On September 30, 2008, we sold 4245 N. Central through our 62.5% ownership interest in Behringer Harvard 4245 Central LP.  The property was sold to Behringer Harvard Holdings, LLC (“BHH”), an affiliate of our General Partners.  Results for the three months ended March 31, 2009 represent final settlements for operations of the property and are classified as discontinued operations in the accompanying consolidated statements of operations.  The following table summarizes the results of discontinued operations for the three months ended March 31, 2009 (in thousands):

 

19

---

 

Behringer Harvard Short-Term Opportunity Fund I LP

Notes to Consolidated Financial Statements

(Unaudited)

		Three months
		ended
		March 31, 2009
Rental revenue		$	3
Expenses
Property operating expenses			2
Real estate taxes			(7	)
Property and asset management fees			1
Total expenses			(4	)
Net income			7
Noncontrolling interest			(2	)
Income from discontinued operations attributable to the Partnership		$	5

*****

 

20

---

 

 

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

 

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include discussion and analysis of the financial condition of us and our subsidiaries, including our ability to rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, the value of our assets, our anticipated capital expenditures, the amount and timing of anticipated future cash distributions to our unitholders, the estimated per unit value of our limited partnership units and other matters.  Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.

 

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions.  These statements are not guarantees of future performance, and we caution unitholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the SEC and the factors described below:

 

·

market and economic challenges experienced by the U.S. economy or real estate industry as a whole and the local economic conditions in the markets in which our properties are located;

 

·

the availability of cash flow from operating activities for distributions and capital expenditures;

 

·

our level of debt and the terms and limitations imposed on us by our debt agreements;

 

·

the availability of credit generally, and any failure to refinance or extend our debt as it comes due or a failure to satisfy the conditions and requirements of that debt;

 

·

the need to invest additional equity in connection with debt refinancings as a result of reduced asset values and requirements to reduce overall leverage;

 

·

future increases in interest rates;

 

·

impairment charges;

 

·

our ability to retain the executive officers and other key personnel of our advisor, our property manager and their affiliates;

 

·

conflicts of interest arising out of our relationships with our advisor and its affiliates;

 

·

changes in the level of financial assistance or support provided by our sponsor or its affiliates: and

 

·

unfavorable changes in laws or regulations impacting our business or our assets.

 

Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect or false.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.

 

Cautionary Note

 

The representations, warranties and covenants made by us in any agreement filed as an exhibit to this 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.

 

21

---

 

 

Unit Valuation

 

Our Partnership Agreement requires that beginning with the fiscal year ended December 31, 2009, the General Partners annually provide our limited partners with an estimate of the amount a holder of limited partnership units would receive if our properties were sold at their fair market values as of the close of the fiscal year, and the proceeds from the sale of the properties (without reduction for selling expenses), together with other funds of the Partnership, were distributed in a liquidation.  In 2005 and 2006, we sold two properties and distributed $0.56 per unit with the result being that the estimated value per share thereafter was adjusted from $10.00 to $9.44 to reflect the special distribution of proceeds from those sales.

 

On January 14, 2010, Behringer Advisors II, our co-general partner, adopted a new estimated value per limited partnership unit as of December 31, 2009.  As part of the valuation process, and as required by the Partnership Agreement, the general partner obtained the opinion of an independent third party, Robert A. Stanger & Co., Inc., that the estimated valuation is reasonable and was prepared in accordance with appropriate methods for valuing real estate.  Robert A. Stanger & Co., founded in 1978, is a nationally recognized investment banking firm specializing in real estate, REIT’s and direct participation programs such as ours.  As of March 31, 2010, the estimated valuation per limited partnership unit remains $6.45.  As contemplated by our partnership agreement, Behringer Advisors II will update its estimated per unit valuation annually.  In addition, if the general partners determine to distribute net sales proceeds upon the sale of one of our remaining properties, the general partners would generally adjust the estimated per unit valuation for that distribution.

