.0% of the
gross offering proceeds; except that no organization and offering expenses will
be reimbursed with respect to purchases made pursuant to our distribution
reinvestment plan. Of the $3,244,938 of organization and offering expenses
reimbursed by us through December 31, 2004, $3,009,465 had been capitalized as
offering costs in "Additional paid-in capital" on our balance sheet and $235,473
has been expensed as organizational costs. For the year ended December 31, 2004,
$3,040,050 of organization and offering expenses were reimbursed by us, of which
$2,822,153 was capitalized as offering costs in "Additional paid-in capital" and
$217,897 was expensed as organizational costs. For the year ended December 31,
2003, $204,887 of organization and offering expenses were reimbursed by us, of
which $187,312 was capitalized as offering costs in "Additional paid-in capital"
and $17,575 was expensed as organizational costs. Behringer Advisors or its
affiliates determines the amount of organization and offering expenses owed
based on specific invoice identification as well as an allocation of costs to us
and Behringer Harvard Mid-Term Value Enhancement Fund I LP and Behringer Harvard
Short-Term Opportunity Fund I LP, our affiliates, based on anticipated
respective equity offering sizes of those entities.
In connection with the Initial Offering and for acquisitions made prior
to February 11, 2005, Behringer Advisors or their affiliates also received
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
purchase or making of a mortgage loan. In connection with the Current Offering,
such fees have been reduced to 2.5% in for acquisitions made on or after
February 11, 2005. Behringer Advisors or their affiliates also received up to
0.5% of the contract purchase price of the real estate assets we acquired 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. In
the year ended December 31, 2004, Behringer Advisors earned $5,103,032 in
acquisition and advisory fees for the investments we acquired. In the year ended
December 31, 2003, Behringer Advisors earned $220,193 in acquisition and
advisory fees for the investments we acquired. We capitalized these fees as part
of our real estate or investments in tenant-in-common interests.
We have paid and expect to pay in the future HPT Management LP ("HPT
Management"), our affiliated property manager, fees for the management and
leasing of our properties, which may be subcontracted to unaffiliated third
parties. Such fees are expected to equal 3.0% of gross revenues of the
respective property, plus leasing commissions based upon the customary leasing
commission applicable to the geographic location of the respective property. We
incurred fees of $205,515 in the year ended December 31, 2004 for the services
provided by HPT Management in connection with the tenant-in-common investments.
We incurred fees of $7,148 in the year ended December 31, 2003 for the services
provided by HPT Management in connection with our tenant-in-common investments
and other real estate investments.
In connection with the Initial Offering, we have paid Behringer Advisors
an annual advisor asset management fee of 0.5% of aggregate asset value for
periods prior to March 2005. Any portion of the asset management fee may be
deferred and paid in a subsequent year. In connection with the Current Offering,
such fees have been increased to 0.6% of aggregate asset value for periods
starting after February 2005. In the year ended December 31, 2004, we incurred
$89,596 of advisor asset management fees. In the year ended December 31, 2003,
we incurred $3,072 of advisor asset management fees.
F-20
Behringer Advisors or their affiliates will also be paid fees if the
advisor provides a substantial amount of services, as determined by our
independent directors, in connection with the sale of one or more properties. In
such event, we will pay the advisor an amount not exceeding the lesser of: (A)
one-half of the brokerage commission paid, or (B) 3.0% of the sales price of
each property sold, provided that such fee will be subordinated to distributions
to investors from sales proceeds of an amount which, together with prior
distributions to the investors, will equal (1) 100.0% of their capital
contributions plus (2) a 9.0% annual, cumulative, non-compounded return on their
capital contributions. Subordinated disposition fees that are not payable at the
date of sale, because investors 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 investors have received a
return of their net capital contributions and a 9.0% annual, cumulative,
non-compounded return, then Behringer Advisors is entitled to 15.0% of remaining
net sales proceeds. Subordinated participation in net sales proceeds that are
not payable at the date of sale, because investors have not yet received their
required minimum distribution, will be deferred and paid at such time as the
subordination conditions have been satisfied.
Upon listing of our common stock on a national securities exchange or
inclusion for quotation on The Nasdaq Stock Market, a listing fee will be paid
to Behringer Advisors equal to 15.0% of the amount by which the market value of
our outstanding stock plus distributions we paid prior to listing exceeds the
sum of (i) the total amount of capital raised from investors and (ii) a 9.0%
annual, cumulative, non-compounded return to investors on their capital
contributions. Upon termination of the Advisory Agreement with Behringer
Advisors, a performance fee will be paid to Behringer Advisors of 15.0% of the
amount by which our appraised asset value at the time of such termination
exceeds the aggregate capital contributions contributed by investors plus
payment to investors of a 9.0% annual, cumulative, non-compounded return on the
capital contributed by investors. No performance fee will be paid if we have
already paid or become obligated to pay Behringer Advisors a listing fee.
Persons independent of us and independent of our advisor will perform such
appraisal of our asset value.
We will reimburse Behringer Advisors for all expenses it pays or incurs
in connection with the services it provides to us, subject to the limitation
that we will not reimburse for any amount by which the advisor's operating
expenses (including the asset management fee) at the end of the four fiscal
quarters immediately preceding the date reimbursement is sought exceeds the
greater of: (i) 2.0% of our average invested assets, or (ii) 25.0% of our net
income for that four quarter period other than any additions to reserves for
depreciation, bad debts or other similar non-cash reserves and any gain from the
sale of our assets for that period.
At December 31, 2004, we had a receivable from affiliates of $200,747.
This balance includes an expected refund of $200,000 from State Farm Life
Insurance Company related to the acquisition of Enclave on the Lake. The refund
was received by Harvard Property Trust LLC in 2004 and will be refunded to us in
April 2005.
We are dependent on Behringer Advisors, Behringer Securities and HPT
Management for certain services that are essential to us, including the sale of
shares of our common stock, 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 us
with the respective services, we would be required to obtain such services from
other sources.
12. INCOME TAXES
We have elected to be taxed as a REIT under the Internal Revenue Code
effective for our taxable year ending December 31, 2004. Accordingly, we
generally will not be subject to federal corporate income taxes on net income we
distribute to our stockholders, assuming that we continue to meet certain
organizational and operating requirements.
