Attached files
file | filename |
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EX-31.2 - Behringer Harvard Mid-Term Value Enhancement Liquidating Trust | v165342_ex31-2.htm |
EX-31.1 - Behringer Harvard Mid-Term Value Enhancement Liquidating Trust | v165342_ex31-1.htm |
EX-32.1 - Behringer Harvard Mid-Term Value Enhancement Liquidating Trust | v165342_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[Mark
One]
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
OR
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ____________ to ____________
Commission
File Number: 000-51292
Behringer
Harvard Mid-Term Value Enhancement Fund I LP
(Exact
Name of Registrant as Specified in Its Charter)
Texas
|
71-0897613
|
|
(State or other jurisdiction of incorporation or
organization)
|
(I.R.S. Employer
Identification No.)
|
15601
Dallas Parkway, Suite 600, Addison, Texas 75001
(Address
of principal executive offices) (Zip Code)
(866)
655-1610
(Registrant’s
telephone number, including area code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.45 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer o
|
Accelerated filer o
|
Non-accelerated filer o (Do not check if a smaller reporting company)
|
Smaller reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
x
BEHRINGER
HARVARD MID-TERM VALUE ENHANCEMENT FUND I LP
FORM
10-Q
Quarter
Ended September 30, 2009
Page
|
|||
PART
I
|
|||
FINANCIAL
INFORMATION
|
|||
|
|||
Item
1.
|
Financial
Statements (Unaudited).
|
||
Consolidated
Balance Sheets as of September 30, 2009 and December 31,
2008
|
3
|
||
Consolidated
Statements of Operations for the three and nine months ended September 30,
2009 and 2008
|
4
|
||
Consolidated
Statements of Partners’ Capital for the year ended December 31, 2008 and
the nine months ended September 30, 2009
|
5
|
||
Consolidated
Statements of Cash Flows for the nine months ended September 30, 2009 and
2008
|
6
|
||
Notes
to Consolidated Financial Statements
|
7
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
14
|
|
Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk.
|
20
|
|
Item
4T.
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Controls
and Procedures.
|
20
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PART
II
|
|||
OTHER
INFORMATION
|
|||
Item
1.
|
Legal
Proceedings.
|
21
|
|
Item
1A.
|
Risk
Factors.
|
21
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
21
|
|
Item
3.
|
Defaults
Upon Senior Securities.
|
21
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders.
|
21
|
|
Item
5.
|
Other
Information.
|
21
|
|
Item
6.
|
Exhibits.
|
21
|
|
Signature
|
22
|
2
PART
I
FINANCIAL
INFORMATION
Item
1. Financial
Statements.
Behringer
Harvard Mid-Term Value Enhancement Fund I LP
Consolidated
Balance Sheets
(Unaudited)
(in
thousands, except unit amounts)
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Real
estate
|
||||||||
Land
|
$ | 5,682 | $ | 5,682 | ||||
Buildings
and improvements, net
|
14,756 | 15,146 | ||||||
Total
real estate
|
20,438 | 20,828 | ||||||
Cash
and cash equivalents
|
4,663 | 6,247 | ||||||
Accounts
receivable, net
|
477 | 370 | ||||||
Prepaid
expenses and other assets
|
59 | 45 | ||||||
Lease
intangibles, net
|
2,382 | 2,615 | ||||||
Total
assets
|
$ | 28,019 | $ | 30,105 | ||||
Liabilities
and partners' capital
|
||||||||
Liabilities
|
||||||||
Accounts
payable
|
$ | - | $ | 23 | ||||
Payables
to related parties
|
87 | 94 | ||||||
Acquired
below-market leases, net
|
70 | 125 | ||||||
Distributions
payable
|
211 | 218 | ||||||
Accrued
liabilities
|
846 | 1,042 | ||||||
Total
liabilities
|
1,214 | 1,502 | ||||||
Commitments
and contingencies
|
||||||||
Partners'
capital
|
||||||||
Limited
partners, 44,000,000 units authorized; 4,275,187 units issued and
outstanding at September 30, 2009 and December 31,
2008
|
26,804 | 28,602 | ||||||
General
partners
|
1 | 1 | ||||||
Total
partners' capital
|
26,805 | 28,603 | ||||||
Total
liabilities and partners' capital
|
$ | 28,019 | $ | 30,105 |
See
Notes to Consolidated Financial Statements.
3
Behringer
Harvard Mid-Term Value Enhancement Fund I LP
Consolidated
Statements of Operations
(Unaudited)
(in
thousands, except per unit amounts)
Three Months
|
Three Months
|
Nine months
|
Nine months
|
|||||||||||||
ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
September 30, 2009
|
September 30, 2008
|
September 30, 2009
|
September 30, 2008
|
|||||||||||||
Rental
revenue
|
$ | 958 | $ | 1,059 | $ | 2,963 | $ | 2,970 | ||||||||
Expenses
|
||||||||||||||||
Property
operating expenses
|
238 | 234 | 642 | 650 | ||||||||||||
Real
estate taxes
|
121 | 177 | 489 | 563 | ||||||||||||
Property
and asset management fees
|
64 | 73 | 210 | 212 | ||||||||||||
General
and administrative
|
154 | 114 | 460 | 402 | ||||||||||||
Depreciation
and amortization
|
358 | 357 | 1,075 | 1,102 | ||||||||||||
Total
expenses
|
935 | 955 | 2,876 | 2,929 | ||||||||||||
Interest
income
|
11 | 36 | 39 | 132 | ||||||||||||
Income
before income taxes
|
34 | 140 | 126 | 173 | ||||||||||||
Provision
for income taxes
|
3 | 4 | 6 | 11 | ||||||||||||
Net
income
|
$ | 31 | $ | 136 | $ | 120 | $ | 162 | ||||||||
Net
income allocated to limited partners
|
$ | 31 | $ | 136 | $ | 120 | $ | 162 | ||||||||
Weighted
average number of limited
|
||||||||||||||||
partnership
units outstanding
|
4,275 | 4,275 | 4,275 | 4,294 | ||||||||||||
Basic
and diluted net income per limited partnership unit
|
$ | 0.01 | $ | 0.03 | $ | 0.03 | $ | 0.04 |
See
Notes to Consolidated Financial Statements.
4
Consolidated
Statements of Partners' Capital
(Unaudited)
(in
thousands)
Limited Partners
|
General Partners
|
|||||||||||||||||||||||
Contributions/
|
Accumulated
|
Number of
|
Accumulated
|
|||||||||||||||||||||
(Distributions)
|
Income (Losses)
|
Units
|
Contributions
|
Income
|
Total
|
|||||||||||||||||||
Balance
as of January 1, 2008
|
$ | 31,384 | $ | - | 4,309 | $ | 1 | $ | - | $ | 31,385 | |||||||||||||
Redemption
of units of limited
|
||||||||||||||||||||||||
partnership
interest
|
(342 | ) | (34 | ) | (342 | ) | ||||||||||||||||||
Distributions
to limited partners
|
(2,440 | ) | (141 | ) | (2,581 | ) | ||||||||||||||||||
Net
income
|
141 | - | 141 | |||||||||||||||||||||
Balance
as of December 31, 2008
|
28,602 | - | 4,275 | 1 | - | 28,603 | ||||||||||||||||||
Distributions
to limited partners
|
(1,798 | ) | (120 | ) | (1,918 | ) | ||||||||||||||||||
Net
income
|
120 | - | 120 | |||||||||||||||||||||
Balance
as of September 30, 2009
|
$ | 26,804 | $ | - | 4,275 | $ | 1 | $ | - | $ | 26,805 |
See
Notes to Consolidated Financial Statements.