 

In addition to meeting its obligation under the Partnership Agreement, the General Partners understand that this estimated value per unit may be used by (i) broker dealers who have customers who own our limited partnership units to assist in meeting customer account statement reporting obligations under the National Association of Securities Dealers (which is the former name of FINRA) Conduct Rule 2340 as required by FINRA and (ii) fiduciaries of retirement plans subject to the annual reporting requirements of ERISA to assist in the preparation of their reports.

 

As with any valuation methodology, the General Partner’s methodology is based upon a number of estimates and assumptions that may not be accurate or complete.  Different parties with different assumptions and estimates could derive a different estimated value per unit, and these differences could be significant.  The estimated value per unit does not represent the fair value according to GAAP of our assets less liabilities, nor does it represent the amount our units would trade at on a national securities exchange.

 

Generally, we do not anticipate selling our assets until we feel it is the right time to dispose of an asset, or we feel that the economy has improved, and we have the opportunity to realize additional value.  Our general partners intend to use all reasonable efforts to realize value for our limited partners when commercial real estate prices have normalized.  Therefore, as we have previously disclosed, we will not be liquidated in our original estimated time frame, but rather in a time frame that our general partners believe will provide more value to the limited partners.

 

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.

 

Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

 

Principles of Consolidation and Basis of Presentation

 

The 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 applicable GAAP, which includes the requirement to consolidate entities deemed to be VIE’s in which we are the primary beneficiary.  If the interest in the entity is determined not to be a VIE, then the entities are evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.

 

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

 

22

---

 

 

Impairment of Long-Lived Assets

 

Management monitors events and changes in circumstances indicating that the carrying amounts of our 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 estimated period we expect to hold 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.

 

In evaluating our investments for impairment, management uses appraisals and 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.

 

Inventory Valuation Adjustment

 

Real estate inventory is stated at the lower of cost or fair market value and consists of developed land, condominiums and constructed homes.  In addition to land acquisition costs, land development costs and construction costs, costs include interest and real estate taxes, which are capitalized during the period beginning with the commencement of development and ending with the completion of construction.

 

Market Overview

 

During the first quarter of 2010, as in 2009, the U.S. and global economies continued to experience the effects of a significant downturn, which includes disruptions in the broader financial and credit markets, weak consumer confidence and high unemployment rates.  These conditions have contributed to weakened market conditions.  Consequently, we believe that overall demand across most real estate sectors will continue to remain low and that rental rates will remain weak through at least the first half of 2010.  The national vacancy percentage for office space continued to increase during 2009.  Additionally, the hospitality industry continues to be negatively affected by the current economic recession.  In addition to reduced occupancy, the national Average Daily Rate (“ADR”) has declined as compared to the prior year and we expect that Hotel Palomar will continue to experience the effects of the current economic recession.

 

Nine of our real estate assets are located in Texas.  These assets are located in the Dallas-Fort Worth metropolitan area. This market and Texas in general have historically been more resistant to recessionary trends than much of the nation.  Office vacancy rates in the Dallas-Fort Worth market continued to rise through 2009.  This was due in large part to office employment declines in the financial activities, professional, and business services industries.  However, despite these declines, leasing activity continues and supply is not as oversaturated in this market as in many other markets.  According to a recent study by the Brookings Institution, a public policy think tank in Washington, D.C., the Dallas-Fort Worth metropolitan area had one of the strongest economies in the nation during the last quarter of 2009.  The Dallas-Fort Worth area is expected to experience modest leasing volume in 2010.

 

While it is unclear when the overall economy will recover, we do not expect conditions to improve significantly in the near future.  As a result of the current economy, our primary objectives will be to continue to preserve capital, as well as sustain and enhance property values, while continuing to focus on the disposition of our properties.  Our ability to dispose of our properties will be subject to various factors, including the ability of potential purchasers to access capital debt financing.  Given the disruptions in the capital markets and the current lack of available credit, our ability to dispose of our properties may be delayed, or we may receive lower than anticipated returns.  In addition, a more prolonged economic downturn could negatively affect our ability to attract and retain tenants.  Given current market conditions, this investment program’s life will extend beyond its original anticipated liquidation date.