13. COMMITMENTS AND CONTINGENCIES
On January 28, 2004, we entered into an agreement with Behringer
Holdings (the "Accommodation Agreement") whereby we would provide loan
guarantees to Behringer Holdings, so that Behringer Holdings may use such loan
guarantees to secure short-term loans from lenders to fund acquisition and
syndication costs related to acquiring real estate projects for tenant-in-common
syndication. Each guaranty will be for a period not to exceed six months and
shall be limited to no more than $1,000,000. Behringer Holdings must pay us a
F-21
1% fee of any loan we guarantee for each six-month period. Behringer Holdings
has granted us a security interest in each purchase agreement entered into with
respect to a project for which we make a guaranty. If Behringer Holdings fails
to acquire such project, they shall transfer all of their rights under the
purchase agreement to us and cooperate with us to obtain an extension of the
purchase agreement with the seller. During February 2004, we placed $2,500,000
in restricted money market accounts with lenders as security for funds to be
advanced to Behringer Holdings for future loans. As of December 31, 2004, we had
no guarantees outstanding on borrowings by Behringer Holdings.
On August 9, 2004, the Accommodation Agreement was amended and restated
to include 1) options to extend the six month guaranty period for one or more
additional six-month periods, with an additional 1% fee payable on the date of
each extension; and 2) the option for our guarantees to include the guarantee of
bridge loans. A bridge loan, as defined in the Amended and Restated
Accommodation Agreement, is any loan pursuant to which Behringer Holdings
acquires an interest in respect of a project, which interest is intended to be
sold in a tenant-in-common offering. Each bridge guaranty is limited to no more
than the obligations under the bridge loan. The term and fees associated with
the bridge guarantees are the same as those of the other guarantees allowed
under this agreement. We and our affiliates have the right, but not an
obligation, to purchase up to a 5% interest in each project with respect to
which we made a guaranty. Our purchase price for each 1% interest in a project
will equal the price paid by Behringer Holdings, plus a pro rata share of the
closing costs.
On August 13, 2004 we entered into an Extended Rate Lock Agreement with
Bear Stearns Commercial Mortgage to lock an interest rate of 5.43% for up to
$60,000,000 in borrowings. We have made total deposits of $1,800,000 ($1,200,000
initial deposit and $600,000 in additional deposits) under this agreement as of
December 31, 2004. The initial and additional deposits are refundable to us in
amounts equal to 2% of any loans funded under the agreement. If the loans are
not made for any reason other than lender willful default, we are responsible
for any interest rate hedging losses incurred by Bear Stearns Commercial
Mortgage in connection with these transactions. The initial rate lock period
expired on September 13, 2004; however the Extended Rate Lock Agreement allows
us to extend the rate lock in 15-day increments at a nonrefundable cost of
$75,000 per occurrence through February 13, 2005. These extension payments are
expensed as incurred and amounted to $525,000 for the year ended December 31,
2004. Subsequent to year-end, we agreed with Bear Stearns Commercial Mortgage to
extend the expiration date of the Extended Rate Lock Agreement through August
2005.
14. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
We determined the following disclosure of estimated fair values using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessary to interpret market data and develop the
related estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts that could be realized upon
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash and cash equivalents and restricted cash are short term and/or
highly liquid in nature. Accordingly, fair value approximates the carrying
values of these items.
The mortgages payable totaling approximately $82,400,000 as of December
31, 2004 have a fair value of approximately $84,900,000 based upon interest
rates for mortgages with similar terms and remaining maturities that management
believes we could obtain.
The fair value estimate presented herein is based on information
available to our management as of December 31, 2004. Although our management is
not aware of any factors that would significantly affect the estimated fair
value amount, such amount has not been comprehensively revalued for purposes of
these consolidated financial statements since that date, and current estimates
of fair value may differ significantly from the amounts presented herein.
F-22
15. QUARTERLY RESULTS (UNAUDITED)
Presented below is a summary of the unaudited quarterly financial
information for the years ended December 31, 2004 and 2003:
2004 Quarters Ended
------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------------------------
Revenues $ - $ - $ - $ 129,981
Net loss $ (148,382) $ (226,053) $ (449,306) $ (715,225)
Weighted average shares outstanding 1,510,520 3,151,134 6,153,181 10,604,837
Basic and diluted loss per share $ (0.10) $ (0.07) $ (0.07) $ (0.07)
Distributions per share $ 0.17 $ 0.17 $ 0.18 $ 0.18
2003 Quarters Ended
------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------------------------
Revenues $ - $ - $ - $ -
Net loss $ (69) $ (1,813) $ (92,937) $ (194,514)
Weighted average shares outstanding 20,000 20,000 20,000 505,728
Basic and diluted loss per share (1) $ - $ (0.09) $ (4.65) $ (0.38)
Distributions per share $ - $ - $ - $ 0.18
- ---------------------------
(1) The large change in the loss per share from the third quarter 2003 of
$(4.65) to $(0.38) in the fourth quarter of 2003 is due to the acceptance of
subscriptions for common stock which began in the fourth quarter 2003 upon
satisfying the established minimum offering requirement of the Initial Offering
of $2,500,000 on October 1, 2003.
16. SUBSEQUENT EVENTS
On January 6, 2005, we acquired a six-story office building containing
approximately 288,175 rentable square feet and a four-story parking garage
located on approximately 10.6 acres of land in Atlanta, Georgia (the "Ashford
Perimeter"). The purchase price of the Ashford Perimeter was approximately
$54,000,000, including closing costs. We used borrowings of $35,400,000 under a
loan agreement with Bear Stearns Commercial Mortgage, Inc. to pay a portion of
the contract purchase price and paid the remaining amount from proceeds of our
Initial Offering.
On February 11, 2005, our Registration Statement on Form S-3, related to
our Current Offering, was declared effective.
On February 22, 2005, we entered into an assignment from Harvard
Property Trust, LLC, an affiliated entity, of a contract to purchase a property
located at 2383 Utah Avenue (the "Utah Building"), a one-story office building
containing approximately 150,495 rentable square feet located on approximately
9.6 acres of land in El Segundo, California. The contract purchase price for the
Utah Building will be $27,500,000, excluding closing costs. This acquisition is
anticipated to close in the second quarter of 2005.
On February 24, 2005, we acquired an undivided 30.583629%
tenant-in-common interest in a sixteen-story office building containing
approximately 191,151 rentable square feet and a four-story parking garage
located on approximately 1.15 acres of land in Denver, Colorado (the "Alamo
Plaza"). The total contract purchase price of the Alamo Plaza, exclusive of
closing costs and initial escrows, was $41,850,000. We borrowed $31,500,000
under a loan agreement with Citigroup Global Markets Realty Corporation to pay a
portion of our share of such contract purchase price and paid the remaining
amount from proceeds of our offering of common stock to the public.