5
Behringer
Harvard Mid-Term Value Enhancement Fund I LP
Consolidated
Statements of Cash Flows
(Unaudited)
(in
thousands)
Nine Months
|
Nine Months
|
|||||||
Ended
|
Ended
|
|||||||
September 30, 2009
|
September 30, 2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
income
|
$ | 120 | $ | 162 | ||||
Adjustments
to reconcile net income to net cash
|
||||||||
flows
provided by operating activities:
|
||||||||
Depreciation
and amortization
|
1,068 | 1,085 | ||||||
Change
in accounts receivable
|
(107 | ) | (23 | ) | ||||
Change
in prepaid expenses and other assets
|
(14 | ) | (8 | ) | ||||
Change
in lease intangibles
|
(338 | ) | (1 | ) | ||||
Change
in accounts payable
|
(23 | ) | 5 | |||||
Change
in payables to related parties
|
(7 | ) | 57 | |||||
Change
in accrued liabilities
|
(196 | ) | (346 | ) | ||||
Cash
provided by operating activities
|
503 | 931 | ||||||
Cash
flows used in investing activities
|
||||||||
Purchases
of property and equipment
|
(162 | ) | - | |||||
Cash
flows used in financing activities
|
||||||||
Distributions
|
(1,925 | ) | (1,944 | ) | ||||
Redemption
of limited partnership units
|
- | (342 | ) | |||||
Cash
used in financing activities
|
(1,925 | ) | (2,286 | ) | ||||
Net
change in cash and cash equivalents
|
(1,584 | ) | (1,355 | ) | ||||
Cash
and cash equivalents at beginning of period
|
6,247 | 7,614 | ||||||
Cash
and cash equivalents at end of period
|
$ | 4,663 | $ | 6,259 | ||||
Supplemental
disclosure:
|
||||||||
Taxes
paid
|
$ | 10 | $ | 14 |
See
Notes to Consolidated Financial Statements.
6
Behringer
Harvard Mid-Term Value Enhancement Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
1.
|
Business
and Organization
|
Business
Behringer
Harvard Mid-Term Value Enhancement Fund I LP (which may be referred to as the
“Partnership,” “we,” “us,” or “our”) is a limited partnership formed in Texas on
July 30, 2002. Our general partners are Behringer Harvard
Advisors I LP (“Behringer Advisors I”) and Robert M. Behringer (collectively the
“General Partners”). We were funded through capital contributions
from our General Partners and initial limited partner on September 20, 2002
(date of inception) and offered our limited partnership units pursuant to the
public offering which commenced on February 19, 2003 (the “Offering”) and
terminated on February 19, 2005. The Offering was a best efforts
continuous offering and we admitted new investors until the termination of the
Offering.
We used
the proceeds from the Offering, after deducting offering expenses, primarily to
acquire six office building properties. As of September 30, 2009,
five of the six properties we acquired remain in our portfolio. These
properties combined contain approximately 236,000 rentable square
feet. We are not currently seeking to purchase any additional
properties for our portfolio; however, in limited circumstances, we may purchase
properties as a result of selling one or more of the properties we currently
hold and reinvest the sales proceeds in properties that fall within our
investment objectives and investment criteria. We are not limited to investments
in institutional quality office properties. We may invest in other
commercial properties, such as shopping centers, business and industrial parks,
manufacturing facilities, warehouse and distribution facilities, in order to
reduce overall portfolio risk or enhance overall portfolio returns if our
General Partners determine that it would be advantageous to do so. In
addition, our General Partners may determine that it would be advantageous to
acquire commercial properties other than institutional quality office properties
in order to diversify our portfolio or in order to respond to changes in the
real estate market. We may also invest in commercial properties that
are not preleased to such tenants or in other types of commercial properties
such as hotels or motels.
We may
purchase properties that have been constructed and have operating histories, are
newly constructed or are under development or construction. Our Agreement of
Limited Partnership, as amended (the “Partnership Agreement”), provides that we
will continue in existence until the earlier of December 31, 2022 or termination
of the Partnership pursuant to the dissolution and termination provisions of the
Partnership Agreement.
Organization
On
February 19, 2003, we commenced the Offering at a price of $10 per
unit. The Offering was terminated in February
2005. As of November 6, 2009, we had 4,275,187 limited partnership
units outstanding. Our limited partnership units are not currently
listed on a national exchange, and we do not expect any public market for the
units to develop.
Until
December 31, 2009 the value of our units will be deemed to be $10, as adjusted
for any special distributions, and no valuation or appraisal of our units will
be performed. Beginning with fiscal year end 2009, we will prepare
annual valuations of our units based upon the estimated amount a limited partner
would receive if all Partnership assets were sold for their estimated values as
of the close of our fiscal year and all proceeds from such sales, without
reduction for selling expenses, together with any funds held by the Partnership,
were distributed to the limited partners upon liquidation. Such
estimated property values will be based upon annual valuations performed by the
General Partners, and the
General Partners are not required to obtain independent property
appraisals. While the General Partners are required under the
Partnership Agreement to obtain the opinion of an independent third party
stating that their estimates of value are reasonable, the unit valuations
provided by the General Partners may not satisfy the technical requirements
imposed on plan fiduciaries under the Employee Retirement Income Security Act
(“ERISA”). Similarly, the unit valuations provided by the General
Partners may be subject to challenge by the Internal Revenue Service if used for
any tax (income, estate and gift or otherwise) valuation purpose as an indicator
of the fair value of the units.
In
February 2009, the Financial Industry Regulatory Authority (“FINRA”) released
Regulatory Notice 09-09. This notice confirms that National Association of
Securities Dealers (“NASD”) Rule 2340(c)(2) prohibits broker-dealers that are
required to report an estimated value per unit for direct participation programs
on customer account statements from using a per unit estimated value developed
from data that is more than 18 months old. Since our offering has been
completed for more than 18 months, this would mean that broker-dealers that
participated in our offering could not use the last price paid to acquire a
limited partnership unit in our public offering as the estimated value per unit
of our limited partnership units on customer account statements.
We currently anticipated
that our valuation process we describe above will assist broker-dealers
with this requirement.
7
Behringer
Harvard Mid-Term Value Enhancement Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
2. Interim
Unaudited Financial Information
The
accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2008, which was filed
with the Securities and Exchange Commission (“SEC”). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America (“GAAP”) have been condensed or omitted in this report
on Form 10-Q pursuant to the rules and regulations of the SEC.
The
results for the interim periods shown in this report are not necessarily
indicative of future financial results. Our accompanying consolidated
balance sheet as of September 30, 2009, consolidated statements of partners’
capital, operations and cash flows for the nine month periods ended September
30, 2009 and 2008 have not been audited by our independent registered public
accounting firm. In the opinion of management, the accompanying
unaudited consolidated financial statements include all adjustments necessary to
present fairly our financial position as of September 30, 2009 and
December 31, 2008 and the results of our operations and cash flows for the
periods ended September 30, 2009 and 2008. Such adjustments are of a
normal recurring nature.
We have
evaluated subsequent events after the balance sheet date of September 30, 2009
through November 13, 2009, which is the date the financial statements were
issued.
3. Summary
of Significant Accounting Policies
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates include such items as
purchase price allocation for real estate acquisitions, impairment of long-lived
assets, depreciation and amortization and allowance for doubtful
accounts. Actual results could differ from those
estimates.
Principles
of Consolidation and Basis of Presentation
The
consolidated financial statements include our accounts and the accounts of all
of our subsidiaries. All inter-company transactions, balances and
profits have been eliminated in consolidation.
Real
Estate
Upon the
acquisition of real estate properties, we allocate the purchase price of those
properties to the assets acquired, consisting of land, inclusive of associated
rights, and buildings, any assumed liabilities, identified intangible assets,
asset retirement obligations based on their relative fair
values. Identified intangible assets consist of the fair value of
above-market and below-market leases, in-place leases, in-place tenant
improvements, in-place leasing commissions and tenant
relationships. Acquisition-related costs are expensed as
incurred. Initial valuations are subject to change until our
information is finalized, which is no later than 12 months from the acquisition
date.