 

Current economic conditions discussed above make it difficult to predict future operating results.  There can be no assurance that we will not experience further declines in revenues or earnings for a number of reasons, including, but not limited to the possibility of greater than anticipated weakness in the economy and the continued impact of the trends mentioned above.

 

23

---

 

 

Results of Operations

 

Three months ended March 31, 2010 as compared to the three months ended March 31, 2009

 

We had eight wholly-owned properties and interests in two properties through investments in partnerships and joint ventures as of March 31, 2010 and 2009.  All investments in partnerships and joint ventures were consolidated with and into our accounts for the three months ended March 31, 2010 and 2009.

 

As a result of the continuing decline in the U.S. housing market and related condominium sector, we implemented a leasing program beginning in the second quarter of 2009 for the unsold condominium units at Hotel Palomar and Residences.  Although our strategy for the project continues to be to sell the units, we will be generating rental income by leasing the units until the condominium market improves.

 

Continuing Operations

 

Rental Revenue. Rental revenue for the three months ended March 31, 2010 and 2009 was $2.4 million and $2.2 million, respectively, and was comprised of revenue, including adjustments for straight-line rent and amortization of above- and below-market leases.  The increase in rental revenues for the three months ended March 31, 2010 is primarily due to leasing of the unsold condominium units at Hotel Palomar and Residences.  Management expects rental revenue to remain relatively flat unless we are able to lease-up available space.

 

Hotel Revenue. Hotel revenue for the three months ended March 31, 2010 and 2009 was $3.1 million and $2.9 million, respectively, and was comprised of revenue generated by the operations of Hotel Palomar.  The continuing economic recession, global credit crisis, and weak consumer confidence all contributed to soft lodging demand and lower daily room rates.  We do not anticipate hotel revenue to improve significantly until the overall U.S. economy experiences sustained growth and lodging demand increases.

 

Property Operating Expenses. Property operating expenses for each of the three months ended March 31, 2010 and 2009 were $3.9 million and were comprised of expenses related to the daily operations of our properties.  We expect property operating expenses to remain at current levels unless we are able to lease-up available space and lodging demand increases.

 

Inventory Valuation Adjustment. The inventory valuation adjustment for the three months ended March 31, 2010 was $1.7 million and was composed of non-cash adjustments related to the constructed luxury homes and developed land lots at Bretton Woods.  During the first quarter of 2010, the U.S. housing market and related condominium sector continued to experience its nationwide downturn that began in 2006.  The housing market has experienced an oversupply of homes available for sale, reduced availability, deterioration in the credit markets, rising foreclosure activity, reduced selling prices and relatively high unemployment and deteriorating conditions in the overall economy.  In the event that market conditions continue to decline in the future or the current difficult market conditions extend beyond our expectations, additional adjustments may be necessary in the future.

 

Interest Expense. Interest expense, net of amounts capitalized, for the three months ended March 31, 2010 and 2009 was $1.4 million and $1.7 million, respectively, and was primarily comprised of interest expense and amortization of deferred financing fees related to the notes associated with the acquisition and development of our properties.  Interest costs for the development of Cassidy Ridge will continue to be capitalized until this project is complete.  For the three months ended March 31, 2010 and 2009 we capitalized interest costs of $0.4 million and $0.3 million, respectively, for Cassidy Ridge.  Interest costs for construction of the luxury homes at Bretton Woods were capitalized until construction was completed during the quarter ended June 30, 2009.  For the three months ended March 31, 2009, we capitalized interest costs of $48,000 for Bretton Woods.  Interest expense for the three months ended March 31, 2009 also includes the reclassification of approximately $0.2 million of realized losses on interest rate derivatives from other comprehensive loss.