F-23
Report of Independent Auditors
To the Board of Directors and Stockholders of
Behringer Harvard REIT I, Inc.:
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of tenant-in-common interests and of cash
flows present fairly, in all material respects, the combined financial position
of the tenant-in-common interest holders of the Colorado Building at December
31, 2004, and the results of its operations and its cash flows for the period
from August 10, 2004 (date of acquisition) through December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America. These combined financial statements are the responsibility of the
tenant-in-common interest holders' management. Our responsibility is to express
an opinion on these combined financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
combined financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the combined financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall combined financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
/s/ PriceWaterhouseCoopers LLP
March 31, 2005
Dallas, Texas
F-24
THE COLORADO BUILDING, TENANT-IN-COMMON INTERESTS
COMBINED BALANCE SHEET
As of
December 31,
2004
---------------
Assets
Real estate, net $ 43,443,201
Acquired lease intangibles, net 5,844,743
Cash and cash equivalents 60,080
Restricted cash 3,629,494
Accounts receivable, net 289,514
Prepaid expenses 31,511
---------------
Total assets $ 53,298,543
---------------
Liabilities and tenant-in-common interests
Accounts payable and accrued liabilities $ 569,652
Acquired below market lease intangibles, net 1,745,107
Tenant security deposits and prepaid rent 226,137
---------------
Total liabilities 2,540,896
Tenant-in-common interests 50,757,647
---------------
Total liabilities and tenant-in-common interests $ 53,298,543
---------------
F-25
THE COLORADO BUILDING, TENANT-IN-COMMON INTEREST
COMBINED STATEMENT OF OPERATIONS
Date of acquisition
(August 10,2004)
through
December 31, 2004
--------------------
Revenues:
Rental income $ 1,440,997
Tenant reimbursement income 208,090
--------------------
Total revenues 1,649,087
--------------------
Operating costs and expenses:
General and operating expenses 322,185
Utilities 133,758
Real estate taxes 247,267
Depreciation and amortization 670,057
--------------------
Total operating costs and expenses 1,373,267
--------------------
Net income $ 275,820
====================
F-26
THE COLORADO BUILDING, TENANT-IN-COMMON INTEREST
COMBINED STATEMENT OF TENANT-IN-COMMON INTEREST
Initial acquisition of tenant-in-common
interests on August 10, 2004 $ 50,993,827
Cash distributions to tenant-in-common interests (512,000)
Net income allocated to tenant-in-common interests 275,820
--------------
Combined tenants-in-common interests at December 31, 2004 $ 50,757,647
==============
F-27
THE COLORADO BUILDING, TENANT-IN-COMMON INTERESTS
COMBINED STATEMENT OF CASH FLOWS
Date of acquisition
(August 10,2004)
through
December 31, 2004
---------------------
Cash flows from operating activities:
Net income $ 275,820
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 582,441
Bad debt expense 16,491
Changes in assets and liabilities:
Accounts receivable (306,005)
Prepaid insurance 137,088
Accounts payable and accrued liabilities (300,821)
---------------------
Net cash used in operating activities 405,014
---------------------
Cash flows from investing activities:
Purchase of real Colorado tenant-in-common
interests (50,993,827)
Additions to real estate (98,766)
Change in restricted cash 265,832
---------------------
Net cash used in investing activities (50,826,761)
---------------------
Cash flows from financing activities:
Contributions from tenant-in-common 50,993,827
Distributions to tenant-in-common (512,000)
---------------------
Net cash provided by financing activities 50,481,827
---------------------
Net change in cash and cast equivalents 60,080
Cash and cash equivalents, beginning of period -
---------------------
Cash and cash equivalents, end of period $ 60,080
=====================
F-28
THE COLORADO BUILDING TENANT-IN-COMMON INTERESTS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
On August 10, 2004, several unrelated parties acquired an undivided 100%
tenant-in-common interest in an office building in Washington D.C. (the
"Colorado Building"). Behringer Harvard REIT I, Inc. ("the REIT") acquired a
79.4752% tenant-in-common interest and the remaining 20.5248% tenant-in-common
interest was acquired by several unaffiliated persons. These combined financial
statements represent 100% of the combined tenant-in-common interests in the
Colorado Building for the period from August 10, 2004 through December 31, 2004
and are being presented to satisfy certain reporting requirements of the REIT.
The tenant-in-common interest holders acquired the Colorado Building at
a cost of approximately $51,000,000 which was funded by approximately
$23,000,000 in cash and $28,000,000 in borrowings by the individual
tenant-in-common interest holders. The purchase price was allocated to assets
and liabilities as follows:
The tenant-in-common interest holders acquired the Colorado Building at
a cost of approximately $51,000,000 which was funded by approximately
$23,000,000 in cash and $28,000,000 in borrowings by the individual
tenant-in-common interest holders. The purchase price was allocated to assets
and liabilities acquired as follows:
Land $ 13,328,000
Building 30,459,082
Lease intangibles, net 4,302,972
Cash and restricted cash 3,895,526
Miscellaneous other assets and liabilities (991,553)
-------------
Real estate, net $ 50,993,827
=============
The tenant-in-common interest holders have entered into a tenant in
common agreement (the "TIC Agreement") under which each of the tenants in common
are each obligated to pay their pro rata share of any future cash contributions
required in connection with the ownership, operation, management and maintenance
of the Colorado Building. Additionally, all tenant-in-common interest holders
must approve certain major decisions relating to the Colorado Building including
the sale, exchange, lease, release, any loans or modifications of any loans
collateralized by the Colorado Building, the approval of the property management
agreement and any extension, renewal or modification thereof. Each
tenant-in-common interest holder may sell, transfer, convey, pledge, encumber or
hypothecate its undivided interest in the Colorado Building or any part thereof,
provided that any transferee shall take such interest subject to the TIC
Agreement. Under the TIC agreement all income, expenses, losses, liabilities and
cash flows from the Colorado Building are allocated to the tenants in common in
proportion to their undivided interests in the property.
The tenant-in-common interest holders have also individually entered
into a property asset and management agreement (the "Management Agreement") with
an affiliate of the REIT.