The fair
value of the tangible assets acquired, consisting of land and buildings, is
determined by valuing the property as if it were vacant, and the “as-if-vacant”
value is then allocated to land and buildings. Land values are
derived from appraisals, and building values are calculated as replacement cost
less depreciation or management’s estimates of the relative fair value of these
assets using discounted cash flow analyses or similar methods. The
value of buildings 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 (1) the contractual amounts to be paid pursuant to the in-place leases
and (2) management’s estimate of current market lease rates for the
corresponding in-place leases, measured over a period equal to (a) the remaining
non-cancelable lease term for above-market leases, or (b) the remaining
non-cancelable lease term plus any fixed rate renewal options for below-market
leases. We record the fair value of above-market and below-market
leases as intangible assets or intangible liabilities, respectively, and
amortize them as an adjustment to rental income over the above determined lease
term.
8
Behringer
Harvard Mid-Term Value Enhancement Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
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 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 value of in-place leases include an
estimate of carrying costs during the expected lease-up periods for the
respective spaces considering current market conditions. In
estimating the carrying costs that would have otherwise been incurred had the
leases not been in place, 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 fair value of tenant relationships also include costs to execute
similar leases including leasing commissions, legal costs and tenant
improvements as well as an estimate of the likelihood of renewal as determined
by management on a tenant-by-tenant basis.
We
amortize the value of in-place leases, in-place tenant improvements and in-place
leasing commissions to expense over the initial term of the respective
leases. The value of tenant relationship intangibles is amortized to
expense over the initial term and any anticipated renewal periods, but in no
event does the amortization period for intangible assets exceed the remaining
depreciable life of the building. Should a tenant terminate its
lease, the unamortized portion of the related real estate intangibles would be
charged to expense.
Anticipated
amortization associated with acquired lease intangibles for the period from
October 1 through December 31, 2009 and for each of the following four
years ended December 31 is as follows (in thousands):
October 1, 2009 - December 31, 2009
|
$ | 160 | ||
2010
|
599 | |||
2011
|
459 | |||
2012
|
249 | |||
2013
|
137 |
Accumulated
depreciation and amortization related to our consolidated investments in real
estate assets and related lease intangibles were as follows (in
thousands):
Acquired
|
||||||||||||
Buildings and
|
Lease
|
Below-Market
|
||||||||||
As of September 30, 2009
|
Improvements
|
Intangibles
|
Leases
|
|||||||||
Cost
|
$ | 18,062 | $ | 5,740 | $ | (388 | ) | |||||
Less:
depreciation and amortization
|
(3,306 | ) | (3,358 | ) | 318 | |||||||
Net
|
$ | 14,756 | $ | 2,382 | $ | (70 | ) | |||||
Acquired
|
||||||||||||
Buildings
and
|
Lease
|
Below-Market
|
||||||||||
As of December 31, 2008
|
Improvements
|
Intangibles
|
Leases
|
|||||||||
Cost
|
$ | 17,900 | $ | 5,408 | $ | (388 | ) | |||||
Less:
depreciation and amortization
|
(2,754 | ) | (2,793 | ) | 263 | |||||||
Net
|
$ | 15,146 | $ | 2,615 | $ | (125 | ) |
Impairment
of Long-Lived Assets
For our
real estate, which is all wholly owned, 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
occur, we assess potential impairment by comparing estimated future undiscounted
operating cash flows expected to be generated over the life of the asset,
including its eventual disposition, to the carrying amount of the
asset. In the event that the carrying amount exceeds the estimated
future undiscounted operating cash flows, we recognize an impairment loss to
adjust the carrying value of the asset to estimated fair value. We
determine the estimated fair value based on discounted cash flow streams using
various factors including estimated future selling prices, costs spent to date,
remaining budgeted costs and selling costs.
During
the first nine months of 2009 and the year 2008, the real estate market
experienced difficult conditions including high inventory levels, tightening of
the credit market and weak consumer confidence. We recognized no
impairment charges for long-lived assets for the three and nine months ended
September 30, 2009 and 2008. In the event that market conditions
continue to decline in the future or the current difficult market conditions
extend beyond our expectations, impairments may be necessary in the
future.
9
Behringer
Harvard Mid-Term Value Enhancement Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
Cash
and Cash Equivalents
We
consider investments in highly-liquid money market funds with original
maturities of three months or less to be cash equivalents.
Accounts
Receivable
Accounts
receivable primarily consists of receivables from tenants related to our
properties. Our allowance for doubtful accounts associated with accounts
receivable was not material at September 30, 2009. We had no
allowance for doubtful accounts at December 31, 2008.
Prepaid
Expenses and Other Assets
Prepaid
expenses and other assets include prepaid directors’ and officers’ insurance as
well as prepaid insurance for our real estate properties.
Revenue
Recognition
We
recognize rental income generated from leases on real estate assets on the
straight-line basis over the terms of the respective leases, including the
effect of rent holidays, if any. The total net increase to rental
revenues due to straight-line rent adjustments for the nine months ended
September 30, 2009 was approximately $126,000. The total net decrease
to rental revenue due to straight-line rent adjustments for the nine months
ended September 30, 2008 was approximately $4,000. Our rental revenue
also includes amortization of above and below market leases. Any
payments made to tenants that are considered lease incentives or inducements are
being amortized to revenue over the life of the respective leases. The revenues
are recognized when earned. Revenues relating to lease termination
fees are recognized at the time that a tenant’s right to occupy the space is
terminated and when we have satisfied all obligations under the
agreement.
Cash
Flow Distributions
Net cash
distributions, as defined in the Partnership Agreement, are to be distributed to
the partners as follows:
|
a)
|
To
the limited partners, on a per unit basis, until each of such limited
partners has received distributions of net cash from operations with
respect to such fiscal year, or applicable portion thereof, equal to eight
percent (8%) per annum of their net capital
contribution;
|
|
b)
|
Then
to the limited partners, on a per unit basis, until each limited partner
has received or has been deemed to have received one hundred percent
(100%) of their net capital contribution;
and
|
|
c)
|
Thereafter,
eighty-five percent (85%) to the limited partners, on a per unit basis,
and fifteen percent (15%) to the General
Partners.
|
Other
limitations of allocated or received distributions are defined within the
Partnership Agreement.
Income
(Loss) Allocations
Net
income for each applicable accounting period is allocated to the partners as
follows:
|
a)
|
To
the partners to the extent of and in proportion to allocations of net loss
as noted below; and
|
|
b)
|
Then,
so as to cause the capital accounts of all partners to permit liquidating
distributions to be made in the same manner and priority as set forth in
the Partnership Agreement with respect to net cash
distributions.
|
Net loss
for each applicable accounting period is allocated to the partners as
follows:
|
a)
|
To
the partners having positive balances in their capital accounts (in
proportion to the aggregate positive balances in all capital accounts) in
an amount not to exceed such positive balance as of the last day of the
fiscal year; and
|
|
b)
|
Then,
eighty-five percent (85%) to the limited partners and fifteen percent
(15%) to the General Partners.
|
We
distribute to our General Partners a share of net cash from operations in the
form of a 15% distribution after the limited partners have received
distributions equal to their net capital contributions plus an 8% annual
cumulative (noncompounded) return on their net capital contributions; provided,
however, that in no event will the General Partners receive more than 10% of
cash available for distribution.
10
Behringer
Harvard Mid-Term Value Enhancement Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
Income
Taxes
As a
limited partnership, we generally are not subject to income
tax. However, legal entities that conduct business in Texas are
generally subject to the Texas margin tax, including previously non-taxable
entities such as limited partnerships and limited liability
partnerships. The tax is assessed on Texas sourced taxable margin,
which is defined as the lesser of (1) 70% of total revenue or
(2) total revenue less (a) the cost of goods sold or
(b) compensation and benefits. Although the law states that the
margin tax is not an income tax, it has the characteristics of an income tax
since it is determined by applying a tax rate to a base that considers both
revenues and expenses. For the nine months ended September 30, 2009,
we recognized a provision for current tax expense of approximately $5,500 and a
deferred tax expense of approximately $600 and for the nine months ended
September 30, 2008, we recognized a provision for current tax expense of
approximately $10,000, and a deferred tax expense of approximately $500, related
to the Texas margin tax.
Certain
of our transactions may be subject to accounting methods for income tax purposes
that differ from the accounting methods used in preparing these financial
statements in accordance with GAAP. Accordingly, our net income or
loss and the resulting balances in the partners’ capital accounts reported for
income tax purposes may differ from the balances reported for those same items
in the accompanying financial statements.