These combined financial statements exclude the $28,000,000 of
borrowings (the "Colorado Building Loan") with Greenwich Capital Financial
Products, Inc. (the "Lender"), which was used to partially fund the cost of the
Colorado Building, and the related interest expense, which is the obligation of
the individual tenant-in-common interest holders. These combined financial
statements also exclude property and asset management fees expense as the
Management Agreement is the responsibility of the individual tenant-in-common
interest holders and not of the combined tenant-in-common interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REAL ESTATE
Upon the acquisition of the Colorado Building, the purchase price was
allocated to the tangible assets acquired, consisting of land and building, and
identified intangible assets. Identified intangible assets consisted 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
building, was determined by valuing the property as if it were vacant, and the
"as-if-vacant" value was then
F-29
allocated to land and building. The land value was derived from appraisals, and
the building value was calculated as replacement cost less depreciation or
management's estimates of the relative fair value of this asset using discounted
cash flow analyses or similar methods. The value of the building is depreciated
over the estimated useful life of 25 years using the straight-line method.
The value of above-market and below-market in-place leases for the
property was determined 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 to be 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 values of above-market
and below-market leases were recorded as intangible assets or intangible
liabilities, respectively, and are 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
were further allocated to in-place lease values, in-place tenant improvements,
in-place leasing commissions and tenant relationships based on an evaluation of
the specific characteristics of the tenants' leases and the overall relationship
with the tenants. The aggregate value for tenant improvements and leasing
commissions were based on estimates of these costs incurred at acquisition of
the acquired leases, amortized through the date of acquisition. The aggregate
value of the in-place leases acquired and tenant relationships were determined
by applying a fair value model. The estimates of fair value of the in-place
leases included an estimate of carrying costs during the expected lease-up
periods for the space considering current market conditions. In estimating the
carrying costs that would have otherwise been incurred had the leases not been
in place, the Colorado Building included such items as real estate taxes,
insurance and other operating expenses as well as lost rental revenue during the
expected lease-up periods based on current market conditions. The estimates of
fair value of the tenant relationships also included costs to execute similar
leases including leasing commissions, legal fees and tenant improvements as well
as an estimate of the likelihood of renewal as determined by the management on a
tenant-by-tenant basis.
The value of the in-place leases and in-place tenant improvements are
amortized to expense over the initial terms of the respective leases. The value
of tenant relationship intangibles is amortized to expense over the initial term
and any anticipated renewal periods, but in no event does the amortization
period for intangible assets exceed the remaining depreciable life of the
building. Should a tenant terminate its lease, the unamortized portion of the
related lease intangibles would be charged to expense.
Real estate is stated at the lower of depreciated cost or net realizable
value. In accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment and Disposal of Long-Lived Assets, impairment
losses on long-lived assets used in operations will be recorded when events and
circumstances indicate that the assets might be impaired and the estimated
undiscounted cash flows, without interest charges to be generated by those
assets are less than the carrying amounts of those assets. The property is
reviewed periodically to determine if its carrying costs will be
recovered from future operating cash flows. In cases where the carrying costs
are not expected to be recovered an impairment loss will be recognized.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and the related accumulated depreciation will be removed
from the accounts and the gain or loss will be reflected in net income.
F-30
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents consist
of cash on hand and investments with maturities of three months or less when
purchased.
CONCENTRATION OF CREDIT RISK
At various times throughout the year, cash and cash equivalents are
maintained in accounts with various financial institutions in excess of the
amount insured by the Federal Deposit Insurance Corporation. The financial
stability of these financial institutions is regularly monitored and management
does not believe there is a significant credit risk associated with deposits in
excess of federally insured amounts.
RESTRICTED CASH
Cash held in escrow includes deposits held for future building
improvements and deposits for real estate taxes.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are reduced by an allowance for amounts estimated to
be uncollectible. Accounts receivable consists primarily of accrued rental rate
increases to be received over the life of in-place leases as well as rents and
operating cost recoveries due from tenants. The adequacy of the allowance for
doubtful accounts is regularly evaluated, considering factors such as the credit
quality of tenants, delinquency of payments, historical trends and current
economic conditions.
RENTAL REVENUE
Rental income is recognized on a straight-line basis over the term of
the leases as earned. Tenant reimbursement income represents operating costs
passed through to tenants and is recorded as earned. Accruable rental income
represents rental income earned in excess of rent payments received pursuant to
the terms of the lease agreements. The aggregate net rental revenue increase
resulting from straight-line adjustments was approximately $76,398 for the
period from August 10, 2004 (date of acquisition) through December 31, 2004.
INCOME TAXES
No provision for income taxes is necessary in these financial statements
because, as a tenant-in-common interest, the tax effect of its activities
accrues to the individual tenant-in-common interest holders.
USE OF ESTIMATES
The preparation of combined financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the combined financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
COMMITMENTS AND CONTINGENCIES
From time to time, the tenants-in-common may be exposed to litigation
arising from operations in the ordinary course of business. Management does not
believe that resolution of these matters will have a material adverse impact on
the combined financial condition or results of operations.
F-31
RISKS AND UNCERTAINTIES
The tenants-in-common exposed to the impact in the creditworthiness of
the tenants. These risks are managed by regularly evaluating the risk exposure,
and taking the appropriate measures to mitigate the risks.
3. REAL ESTATE
Real estate is comprised of the following at December 31, 2004:
Land $ 13,328,000
Building and improvements 30,520,457
---------------
43,848,457
Accumulated depreciation (405,256)
---------------
Real estate, net $ 43,443,201
===============
Depreciation expense for the period from August 10, 2004 (date of acquisition)
through December 31, 2004 was $405,256.
4. ACQUIRED LEASE INTANGIBLES AND ACQUIRED BELOW MARKET LEASE INTANGIBLES
Acquired lease intangibles are comprised of the following at December
31, 2004:
Above market lease intangibles $ 802,074
In-place leases 1,801,110
In-place tenant improvements 2,155,828
Customer relationship intangibles 1,400,970
---------------
6,159,982
Accumulated amortization (315,239)
---------------
Acquired lease intangibles $ 5,844,743
===============
Acquired below market lease intangibles are comprised of the following
at December 31, 2004:
Acquired below market lease intangibles $ 1,857,010
Accumulated amortization (111,903)
---------------
Acquired below market lease intangibles, net $ 1,745,107
===============
Amortization (accretion) of $256,018 and ($61,465) is included in depreciation
and amortization and rental income, respectively, on the accompanying combined
statement of operations for the period from August 10, 2004 (date of
acquisition) through December 31, 2004.
F-32
5. ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following at December 31, 2004:
Rents and services receivable $ 229,607
Accruable rental income 76,398
---------------
306,005
Allowance for doubtful accounts (16,491)
---------------
Accounts receivable, net $ 289,514
===============
Bad debt expense for the period from August 10, 2004 (date of acquisition)
through December 31, 2004 of $16,491 was included in general and operating
expenses on the accompanying statement of operations.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are comprised of the following
at December 31, 2004:
Accounts payable and accrued expenses $ 409,998
Accrued property taxes 159,654
---------------
Total accounts payable and accrued liabilities $ 569,652
===============
7. TENANT SECURITY DEPOSITS AND PREPAID RENT
Tenant security deposits and prepaid rent consists of the following
amounts as of December 31, 2004:
Tenant security deposits $ 202,705
Prepaid rent 23,432
---------------
Total tenant security deposits and prepaid rent $ 226,137
===============
8. LEASING ACTIVITIES
The Colorado Building leases the building to tenants under operating
leases with termination dates extending through the year 2018. Minimum future
rentals on noncancelable leases for tenants occupying space at December 31,
2004, excluding tenant reimbursements for increases in operating expenses, are
as follows:
F-33
2005 $ 3,768,202
2006 3,769,730
2007 3,676,648
2008 3,068,800
2009 2,392,386
Thereafter 5,074,429
---------------
$ 21,750,195
---------------
64% of the total revenues relates to 4 tenants who occupy approximately 64% of
the available space in the Colorado Building.
9. ITEMS NOT REFLECTED IN COMBINED FINANCIAL STATEMENTS
In connection with the acquisition of the Colorado Building, each
tenant-in-common interest holder is party to a $28,000,000 mortgage loan that is
collateralized by each tenant-in-common interest holder's undivided interest in
the Colorado Building. The mortgage loan bears interest at an annual rate of
6.075% and requires monthly interest only payments until October 2009, at which
time monthly payments of principal and interest in the amount of $71,926 are
required. The loan matures in 2014 and is subject to certain debt service
coverage ratio requirements, with which the Colorado Building is compliant as of
December 31, 2004. Interest expense on this mortgage loan was $663,694 for the
period ending December 31, 2004. The mortgage loan and related interest expense
is not reflected in these combined financial statements as the debt is joint and
severally liable to each tenant-in-common interest holder and is not the
responsibility of the combined tenant-in-common interest holders.
Aggregate principal payments on the mortgage loan at December 31, 2004
are due as follows:
2005 $ -
2006 -
2007 -
2008 -
2009 78,102
Thereafter 27,921,898
---------------
$ 28,000,000
===============
Behringer Harvard TIC Management Services LP (the "Property Manager"),
an affiliate of the REIT, has the sole and exclusive right to manage, operate,
lease, and supervise the overall maintenance of the Colorado Building. Under the
terms of the Management Agreement, the Property Manager receives a property
management fee equal to 3.0% of the monthly gross revenues of the Colorado
Building. The Management Agreement with the Property Manager shall terminate on
the earlier of (i) the sale of the Colorado Building, (ii) failure by the
tenants in common to renew the Management Agreement beyond December 31, 2004 and
each anniversary of such date thereafter or (iii) December 31, 2025. Total
management fees earned by the Property Manager from August 10, 2004 through
December 31, 2004 were $40,986. These fees are not reflected in the accompanying
combined financial statements as the fees are the responsibility of the
individual tenant-in-common interest holders.
The Colorado Building also pays Behringer Advisors, an affiliate of the
REIT, an annual advisor asset management fee of 0.5% of the aggregate value of
the assets of the Colorado Building. Total asset management fees earned by
Behringer Advisors during the period from August 10, 2004 through December 31,
2004 were $4,667. These fees are not reflected in the accompanying combined
financial statements as the fees are the responsibility of the individual
tenant-in-common interest holders.
F-34
Report of Independent Registered Public Accounting Firm
on Financial Statement Schedule
To the Board of Directors and Stockholders of
Behringer Harvard REIT I, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated March 31, 2005, included in this Annual Report on Form 10-K, also included
an audit of the financial statement schedule listed in Item 15(a)(2) of this
Form 10-K. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 31, 2005
F-35
BEHRINGER HARVARD REIT I, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III
DECEMBER 31, 2004
Gross
Cost amount
Initial cost capitalized carried Deprec-
------------------------ subsequent to at close Accumulated Year of Date iable
Office Building Encumbrances Land Building acquisition of period depreciation construction acquired life
- --------------- ------------ ------------------------ ------------- ----------- ------------ ------------ ---------- ---------
Cyprus Building $ - $2,056,361 $15,500,115 $ - $17,556,476 $ - 1988 12/16/2004 25 years
Englewood, Colorado
(1) The aggregate cost of real estate owned at December 31, 2004 for federal income tax purposes was $17,556,476 (unaudited).
F-36
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
1.1 Form of Dealer Manager Agreement (previously filed in and
incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form S-3, Commission File
No. 333-119945, filed on February 1, 2005)
3.1 Sixth Articles of Amendment and Restatement (previously filed in
and incorporated by reference to Post-Effective Amendment No. 3
to Registrant's Registration Statement on Form S-11, Commission
File No. 333-91532, filed on October 20, 2003)
3.2 Amended and Restated Bylaws (previously filed in and
incorporated by reference to Amendment No. 4 to Registrant's
Registration Statement on Form S-11, Commission File No.
333-91532, filed on February 11, 2003)
4.1 Form of Subscription Agreement and Subscription Agreement
Signature Page (included as Exhibit B to prospectus)
5.1 Opinion of Venable LLP as to legality of securities (previously
filed in and incorporated by reference to Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on Form
S-3, Commission File No. 333-119945, filed on February 1, 2005)
8.1 Opinion of Morris, Manning & Martin, LLP as to tax matters
(previously filed in and incorporated by reference to
Pre-Effective Amendment No. 1 to Registrant's Registration
Statement on Form S-3, Commission File No. 333-119945, filed on
February 1, 2005)
8.2 Opinion of Morris, Manning & Martin, LLP as to ERISA matters
(previously filed in and incorporated by reference to
Pre-Effective Amendment No. 1 to Registrant's Registration
Statement on Form S-3, Commission File No. 333-119945, filed on
February 1, 2005)
10.1 Form of Agreement of Limited Partnership of Behringer Harvard
Operating Partnership I LP (previously filed in and incorporated
by reference to Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form S-11, Commission File No.