Concentration
of Credit Risk
We have
cash and cash equivalents in excess of federally insured levels on deposit in
financial institutions. We have diversified our cash and cash
equivalents between several banking institutions in an attempt to minimize
exposure to any one of these entities. We regularly monitor the
financial stability of these financial institutions and believe that we are not
exposed to any significant credit risk in cash and cash equivalents and have no
restricted cash. The Federal Deposit Insurance Corporation, or
“FDIC,” generally only insures limited amounts per depositor per insured
bank. Through December 31, 2009, the FDIC will insure up to $250,000 per
depositor per insured bank; on January 1, 2010, the standard coverage limit will
return to $100,000 for most deposit categories. Unlimited deposit
insurance coverage will be available to our non-interest bearing transaction
accounts held at those institutions participating in FDIC’s Temporary Liquidity
Guarantee Program through December 31, 2009.
Reportable
Segments
We have
determined that we have one reportable segment, with activities related to the
ownership, development and management of real estate. Our income
producing properties generated 100% of our consolidated revenues for the three
and nine months ended September 30, 2009 and 2008. Our chief
operating decision maker evaluates operating performance on an individual
property level. Therefore, our properties are aggregated into one
reportable segment.
Net
Income Per Limited Partnership Unit
Net
income per limited partnership unit is calculated by dividing the net income
allocated to limited partners for each period by the weighted average number of
limited partnership units outstanding during such period. Net income
per limited partnership unit on a basic and diluted basis is the same because
the Partnership has no potential dilutive limited partnership units
outstanding.
4. New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued new
accounting guidance on fair value measurements. This guidance
establishes a single authoritative definition of fair value, sets out a
framework for measuring fair value, and requires additional disclosures about
fair value measurements. It applies only to fair value measurements
that are already required or permitted by other accounting
standards. In February 2008, the FASB staff issued authoritative
guidance deferring the effective date of the fair value guidance for all
non-financial assets and liabilities to fiscal years beginning after November
15, 2008, except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The
implementation of this standard on January 1, 2009 did not have a material
impact on our consolidated financial position and results of
operations.
In
December 2007, the FASB issued new guidance on business combinations.
The new standard provides revised guidance on how acquirors recognize and
measure the consideration transferred, identifiable assets acquired, liabilities
assumed, noncontrolling interests, and goodwill acquired in a business
combination. This standard applies the same method of accounting (the
acquisition method) to all transactions and other events in which one entity
obtains control over one or more other businesses. It also includes a
broader definition of a business and the requirement that acquisition related
costs are expensed as incurred and applies to business combinations occurring on
or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. We adopted the provisions of this standard
on January 1, 2009. The acquisition of a real estate property has
been determined to meet the definition of a business combination under the new
standard. Therefore, if we make future acquisitions, this standard
will have a material effect on our accounting, primarily as acquisition costs
will no longer be capitalized, but will be expensed.
11
Behringer
Harvard Mid-Term Value Enhancement Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
In April
2009, the FASB issued additional guidance for estimating fair value when there
has been a significant decrease in market activity for a financial
asset. This accounting guidance re-emphasizes that regardless of
market conditions, the fair value measurement is an exit price
concept. It clarifies and includes additional factors to consider in
determining whether there has been a significant decrease in market activity for
an asset or liability and provides additional clarification on estimating fair
value when the market activity for an asset or liability has declined
significantly. This guidance is applied prospectively to all fair
value measurements where appropriate and is effective for interim and annual
periods ending after June 15, 2009. The implementation of this
guidance on June 30, 2009 did not have a material impact on our consolidated
financial statements.
In
April 2009, the FASB issued guidance requiring an entity to provide
disclosures about fair value of financial instruments in interim financial
information. This guidance is to be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15,
2009. We implemented this guidance on June 30, 2009 and have included
the additional disclosure information required within Note 5, “Fair Value of
Financial Instruments.”
In May
2009, the FASB issued new guidance on subsequent events. The new
guidance establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date; that is, whether the date represents the actual
date the financial statements were issued or were available to be
issued. The implementation of this standard had no material impact on
our consolidated financial statements. See Note 2, “Interim Unaudited
Financial Information.”
In June
2009, the FASB issued the Accounting Standards Codification
(“Codification”). The Codification is the source and organization of
GAAP recognized by the FASB to be applied by nongovernmental
entities. The Codification is effective for financial statements
issued for interim and annual periods ending after September 15,
2009. The implementation of this standard on September 30, 2009 did
not have a material impact on our consolidated financial position and results of
operations.
5. Fair
Value of Financial Instruments
The
following disclosure of estimated fair values was determined by us using
available market information and appropriate valuation
methodologies. However, considerable judgment is necessary to
interpret market data and develop the related estimates of fair
value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that could be realized upon disposition of
the financial instruments. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
As of
September 30, 2009 and December 31, 2008, management estimated that the carrying
value of cash and cash equivalents, accounts receivable, accounts payable,
accrued expenses and distributions payable were at amounts that reasonably
approximated their fair value based on their short-term maturities.
The fair
value estimates presented herein are based on information available to
management as of September 30, 2009 and December 31,
2008. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these consolidated financial
statements since that date, and current estimates of fair value may differ
significantly from the amounts presented herein.
6. Real
Estate
We wholly
owned the following five properties at September 30, 2009 and December 31,
2008:
Approximate
|
||||||
Rentable Square
|
||||||
Property Name
|
Location
|
Footage
|
Description
|
|||
Hopkins Building
|
Minneapolis, Minnesota
|
29,660
|
One-story office building
|
|||
Tucson Way
|
Denver, Colorado
|
70,660
|
Two-story office building
|
|||
2800 W. Mockingbird
|
Dallas, Texas
|
73,349
|
One-story office building
|
|||
Parkway Vista
|
Dallas, Texas
|
33,467
|
Two-story office building
|
|||
ASC Building
|
Dallas, Texas
|
28,880
|
One-story office building
|
12
Behringer
Harvard Mid-Term Value Enhancement Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
The
following information generally applies to all of our properties:
|
·
|
we
believe all of our properties are adequately covered by insurance and
suitable for their intended
purposes;
|
|
·
|
our
properties are located in markets where we are subject to competition in
attracting new tenants and retaining current tenants;
and
|
|
·
|
depreciation
is provided on a straight-line basis over the estimated useful lives of
the buildings of 25 years.
|
7. Partners’
Capital
We
initiated the declaration of monthly distributions in March 2004 in the amount
of a 6% annualized rate of return, based on an investment in our limited
partnership units of $10 per unit. We record all distributions when
declared. Distributions payable at September 30, 2009 was
$211,000. The following are the total distributions declared during
the first three quarters of 2009 and 2008 (in thousands):
2009
|
2008
|
|||||||
Third
Quarter
|
$ | 646 | $ | 646 | ||||
Second
Quarter
|
640 | 643 | ||||||
First
Quarter
|
632 | 645 | ||||||
$ | 1,918 | $ | 1,934 |
8. Related
Party Arrangements
The
General Partners and certain of their affiliates are entitled to receive fees
and compensation in connection with the acquisition, management and sale of our
assets, and have received fees in the past in connection with the
Offering. Our General Partners have agreed that all of these fees and
compensation will be allocated to Behringer Advisors I since the day-to-day
responsibilities of serving as our general partner are performed by Behringer
Advisors I through the executive officers of its general partner.
For the
management and leasing of our properties, we pay Behringer Harvard Mid-Term
Management Services, LLC, Behringer Harvard Real Estate Services, LLC or HPT
Management Services LP, our affiliated property managers or their affiliates
(individually or collectively referred to as "Property Manager"), property
management and leasing fees equal to the lesser of: (A) the
amounts charged by unaffiliated persons rendering comparable services in the
same geographic area or (B)(1) for commercial properties that are not leased on
a long-term net lease basis, 4% of gross revenues, plus separate leasing fees of
up to 1.5% of gross revenues based upon the customary leasing fees applicable to
the geographic location of the properties, and (2) in the case of
commercial properties that are leased on a long-term net lease basis (10 or more
years), 1% of gross revenues plus a one-time initial leasing fee of 3% of gross
revenues payable over the first five years of the lease term. We
reimburse the costs and expenses incurred by our Property Manager on our behalf,
including the wages and salaries and other employee-related expenses of all
on-site employees of our Property Manager who are engaged in the operation,
management, maintenance and leasing or access control of our properties,
including taxes, insurance and benefits relating to such employees, and legal,
travel and other out-of-pocket expenses that are directly related to the
management of specific properties. During the nine months ended
September 30, 2009 and 2008, we incurred property management fees payable to our
Property Manager, of approximately $107,000 and $109,000,
respectively.
We pay
Behringer Advisors I, or its affiliates, an annual asset management fee of 0.5%
of the contract purchase price of our assets. Any portion of the
asset management fees may be deferred and paid in a subsequent
year. During each of the nine months ended September 30, 2009 and
2008, we incurred asset management fees of approximately $103,000.
We may
reimburse Behringer Advisors I for costs and expenses paid or incurred to
provide services to us, including the costs of goods, services or materials used
by us and the salaries and benefits of persons employed by these entities and
performing services for us; provided, however, no reimbursement is made for
costs of personnel to the extent the advisor receives a separate fee for their
services. For the nine months ended September 30, 2009 and 2008 we
incurred and expensed such costs for administrative services totaling
approximately $136,000 and $57,000, respectively.
At
September 30, 2009, we had payables to related parties of approximately $87,000,
which primarily consisted of administrative services payable to Behringer
Advisors I and management fees payable to our Property
Manager.
We are
dependent on Behringer Advisors I and our Property Manager for certain services
that are essential to us, including asset acquisition and disposition decisions,
property management and leasing services and other general and administrative
responsibilities. In the event that these companies were unable to
provide the respective services to us, we would be required to obtain such
services from other sources.
*****
13
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The
following discussion and analysis should be read in conjunction with our
accompanying financial statements and the notes thereto:
Forward-Looking
Statements
This
section of the quarterly report contains forward-looking statements, including
discussion and analysis of us and our subsidiaries, our financial condition,
anticipated capital expenditures required to complete projects, amounts of
anticipated cash distributions to our limited partners in the future and other
matters. These forward-looking statements are not historical facts
but are the intent, belief or current expectations of our management based on
their knowledge and understanding of the business and industry. Words
such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,”
“seeks,” “estimates,” “would,” “could,” “should” and variations of these words
and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of the 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 Form 10-Q. 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. Factors that could cause actual results to differ materially
from any forward-looking statements made in this Form 10-Q include changes
in general economic conditions, changes in real estate conditions, construction
costs that may exceed estimates, construction delays, increases in interest
rates, lease-up risks, inability to obtain new tenants upon the expiration of
existing leases, the potential need to fund tenant improvements or other capital
expenditures out of operating cash flows and our inability to realize value for
limited partners upon disposition of our assets. The forward-looking
statements should be read in light of the risk factors identified in the “Risk
Factors” section of our Quarterly
Report on Form 10-Q for the period ended September 30, 2009 and our
Annual
Report on Form 10-K for the year ended December 31, 2008, as filed with the
SEC on March 31, 2009.
Cautionary
Note
The
representations, warranties and covenants made by us in any agreement filed as
an exhibit to this Quarterly Report on Form 10-Q are made solely for the benefit
of the parties to the agreement, including, in some cases, for the purpose of
allocating risk among the parties to the agreement, and should not be deemed to
be representations, warranties or covenants to or with any other
parties. Moreover, these representations, warranties or covenants
should not be relied upon as accurately describing or reflecting the current
state of our affairs.
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 will be
based on management’s historical industry experience and on various other
assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these
estimates.
Below is
a discussion of the accounting policies that we consider to be critical in that
they may require complex judgment in their application or require estimates
about matters that are inherently uncertain.
Real
Estate
Upon the
acquisition of real estate properties, we allocate the purchase price of those
properties to the assets acquired, consisting of land, inclusive of associated
rights, and buildings, any assumed liabilities, identified intangible assets,
asset retirement obligations based on their relative fair
values. Identified intangible assets consist of the fair value of
above-market and below-market leases, in-place leases, in-place tenant
improvements, in-place leasing commissions and tenant
relationships. Acquisition-related costs are expensed as
incurred. Initial valuations are subject to change until our
information is finalized, which is no later than 12 months from the acquisition
date.
The fair
value of the tangible assets acquired, consisting of land and buildings, is
determined by valuing the property as if it were vacant, and the “as-if-vacant”
value is then allocated to land and buildings. Land values are
derived from appraisals, and building values are calculated as replacement cost
less depreciation or management’s estimates of the relative fair value of these
assets using discounted cash flow analyses or similar methods. The
value of buildings is depreciated over the estimated useful life of 25 years
using the straight-line method.
14
We
determine the value of above-market and below-market in-place leases for
acquired properties based on the present value (using an interest rate that
reflects the risks associated with the leases acquired) of the difference
between (1) the contractual amounts to be paid pursuant to the in-place leases
and (2) management’s estimate of current market lease rates for the
corresponding in-place leases, measured over a period equal to (a) the remaining
non-cancelable lease term for above-market leases, or (b) the remaining
non-cancelable lease term plus any fixed rate renewal options for below-market
leases. We record the fair value of above-market and below-market
leases as intangible assets or intangible liabilities, respectively, and
amortize them as an adjustment to rental income over the above determined lease
term.
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 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 value of in-place leases include an
estimate of carrying costs during the expected lease-up periods for the
respective spaces considering current market conditions. In
estimating the carrying costs that would have otherwise been incurred had the
leases not been in place, 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 fair value of tenant relationships also include costs to execute
similar leases including leasing commissions, legal costs and tenant
improvements as well as an estimate of the likelihood of renewal as determined
by management on a tenant-by-tenant basis.
We
amortize the value of in-place leases and in-place tenant improvements to
expense over the initial term of the respective leases. The value of
tenant relationship intangibles is amortized to expense over the initial term
and any anticipated renewal periods, but in no event does the amortization
period for intangible assets exceed the remaining depreciable life of the
building. Should a tenant terminate its lease, the unamortized
portion of the related real estate intangibles would be charged to
expense.
In
allocating the purchase price of each of our properties, management makes
assumptions and uses various estimates, including, but not limited to, the
estimated useful lives of the assets, the cost of replacing certain assets,
discount rates used to determine present values, market rental rates per square
foot and the period required to lease the property up to its occupancy at
acquisition if it were vacant. Many of these estimates are obtained
from independent third party appraisals. However, management is
responsible for the source and use of these estimates. A change in
these estimates and assumptions could result in the various categories of our
real estate assets and/or related intangibles being overstated or understated,
which could result in an overstatement or understatement of depreciation and/or
amortization expense. These variances could be material to our
financial statements.
Impairment
of Long-Lived Assets
For our
real estate, which is all wholly owned, 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
occur, we assess potential impairment by comparing estimated future undiscounted
operating cash flows expected to be generated over the life of the asset,
including its eventual disposition, to the carrying amount of the
asset. In the event that the carrying amount exceeds the estimated
future undiscounted operating cash flows, we recognize an impairment loss to
adjust the carrying value of the asset to estimated fair value. We
determine the estimated fair value based on cash flow streams using various
factors including estimated future selling prices, costs spent to date,
remaining budgeted costs and selling costs.
In
evaluating our investments for impairment, management makes several estimates
and assumptions, including, but not limited to, the projected date of
disposition of the properties, the estimated future cash flows of the properties
during our ownership and the projected sales price of each of the
properties. A change in these estimates and assumptions could result
in understating or overstating the book value of our investments, which could be
material to our financial statements. Determining if a property is
impaired and, if impaired, the amount of required write-down to fair value
requires a significant amount of judgment by management and is based on the best
information available to management at the time of evaluation.