333-91532, filed on May 15, 2003)
10.2 Form of Amended and Restated Advisory Agreement (previously
filed in and incorporated by reference to Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on Form
S-3, Commission File No. 333-119945, filed on February 1, 2005)
10.3 Form of Amended and Restated Property Management and Leasing
Agreement among Registrant, Behringer Harvard Operating
Partnership I LP and HPT Management Services, Inc. (previously
filed in and incorporated by reference to Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on Form
S-3, Commission File No. 333-119945, filed on February 1, 2005)
10.4 Reserved.
10.5 Behringer Harvard REIT I, Inc. Non-Employee Director Stock
Option Plan (previously filed in and incorporated by reference
to Amendment No. 1 to Registrant's Registration Statement on
Form S-11, Commission File No. 333-91532, filed on September 3,
2002)
10.6 Form of Option Agreement under Non-Employee Director Stock
Option Plan (previously filed in and incorporated by reference
to Amendment No. 2 to Registrant's Registration Statement on
Form S-11, Commission File No. 333-91532, filed on November 1,
2002)
10.7 Behringer Harvard REIT I, Inc. Non-Employee Director Warrant
Plan (previously filed in and incorporated by reference to
Amendment No. 1 to Registrant's Registration Statement on Form
S-11, Commission File No. 333-91532, filed on September 3, 2002)
10.8 Behringer Harvard REIT I, Inc. 2002 Employee Stock Option Plan
(previously filed in and incorporated by reference to Amendment
No. 2 to Registrant's Registration Statement on Form S-11,
Commission File No. 333-91532, filed on November 1, 2002)
10.9 Form of Option Agreement under 2002 Employee Stock Option Plan
(previously filed in and incorporated by reference to Amendment
No. 2 to Registrant's Registration Statement on Form S-11,
Commission File No. 333-91532, filed on November 1, 2002)
10.10 Loan Agreement with Greenwich Capital Financial Products, Inc.
regarding the Minnesota Center (previously filed in and
incorporated by reference to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form S-11, Commission
File No. 333-91532, filed on October 20, 2003)
10.11 Tenants in Common Agreement regarding the Minnesota Center
(previously filed in and incorporated by reference to
Post-Effective Amendment No. 3 to Registrant's Registration
Statement on Form S-11, Commission File No. 333-91532, filed on
October 20, 2003)
10.12 Property and Asset Management Agreement regarding the Minnesota
Center (previously filed in and incorporated by reference to
Post-Effective Amendment No. 3 to Registrant's Registration
Statement on Form S-11, Commission File No. 333-91532, filed on
October 20, 2003)
10.13 Tenants in Common Agreement regarding Enclave on the Lake
(previously filed in and incorporated by reference to
Post-Effective Amendment No. 6 to Registrant's Registration
Statement on Form S-11, Commission File No. 333-91532, filed on
June 29, 2004)
10.14 Deed of Trust and Security Agreement by Behringer Harvard
Enclave S LP and Behringer Harvard Enclave H LP for the benefit
of State Farm Life Insurance Company (previously filed in and
incorporated by reference to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form S-11, Commission
File No. 333-91532, filed on June 29, 2004)
10.15 Promissory Note made by Behringer Harvard Enclave S LP and
Behringer Harvard Enclave H LP payable to State Farm Life
Insurance Company (previously filed in and incorporated by
reference to Post-Effective Amendment No. 6 to Registrant's
Registration Statement on Form S-11, Commission File No.
333-91532, filed on June 29, 2004)
10.16 Form of Assumption Agreement among State Farm Life Insurance
Company, Behringer Harvard Enclave S LP, Behringer Harvard
Enclave H LP, and Behringer Harvard Holdings, LLC (previously
filed in and incorporated by reference to Post-Effective
Amendment No. 6 to Registrant's Registration Statement on Form
S-11, Commission File No. 333-91532, filed on June 29, 2004)
10.17 Limited Guaranty made by Robert M. Behringer with regard to
Enclave on the Lake (previously filed in and incorporated by
reference to Post-Effective Amendment No. 6 to Registrant's
Registration Statement on Form S-11, Commission File No.
333-91532, filed on June 29, 2004)
10.18 Limited Guaranty made by Behringer Harvard Holdings, LLC with
regard to Enclave on the Lake (previously filed in and
incorporated by reference to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form S-11, Commission
File No. 333-91532, filed on June 29, 2004)
10.19 Property and Asset Management Agreement regarding Enclave on the
Lake (previously filed in and incorporated by reference to
Post-Effective Amendment No. 6 to Registrant's Registration
Statement on Form S-11, Commission File No. 333-91532, filed on
June 29, 2004)
10.20 Sale Agreement between Trizec Holdings, Inc. and Behringer
Harvard Operating Partnership I LP regarding the St. Louis Place
Property (previously filed in and incorporated by reference to
Post-Effective Amendment No. 7 to Registrant's Registration
Statement on Form S-11,
Commission File No. 333-91532, filed on September 29, 2004)
10.21 Deed of Trust, Assignment of Leases and Rents and Security
Agreement by Behringer Harvard St. Louis Place H, LLC and
Behringer Harvard St. Louis Place S, LLC, for the benefit of
Greenwich Capital Financial Products, Inc. regarding the St.
Louis Place Property (previously filed in and incorporated by
reference to Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form S-11, Commission File No.
333-91532, filed on September 29, 2004)
10.22 Consent and Subordination of Manager by and among Behringer
Harvard St. Louis Place H, LLC, Behringer Harvard St. Louis
Place S, LLC and Behringer Harvard TIC Management Services LP
regarding the St. Louis Place Property (previously filed in and
incorporated by reference to Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form S-11, Commission
File No. 333-91532, filed on September 29, 2004)
10.23 Loan Agreement by and among Behringer Harvard St. Louis Place H,
LLC, Behringer Harvard St. Louis Place S, LLC and Greenwich
Capital Financial Products, Inc. regarding the St. Louis Place
Property (previously filed in and incorporated by reference to
Post-Effective Amendment No. 7 to Registrant's Registration
Statement on Form S-11, Commission File No. 333-91532, filed on
September 29, 2004)
10.24 Promissory Note made by Behringer Harvard St. Louis Place H, LLC
and Behringer Harvard St. Louis Place S, LLC, payable to
Greenwich Capital Financial Products, Inc. regarding the St.
Louis Place Property (previously filed in and incorporated by
reference to Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form S-11, Commission File No.