Overview
During
2008 and the first nine months of 2009, the U.S. and global economies continued
to experience a significant downturn, which included disruptions in the broader
financial and credit markets, declining consumer confidence and an increase in
unemployment rates. These conditions have contributed to weakened
market conditions. However, our portfolio is un-leveraged and
currently comprised of five buildings, four of which are 100% occupied by single
tenants. Therefore, we believe our exposure to the economic downturn
is minimal.
15
At
September 30, 2009 and 2008, we wholly owned five properties. These
properties combined contain approximately 236,000 rentable square
feet.
Results
of Operations
Three
months ended September 30, 2009 as compared to the three months ended
September 30, 2008
Rental
Revenue. Rental revenue for the three months ended September
30, 2009 and 2008 was $1.0 million and $1.1 million, respectively, and was
comprised of revenue, including adjustments for straight-line rent and
amortization of above-market and below-market leases. The decrease in
rental revenue for the three months ended September 30, 2009 was primarily due
to a reduction in the amount of expense reimbursements from
tenants. Management expects rental revenue to remain constant in the
near future.
Property Operating
Expenses. Property operating expenses for the three months
ended September 30, 2009 and 2008 were $238,000 and $234,000, respectively, and
were comprised of expenses related to the daily operations of our properties.
Management expects property operating expenses to remain constant in the near
future.
Real Estate
Taxes. Real estate taxes for the three months ended September
30, 2009 and 2008 were $121,000 and $177,000, respectively. The
decrease in real estate taxes for the three months ended September 30, 2009 is
due to a decrease in valuations by taxing authorities. Management
anticipates that real estate taxes will remain relatively unchanged in the near
future.
Property and Asset Management
Fees. Property and asset management fees for the three months
ended September 30, 2009 and 2008 were $64,000 and $73,000 respectively.
Management expects property and asset management fees to remain constant in
future periods.
General and Administrative
Expenses. General and administrative expenses for the three
months ended September 30, 2009 and 2008 were $154,000 and $114,000,
respectively. General and administrative expenses were comprised of
administrative services provided by our advisor, auditing fees, directors’ and
officers’ insurance premiums, tax preparation fees, transfer agent fees, legal
fees, printing costs and other administrative expenses. The increase
in general and administrative expenses is primarily due to an increase in
administrative services from Behringer Advisors I, our general
partner. Management expects general and administrative expenses to
remain relatively constant in the near future.
Depreciation and Amortization
Expense. Depreciation and amortization expense for the three
months ended September 30, 2009 and 2008 was $358,000 and $357,000,
respectively, and were comprised of depreciation and amortization of buildings
and real estate intangibles associated with our five
properties. Management expects future depreciation and amortization
expense to remain relatively constant.
Interest
Income. Interest income for the three months ended September
30, 2009 and 2008 was $11,000 and $36,000 respectively, and was comprised of
interest income associated with funds on deposit with banks. The
decrease in interest income is due to a decrease in cash balances and interest
rates on cash deposits.
Nine
months ended September 30, 2009 as compared to the nine months ended September
30, 2008
Rental
Revenue. Rental revenue for each of the nine months ended
September 30, 2009 and 2008 was $3.0 million and was comprised of revenue,
including adjustments for straight-line rent and amortization of above-market
and below-market leases. Management expects rental revenue to remain constant in
the near future.
Property Operating
Expenses. Property operating expenses for the nine months
ended September 30, 2009 and 2008 were $642,000 and $650,000, respectively, and
were comprised of expenses related to the daily operations from our properties.
Management anticipates the property and operating expenses will remain
relatively unchanged in the near future.
Real Estate
Taxes. Real estate taxes for the nine months ended September
30, 2009 and 2008 were $489,000 and $563,000 respectively. The
decrease in real estate taxes for the nine months ended September 30, 2009 is
due to a decrease in valuations by taxing authorities. Management
anticipates that real estate taxes will remain relatively unchanged in the near
future.
Property and Asset Management
Fees. Property and asset management fees for the nine months
ended September 30, 2009 and 2008 were $210,000 and $212,000,
respectively. Management expects property and asset management fees
to remain constant in future periods.
General and Administrative
Expenses. General and administrative expenses for the nine
months ended September 30, 2009 and 2008 were $460,000 and $402,000
respectively. General and administrative expenses were comprised of
corporate general and administrative expenses, including directors’ and
officers’ insurance premiums, transfer agent fees, auditing fees, legal fees and
other administrative expenses. The increase in general and
administrative expenses is primarily due to an increase in administrative
services from Behringer Advisors I, our general partner. Management
expects general and administrative expenses to remain relatively constant in the
near future.
Depreciation and Amortization
Expense. Depreciation and amortization expense for each of the
nine months ended September 30, 2009 and 2008 was $1.1 million, and was
comprised of depreciation and amortization of buildings and intangibles at our
five properties. Management expects depreciation and amortization
expenses to remain relatively constant in the near future.
16
Interest
Income. Interest income for the nine months ended September
30, 2009 and 2008 was $39,000 and $132,000, respectively, and was comprised of
interest income associated with funds on deposit with banks. The
decrease in interest income is due to a decrease in cash balances and interest
rates on cash deposits.
Cash
Flow Analysis
Cash
provided by operating activities for the nine months ended September 30, 2009
was $503,000 and was comprised of net income of $120,000, adjusted for
depreciation and amortization of $1.1 million, partially offset by a change in
lease intangibles of $338,000 and changes in working capital accounts of
$347,000. Cash provided by operating activities for the nine months
ended September 30, 2008 of $931,000 was primarily comprised of net income of
$162,000, adjusted for depreciation and amortization of $1.1 million, partially
offset by changes in working capital accounts of $314,000.
Cash used
in investing activities for the nine months ended September 30, 2009 was
$162,000 and was comprised of purchases of property and equipment for our
properties. There was no investing activity for the nine months ended
September 30, 2008.
Cash used
in financing activities consisted of distributions of $1.9 million for the nine
months ended September 30, 2009. For the nine months ended September
30, 2008 cash used in financing activities was approximately $2.3 million and
consisted of distributions of approximately $2.0 million and redemptions of
approximately $342,000.
Liquidity
and Capital Resources
Our cash
and cash equivalents were approximately $4.7 million at September 30,
2009. Our principal demands for funds will be for the payment of
operating expenses and distributions. Generally, cash needs are
expected to be met from operations and available cash on hand. The
timing and amount of cash to be distributed to our limited partners is
determined by our General Partners and is dependent on a number of factors,
including funds available for payment of distributions, financial condition and
capital expenditures. While we continue to pay monthly distributions
at a 6% annualized rate of return, in light of the pervasive and fundamental
disruptions in the global financial and real estate markets, we cannot provide
assurance that we will be able to continue to pay distributions at any
particular level. If the current economic conditions continue, our
General Partners may determine to reduce our current distribution rate in order
to conserve cash. In addition, our General Partners, in their
discretion, may defer fees payable by us to our General Partners, allowing for
more cash to be available to us for distribution to our limited
partners. In addition, our General Partners may make supplemental
payments to us or to our limited partners, or otherwise support our operations
to the extent not prohibited under the North American Securities Administrators
Association Guidelines for Real Estate Programs, which would permit
distributions to our limited partners in excess of cash from
operations. Accordingly, all or some of such distributions may
constitute a return of capital to our limited partners to the extent that
distributions exceed net cash from operations, or may be recognized as taxable
income to our limited partners or us.
The
distributions paid in the nine months ended September 30, 2009 were
approximately $1.9 million. For the nine months ended September 30,
2009, we had cash flow from operating activities of $503,000. For the
nine months ended September 30, 2008, we generated cash flow from operating
activities of $931,000. For the nine months ended September 30, 2009
and 2008, cash amounts distributed to our limited partners exceeded cash flow
from operating activities by approximately $1.4 million and $1.0 million,
respectively, which difference was funded from cash on hand.
The
amount by which distributions paid exceeded cash flow from operating activities
increased approximately $410,000 during the nine months ended September 30, 2009
as compared to the nine months ended September 30, 2008. This
increase is primarily due to the following activities in 2009: leasing
commissions paid in conjunction with new tenant leases and a decrease in
interest income earned.