333-91532, filed on September 29, 2004)
10.25 Loan Assumption and Ratification Agreement by and among
Behringer Harvard St. Louis Place S, LLC and Greenwich Capital
Financial Products, Inc. regarding the St. Louis Place Property
(previously filed in and incorporated by reference to
Post-Effective Amendment No. 7 to Registrant's Registration
Statement on Form S-11, Commission File No. 333-91532, filed on
September 29, 2004)
10.26 Guaranty of Recourse Obligations made by Behringer Harvard
Holdings, LLC and Robert Behringer in favor of Greenwich Capital
Financial Products, Inc. regarding the St. Louis Place Property
(previously filed in and incorporated by reference to
Post-Effective Amendment No. 7 to Registrant's Registration
Statement on Form S-11, Commission File No. 333-91532, filed on
September 29, 2004)
10.27 Purchase and Sale Agreement by and between Hippo Properties LLC
and Harvard Property Trust, LLC regarding the Colorado Property
(previously filed and incorporated by reference to Form 10-Q for
the period ended June 30, 2004)
10.28 First Amendment to Purchase and Sale Agreement between Hippo
Properties LLC and Harvard Property Trust, LLC regarding the
Colorado Property (previously filed and incorporated by
reference to Form 10-Q for the period ended June 30, 2004)
10.29 Second Amendment to Purchase and Sale Agreement between Hippo
Properties LLC and Harvard Property Trust, LLC regarding the
Colorado Property (previously filed and incorporated by
reference to Form 10-Q for the period ended June 30, 2004)
10.30 Third Amendment to Purchase and Sale Agreement between Hippo
Properties LLC and Harvard Property Trust, LLC regarding the
Colorado Property (previously filed and incorporated by
reference to Form 10-Q for the period ended June 30, 2004)
10.31 Tenants in Common Agreement regarding the Colorado Property
(previously filed and incorporated by reference to Form 10-Q for
the period ended June 30, 2004)
10.32 Loan Agreement with Greenwich Capital Financial Products, Inc.
regarding the Colorado Property (previously filed and
incorporated by reference to Form 10-Q for the period ended June
30, 2004)
10.33 Guaranty of Recourse Obligations by Behringer Harvard Holdings,
LLC and Robert Behringer regarding the Colorado Property
(previously filed and incorporated by reference to Form 10-Q for
the period ended June 30, 2004)
10.34 Property and Asset Management Agreement regarding the Colorado
Property (previously filed and incorporated by reference to Form
10-Q for the period ended June 30, 2004)
10.35 Amended and Restated Accommodation Agreement between Behringer
Harvard REIT I, Inc. and Behringer Harvard Holdings, LLC
(previously filed and incorporated by reference to Form 10-Q for
the period ended June 30, 2004)
10.36 Real Estate Purchase and Sale Agreement between AEW/McCord, L.P.
and Harvard Property Trust, LLC regarding the Travis Tower
(previously filed and incorporated by reference to Form 8-K
filed on October 7, 2004)
10.37 First Amendment to Purchase and Sale Agreement between
AEW/McCord, L.P. and Harvard Property Trust, LLC regarding the
Travis Tower (previously filed and incorporated by reference to
Form 8-K filed on October 7, 2004)
10.38 Loan Agreement between Bear Stearns Commercial Mortgage, Inc.,
Behringer Harvard Travis Tower S LP and Behringer Harvard Travis
Tower H LP regarding the Travis Tower (previously filed and
incorporated by reference to Form 8-K filed on October 7, 2004)
10.39 Promissory Note made by Behringer Harvard Travis Tower S LP and
Behringer Harvard Travis Tower H LP to Bear Stearns Commercial
Mortgage, Inc. regarding the Travis Tower (previously filed and
incorporated by reference to Form 8-K filed on October 7, 2004)
10.40 Deed of Trust and Security Agreement by Behringer Harvard Travis
Tower S LP and Behringer Harvard Travis Tower H LP, as grantor,
to Reno Hartfiel, as trustee for the benefit of Bear Stearns
Commercial Mortgage, Inc. regarding the Travis Tower (previously
filed and incorporated by reference to Form 8-K filed on October
7, 2004)
10.41 Assignment of Leases and Rents by Behringer Harvard Travis Tower
S LP and Behringer Harvard Travis Tower H LP to Bear Stearns
Commercial Mortgage, Inc. regarding the Travis Tower (previously
filed and incorporated by reference to Form 8-K filed on October
7, 2004)
10.42 Loan Agreement between First American Bank, SSB and Behringer
Harvard Holdings, LLC regarding the Travis Tower (previously
filed and incorporated by reference to Form 8-K filed on October
7, 2004)
10.43 Promissory Note made by Behringer Harvard Holdings, LLC to First
American Bank, SSB regarding the Travis Tower (previously filed
and incorporated by reference to Form 8-K filed on October 7,
2004)
10.44 Guaranty Agreement made by Behringer Harvard REIT I, Inc. for
the benefit of First American Bank, SSB regarding the Travis
Tower (previously filed and incorporated by reference to Form
8-K filed on October 7, 2004)
10.45 Security Agreement granted by Behringer Harvard REIT I, Inc. for
the benefit of First American Bank, SSB regarding the Travis
Tower (previously filed and incorporated by reference to Form
8-K filed on October 7, 2004)
10.46 Purchase and Sale Agreement by and between MG-Alamo, LLC and
Harvard Property Trust, LLC dated October 18, 2004, as assigned
by Harvard Property Trust to Behringer Harvard REIT I, Inc. on
November 4, 2004 regarding Alamo Plaza (previously filed and
incorporated by reference to Form 10-Q for the period ended
September 30, 2004)
10.47 Agreement of Sale and Purchase by and between HSOV Ashford
Perimeter, LLC and Harvard Property Trust, LLC dated November 4,
2004, as assigned by Harvard Property Trust to Behringer Harvard
REIT I, Inc. on November 4, 2004 regarding Ashford Perimeter
(previously filed and incorporated by reference to Form 10-Q for
the period ended September 30, 2004)