The
turbulent financial markets and disruption in the banking system, as well as the
nationwide economic downturn, has created a severe lack of credit and rising
costs of any debt that is available. Fortunately, we have limited
exposure to the currently malfunctioning credit markets. We have no
exposure to money market mutual funds. We monitor the depository
institutions that hold our cash and cash equivalents on a regular basis and
believe that we have placed our deposits with creditworthy financial
institutions. We also have no outstanding debt. However, the
continued economic downturn and lack of available credit could delay or inhibit
our ability to dispose of our properties, or cause us to have to dispose of our
properties for a lower than anticipated return. As a result, our
current objective is to preserve capital and sustain property values while
selectively disposing of our properties.
17
As of
September 30, 2009, our portfolio was 95% leased as compared to 94% as of
September 30, 2008. The major tenants in our portfolio include Raytheon Company,
Government Records Services, Inc., part of Affiliated Computer Systems (“ACS”)
and Air Systems Components, LP. Minneapolis, Denver, Dallas and its
surrounding areas represent our geographic exposure. Of our approximately
236,000 square feet of leasable space, 32% is due to expire in the next 12
months and we have already begun the process of finding new tenants to fill
those vacancies. In addition, we collected 100% of our base rent from our
tenants for the third quarter 2009, which is a good indication of credit quality
and stability.
We expect
to meet our future short-term operating liquidity requirements through cash
provided by the operations of our current properties and available cash on
hand. Management also expects that our properties will generate
sufficient cash flow to cover operating expenses and a portion of the payment of
a monthly distribution. Currently, distributions are paid from
available cash on hand from the proceeds from the sale of the Northpoint
Property in 2006. Other potential future sources of capital include
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.
Net
Operating Income
Net
operating income (“NOI”) is a non-GAAP financial measure that is defined as
rental revenue less property operating expenses, real estate taxes and property
management fees. Management believes that NOI provides an accurate measure of
our operating performance because NOI reflects the operating performance of our
properties and excludes certain items that are not associated with management of
the properties. NOI should not be considered as an alternative to net
income (loss), or an indication of our liquidity. NOI is not
indicative of funds available to fund our cash needs or our ability to make
distributions and should be reviewed in connection with other GAAP
measurements. To facilitate understanding of this financial measure,
a reconciliation of NOI to net income has been provided in accordance with
GAAP. Our calculations of NOI for the three and nine months ended
September 30, 2009 and 2008 are presented below (in thousands):
Three months
|
Three months
|
Nine months
|
Nine months
|
||||||||||||||
ended
|
ended
|
ended
|
ended
|
||||||||||||||
September 30, 2009
|
September 30, 2008
|
September 30, 2009
|
September 30, 2008
|
||||||||||||||
Rental
revenue
|
$ | 958 | $ | 1,059 | $ | 2,963 | $ | 2,970 | |||||||||
Operating
expenses
|
|||||||||||||||||
Property
operating expenses
|
238 | 234 | 642 | 650 | |||||||||||||
Real
estate taxes
|
121 | 177 | 489 | 563 | |||||||||||||
Property
and asset management fees
|
64 | 73 | 210 | 212 | |||||||||||||
Less:
Asset management fees
|
(34 | ) | (37 | ) | (103 | ) | (103 | ) | |||||||||
Total
operating expenses
|
389 | 447 | 1,238 | 1,322 | |||||||||||||
Net
operating income
|
$ | 569 | $ | 612 | $ | 1,725 | $ | 1,648 | |||||||||
Reconciliation of NOI to Net
income
|
|||||||||||||||||
Net
operating income
|
$ | 569 | $ | 612 | $ | 1,725 | $ | 1,648 | |||||||||
Less:
|
General
and administrative
|
(154 | ) | (114 | ) | (460 | ) | (402 | ) | ||||||||
Depreciation
and amortization
|
(358 | ) | (357 | ) | (1,075 | ) | (1,102 | ) | |||||||||
Asset
management fees
|
(34 | ) | (37 | ) | (103 | ) | (103 | ) | |||||||||
Provision
for income taxes
|
(3 | ) | (4 | ) | (6 | ) | (11 | ) | |||||||||
Add:
|
Interest
income
|
11 | 36 | 39 | 132 | ||||||||||||
Net
income
|
$ | 31 | $ | 136 | $ | 120 | $ | 162 |
18
Performance
Reporting Required by the Partnership Agreement
Section
15.2 in our Partnership Agreement requires us to provide our limited partners
with our net cash from operations, a non-GAAP financial measure which is defined
as net income, computed in accordance with GAAP, plus depreciation and
amortization on real estate assets and adjustments for gain from sale of assets,
gain on sale of discontinued operations and capital improvements (“Net Cash From
Operations”). Our calculations of Net Cash From Operations for the
three and nine months ended September 30, 2009 and 2008 are presented below (in
thousands):
Three months
|
Three months
|
Nine months
|
Nine months
|
|||||||||||||
ended
|
ended
|
ended
|
ended
|
|||||||||||||
September 30, 2009
|
September 30, 2008
|
September 30, 2009
|
September 30, 2008
|
|||||||||||||
Net
income
|
$ | 31 | $ | 136 | $ | 120 | $ | 162 | ||||||||
Depreciation
and amortization
|
358 | 357 | 1,075 | 1,102 | ||||||||||||
Less: Capital
improvements
|
(55 | ) | - | (162 | ) | - | ||||||||||
Net
cash from operations
|
$ | 334 | $ | 493 | $ | 1,033 | $ | 1,264 |
Disposition
Policies
We intend
to hold the various real properties in which we have invested until such time as
sale or other disposition appears to be advantageous to achieve our investment
objectives or until it appears that such objectives will not be
met. In deciding whether to sell properties, we will consider factors
such as potential capital appreciation, cash flow and federal income tax
considerations, including possible adverse federal income tax consequences to
our limited partners. Our General Partners may exercise their
discretion as to whether and when to sell a property, and we will have no
obligation to sell properties at any particular time, except upon our
termination on December 31, 2022, or earlier if our General Partners determine
to liquidate us, or, after February 19, 2013, if investors holding a majority of
the units vote to liquidate us in response to a formal proxy to
liquidate. Instead of causing us to liquidate, our General Partners,
in their sole discretion, may determine to offer to limited partners the
opportunity to convert their units into interests in another public real estate
program sponsored by our General Partners or their affiliates, through a plan of
merger, plan of exchange or plan of conversion, provided that the transaction is
approved by holders of such percentage of units as determined by our General
Partners, but not less than a majority and excluding those held by our General
Partners and their affiliates. If such an opportunity is provided to
our limited partners, it may involve the distribution to limited partners of
freely traded securities that are listed on a securities exchange.
Cash flow
from operations will not be invested in the acquisition of real estate
properties. However, in the discretion of our General Partners, cash
flow may be held as working capital reserves or used to make capital
improvements to existing properties. In addition, net sale proceeds
generally will not be reinvested but will be distributed to the partners, unless
our General Partners determine that it is in our best interest to reinvest the
proceeds of any particular sale in other real estate investments in order to
meet our investment objectives. We will not reinvest the proceeds
from any sale in additional properties unless our General Partners determine it
is likely that we would be able to hold such additional properties for a
sufficient period of time prior to the termination of the fund in order to
satisfy our investment objectives with respect to that
investment. Thus, we are intended to be self-liquidating in
nature. In addition, our Partnership Agreement prohibits us from
reinvesting proceeds from the sale or refinancing of our properties at any time
after February 19, 2010. Our General Partners may also determine
not to distribute net sale proceeds if such proceeds are, in the discretion of
our General Partners:
|
·
|
used
to purchase land underlying any of our
properties;
|
|
·
|
used
to buy out the interest of any co-tenant or joint venture partner in a
property that is jointly owned;
|
|
·
|
used
to enter into a joint venture with respect to a
property;
|
|
·
|
held
as working capital reserves; or
|
|
·
|
used
to make capital improvements to existing
properties.
|
Notwithstanding
the above, reinvestment of proceeds from the sale of properties will not occur
unless sufficient cash will be distributed to pay any federal or state income
tax liability created by the sale of the property, assuming limited partners
will be subject to a 30.0% combined federal and state tax rate.