10.48 Purchase and Sale Agreement by and between PERA Mineral, Inc.
and Harvard Property Trust, LLC dated November 9, 2004 as
assigned by Harvard Property Trust, LLC to Behringer Harvard
REIT I on November 12, 2004 regarding the Cyprus Building
(previously filed and incorporated by reference to Form 8-K
filed on November 18, 2004)
10.49 Loan Agreement between Citigroup Global Markets Realty Corp. and
Behringer Harvard Pratt H, LLC and the initial TIC borrowers
regarding the Pratt Building (previously filed and incorporated
by reference to Form 8-K filed on December 22, 2004)
10.50 Promissory Note made between Behringer Harvard Pratt H, LLC and
the initial TIC borrowers and Citigroup Global Markets Realty
Corp. regarding the Pratt Building (previously filed and
incorporated by reference to Form 8-K filed on December 22,
2004)
10.51 Deed of Trust, Assignment of Leases and Rents and Security
Agreement by Behringer Harvard Pratt H, LLC and the initial TIC
borrower, as grantor, to Christopher F. Naughten as trustee for
the benefit of Citigroup Global Markets Realty Corp. regarding
the Pratt Building (previously filed and incorporated by
reference to Form 8-K filed on December 22, 2004)
10.52 Assignment of Leases and Rents by Behringer Harvard Pratt H, LLC
and the initial TIC borrowers to Citigroup Global Markets Realty
Corp. regarding the Pratt Building (previously filed and
incorporated by reference to Form 8-K filed on December 22,
2004)
10.53 Guaranty of Recourse Obligation made between Behringer Harvard
Holdings, LLC, Behringer Harvard REIT I, Inc. and Robert
Behringer for the benefit of Citigroup Global Markets Realty
Corp. regarding the Pratt Building (previously filed and
incorporated by reference to Form 8-K filed on December 22,
2004)
10.54 Tenants in Common Agreement regarding the Pratt Building
(previously filed and incorporated by reference to Form 8-K
filed on December 22, 2004)
10.55 Property and Asset Management Agreement regarding the Pratt
Building (previously filed and incorporated by reference to Form
8-K filed on December 22, 2004)
10.56 Sale Agreement between Trizec 250 W. Pratt, LLC and Behringer
Harvard Operating Partnership I LP regarding the Pratt Building
(previously filed and incorporated by reference to Form 8-K
filed on December 22, 2004)
10.57 Credit Agreement between Bank of America, N.A. and Behringer
Harvard REIT I, Inc., Behringer Harvard Operating Partnership I
LP and Behringer Harvard Cyprus, LLC regarding the Cyprus
Building (previously filed and incorporated by reference to Form
8-K filed on January 5, 2005)
10.58 Promissory Note made between Behringer Harvard REIT I, Inc. and
Bank of America, N.A. regarding the Cyprus Building (previously
filed and incorporated by reference to Form 8-K filed on January
5, 2005)
10.59 Deed of Trust, Assignment of Leases and Rents and Security
Agreement by Behringer Harvard Cyprus, LLC, as grantor, to the
Public Trustee of Arapahoe County, Colorado as trustee for the
benefit of Bank of America, N.A. regarding the Cyprus Building
(previously filed and incorporated by reference to Form 8-K
filed on January 5, 2005)
10.60 Assignment of Leases and Rents and Other Income by Behringer
Harvard Cyprus, LLC to Bank of America, N.A. regarding the
Cyprus Building (previously filed and incorporated by reference
to Form 8-K filed on January 5, 2005)
10.61 Guaranty Agreement made between Behringer Harvard Operating
Partnership I LP in favor of Bank of America, N.A. regarding the
Cyprus Building (previously filed and incorporated by reference
to Form 8-K filed on January 5, 2005)
10.62 Guaranty Agreement made between Behringer Harvard Cyprus, LLC in
favor of Bank of America, N.A. regarding the Cyprus Building
(previously filed and incorporated by reference to Form 8-K
filed on January 5, 2005)
10.63 Loan Agreement between Bear Stearns Commercial Mortgage, Inc.
and Behringer Harvard Ashford Perimeter H, LLC regarding Ashford
Perimeter (previously filed and incorporated by reference to
Form 8-K filed on January 12, 2005)
10.64 Deed to Secure Debt, Assignment of Leases and Rents and Security
Agreement between Bear Stearns Commercial Mortgage, Inc. and
Behringer Harvard Ashford Perimeter H, LLC regarding Ashford
Perimeter (previously filed and incorporated by reference to
Form 8-K filed on January 12, 2005)
10.65 Promissory Note between Bear Stearns Commercial Mortgage, Inc.
and Behringer Harvard Ashford Perimeter H, LLC regarding Ashford
Perimeter (previously filed and incorporated by reference to
Form 8-K filed on January 12, 2005)
10.66 Assignment of Leases and Rents between Bear Stearns Commercial
Mortgage, Inc. and Behringer Harvard Ashford Perimeter H, LLC
regarding Ashford Perimeter (previously filed and incorporated
by reference to Form 8-K filed on January 12, 2005)
10.67 Indemnity Agreement by Behringer Harvard Ashford Perimeter H,
LLC and Behringer Harvard REIT I, Inc. in favor of Bear Stearns
Commercial Mortgage, Inc. regarding Ashford Perimeter
(previously filed and incorporated by reference to Form 8-K
filed on January 12, 2005)
10.68 Purchase and Sale Agreement by and between LBA-VIF Utah, LLC and
Harvard Property Trust, LLC dated February 15, 2005 regarding
the Utah Building (previously filed and incorporated by
reference to Form 8-K filed on February 28, 2005)
10.69 Assignment of Purchase and Sale Agreement by Harvard Property
Trust, LLC to Behringer Harvard Operating Partnership I LP dated
February 22, 2005 regarding the Utah Building (previously filed
and incorporated by reference to Form 8-K filed on February 28,
2005)
10.70 Loan Agreement between Citigroup Global Markets Realty Corp. and
Behringer Harvard Alamo Plaza H, LLC and Behringer Harvard Alamo
Plaza S, LLC regarding Alamo Plaza (previously filed and
incorporated by reference to Form 8-K filed on March 2, 2005)
10.71 Deed of Trust, Assignment of Leases and Rents and Security
Agreement between Behringer Harvard Alamo Plaza H, LLC and
Behringer Harvard Alamo Plaza S, LLC and the Public Trustee of
the City and County of Denver, Colorado for the benefit of
Citigroup Global Markets Realty Corp. regarding Alamo Plaza
(previously filed and incorporated by reference to Form 8-K
filed on March 2, 2005)
10.72 Promissory Note between Citigroup Global Markets Realty Corp.
and Behringer Harvard Alamo Plaza H, LLC and Behringer Harvard
Alamo Plaza S, LLC regarding Alamo Plaza (previously filed and
incorporated by reference to Form 8-K filed on March 2, 2005)
10.73 Guaranty of Recourse Obligations made by Behringer Harvard
Holdings, LLC and Robert Behringer as guarantors in favor of
Citigroup Global Markets Realty Corp. regarding Alamo Plaza
(previously filed and incorporated by reference to Form 8-K
filed on March 2, 2005)
10.74 Assignment of Leases and Rents between Citigroup Commercial
Mortgage, Inc. and Behringer Harvard Alamo Plaza H, LLC
regarding Alamo Plaza (previously filed and incorporated by
reference to Form 8-K filed on March 2, 2005)
21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
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