19
We will
not pay, directly or indirectly, any commission or fee, except as specifically
permitted under Article XII of our Partnership Agreement, to our General
Partners or their affiliates in connection with the reinvestment or distribution
of proceeds from the sale, exchange or financing of our properties.
Although
not required to do so, we will generally seek to sell our real estate properties
for cash. We may, however, accept terms of payment from a buyer that
include purchase money obligations secured by mortgages as partial payment,
depending upon then-prevailing economic conditions customary in the area in
which the property being sold is located, credit of the buyer and available
financing alternatives. Some properties we sell may be sold on the
installment basis under which only a portion of the sale price will be received
in the year of sale, with subsequent payments spread over a number of
years. In such event, our full distribution of the net proceeds of
any sale may be delayed until the notes are paid, sold or financed.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
Item
3. Quantitative
and Qualitative Disclosures About Market Risk.
We have
limited exposure to financial market risks, including changes in interest rates
and other relevant market prices. We have no investments or
obligations that would be affected by an increase or decrease in interest rates,
nor any foreign operations exposing us to foreign currency
fluctuations.
Item
4T. Controls
and Procedures.
Evaluation
of Disclosure Controls and Procedures
As
required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), the management of
Behringer Advisors I, including its Chief Executive Officer and Chief Financial
Officer, evaluated as of September 30, 2009 the effectiveness of our disclosure
controls and procedures as defined in Exchange Act Rule 13a-15(e) and
Rule 15d-15(e). Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer of Behringer Advisors I concluded that our
disclosure controls and procedures, as of September 30, 2009, were
effective for the purpose of ensuring that information required to be disclosed
by us in this report is recorded, processed, summarized and reported within the
time periods specified by the rules and forms of the Exchange Act and is
accumulated and communicated to the management of Behringer Advisors I,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosures.
We
believe, however, that a controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud or error, if any, within a
partnership have been detected.
Changes
in Internal Control over Financial Reporting
There has
been no change in internal control over financial reporting that occurred during
the quarter ended September 30, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
20
PART
II
OTHER
INFORMATION
Item
1. Legal
Proceedings.
We are
not a party to, and none of our properties are subject to, any material pending
legal proceedings.
Item
1A. Risk
Factors.
The
following risk factors supplement the risk factors set forth in our Annual
Report on Form 10-K for the year ended December 31, 2008;
Until
we generate sufficient cash flow from operating activities to cover
distributions to our unitholders, we may make distributions from other sources,
which may negatively impact our ability to sustain or pay
distributions.
Distributions
are authorized at the discretion of our General Partners based on their analysis
of our earnings, cash flow, anticipated cash flow, capital expenditure
requirements, general financial condition and other factors that our General
Partners deems relevant. Actual cash available for distribution may
vary substantially from estimates. In addition, to the extent we have
significant capital requirements for our properties, our ability to make
distributions may be negatively impacted. If cash flow from operating activities
is not sufficient to fully fund the payment of distributions, the level of our
distributions may not be sustainable and some or all of our distributions will
be paid from other sources. Historically, the amount of our declared
distributions has exceeded our cash flow from operating
activities. From time to time, our advisor and its affiliates may
agree, but are not required, to waive or defer all, or a portion, of the
acquisition, asset management or other fees or other incentives due to them,
enter into lease agreements for unleased space, pay general administrative
expenses or otherwise supplement investor returns in order to increase the
amount of cash available to make distributions to our unitholders.
Adverse
economic and geopolitical conditions and dislocations in the credit markets
could have a material adverse effect on our results of operations, financial
condition and ability to pay distributions to you.
The
global financial markets have undergone pervasive and fundamental
disruptions. This volatility has had and may continue to have an
adverse impact on the availability of credit to businesses, generally, and has
resulted in the weakening of the U.S. and global economies. Our
business has been and may continue to be affected by market and economic
challenges experienced by the U.S. economy or real estate industry as a whole or
by the local economic conditions in the markets in which our properties are
located, including the current dislocations in the credit
markets. These conditions, or similar conditions existing in the
future, may have the following consequences:
·
|
the
financial condition of our tenants has been and may continue to be
adversely affected, which may result in us having to increase tenant
concessions, reduce rental rates or make capital improvements in order to
maintain occupancy levels, or which may result in tenant defaults under
leases due to bankruptcy, lack of liquidity, operational failures or for
other reasons;
|
·
|
significant job
losses in the financial and professional services industries may continue
to occur, which may decrease demand for our office space, causing market
rental rates and property values to be negatively
impacted;
|
·
|
reduced
values of our properties may limit our ability to dispose of assets at
attractive prices or to obtain debt financing secured by our
properties;
|
·
|
the
value and liquidity of our short-term investments and cash deposits could
be reduced as a result of a deterioration of the financial condition of
the institutions that hold our cash deposits or the institutions or assets
in which we have made short-term investments, the dislocation of the
markets for our short-term investments, increased volatility in market
rates for such investments or other factors;
and
|
|
|
Further,
in light of the current economic conditions, we cannot provide assurance that we
will be able to sustain the current level of our distributions or that the
amount of distributions will increase over time. If the conditions
continue, our General Partners may determine to reduce our current distribution
rate or suspend distributions altogether in order to conserve cash.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds.
None.
Item
3. Defaults
Upon Senior Securities.
None.
Item
4. Submission
of Matters to a Vote of Security Holders.
No
matters were submitted to a vote of security holders during the third quarter of
2009.
Item
5. Other
Information.
None.
Item
6. Exhibits.
The
exhibits filed in response to Item 601 of Regulation S-K are listed on the
Exhibit Index attached hereto.
21
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Behringer
Harvard Mid-Term Value Enhancement Fund I LP
|
|||
By:
|
Behringer
Harvard Advisors I LP
|
||
Co-General
Partner
|
|||
Dated:
November 13, 2009
|
By:
|
/s/ Gary S. Bresky
|
|
Gary
S. Bresky
|
|||
Chief
Financial Officer
|
|||
(Principal
Financial Officer)
|
22
Index
to Exhibits
Exhibit Number
|
Description
|
|
3.1
|
Agreement
of Limited Partnership of Registrant dated July 30, 2002 (previously filed
in and incorporated by reference to Exhibit B to the prospectus of the
Registrant filed pursuant to Rule 424(b)(3) on February 20, 2003, as
supplemented)
|
|
3.2
|
First
Amendment to Agreement of Limited Partnership of Registrant dated
September 2, 2003 (previously filed in and incorporated by reference to
Exhibit B to Supplement No. 1 to the prospectus of the Registrant
contained within Post-Effective Amendment No. 1 to the Registrant’s
Registration Statement on Form S-11, Commission File No. 333-100126, filed
on September 3, 2003)
|
|
3.3
|
Certificate
of Limited Partnership of Registrant (previously filed in and incorporated
by reference to Registrant’s Registration Statement on Form S-11,
Commission File No. 333-100126, filed on September 27,
2002)
|
|
3.4
|
Second
Amendment to Agreement of Limited Partnership of Registrant dated March
29, 2006 (previously filed in and incorporated by reference to Form 8-K
filed on March 30, 2006)
|
|
4.1
|
Form
of Subscription Agreement and Subscription Agreement Signature Page
(included as Exhibit
C to prospectus of the Registrant filed pursuant to Rule 424(b)(3) on
February 20, 2003, as supplemented)
|
|
31.1*
|
Rule
13a-14(a)/15d-14(a) Certification
|
|
31.2*
|
Rule
13a-14(a)/15d-14(a) Certification
|
|
32.1**
|
Section
1350 Certifications
|
*
|
Filed
herewith
|
**
|
In
accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not
deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise
subject to the liabilities of that section. Such certifications
will not be deemed incorporated by reference into any filing under the
Securities Act or the Exchange Act, except to the extent that the
registrant specifically incorporates it by
reference.
|