 

The U.S. credit markets continue to experience volatility and as a result, there is greater uncertainty regarding our ability to access the credit markets in order to attract financing on reasonable terms.  Our ability to borrow funds to refinance current debt could be adversely affected by our inability to secure financing on favorable terms.

 

Real Estate Taxes. Real estate taxes, net of amounts capitalized, for the three months ended March 31, 2010 and 2009 were $0.8 million and $0.7 million, respectively, and were comprised of real estate taxes from each of our properties.  The increase for the three months ended March 31, 2010 is primarily due to a successful appeal of property valuations in 2009.  We expect real estate taxes to remain relatively constant in the near future.

 

Property and Asset Management Fees. Property and asset management fees for the three months ended March 31, 2010 and 2009 were $0.4 million and $0.5 million, respectively, and were comprised of property and asset management fees from our consolidated properties.  Asset management fees of approximately $17,000 were waived by Behringer Advisors II for the three months ended March 31, 2010. We expect property and asset management fees to remain relatively constant in the near future.

 

24

---

 

 

General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2010 and 2009 were $0.2 million and $0.5 million, respectively.  General and administrative expenses were comprised of auditing fees, transfer agent fees, tax preparation fees, directors’ and officers’ insurance premiums, legal fees, printing costs and other administrative expenses.  Our advisor waived reimbursement of general and administrative expenses of $0.1 million for the three months ended March 31, 2010.  The decrease for the three months ended March 31, 2010 is primarily the result of reduced auditing costs and legal costs.  We expect 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 March 31, 2010 and 2009 were $1.7 million and $1.5 million, respectively, and includes depreciation and amortization of buildings, furniture and equipment and real estate intangibles associated with our consolidated properties.

 

Loss on Derivative Instruments.  Loss on derivative instruments, net, for the three months ended March 31, 2010 and 2009 was $34,000 and $183,000, respectively.  In September 2007, we entered into an interest rate swap agreement associated with the Hotel Palomar and Residences loan with Bank of America, which was designated as a cash flow hedge.  Accordingly, changes in the fair value of the swap were recorded in accumulated other comprehensive loss at each measurement date.  We entered into an amendment to the swap agreement in October 2008, thus terminating the original interest rate swap.  The amended interest rate swap was entered into as an economic hedge against the variability of future interest rates on the variable interest rate borrowings.  The amended swap agreement has not been designated as a cash flow hedge for accounting purposes.  Thus, changes in the fair value of the amended interest rate swap are recognized in current earnings.  We mark the interest rate swap to its estimated fair value as of each balance sheet date.

 

Net Loss Attributable to Noncontrolling Interest. Net loss attributable to noncontrolling interest for the three months ended March 31, 2010 and 2009 was $0.5 million and $0.6 million, respectively, and represents the other partners’ proportionate share of losses from investments in the partnerships that we consolidate.

 

Discontinued Operations

 

Income from Discontinued Operations. Income from discontinued operations for the three months ended March 31, 2009 represents final settlements related to operations of 4245 N. Central which was sold on September 30, 2008.

 

Cash Flow Analysis

 

Cash used in operating activities for the three months ended March 31, 2010 was $6.9 million and was comprised primarily of the net loss of $4.6 million, adjusted for depreciation and amortization of $1.8 million, inventory valuation adjustments of $1.7 million, an increase in real estate inventory of $3.7 million and changes in working capital accounts of $2.1 million.  Cash used in operating activities for the three months ended March 31, 2009 was $6.5 million and was comprised primarily of the net loss of $3.8 million, adjusted for depreciation and amortization of $1.9 million, an increase in real estate inventory of $2.4 million and other changes in working capital accounts of $2.4 million.

 

Cash used in investing activities for the three months ended March 31, 2010 was $0.8 million and was primarily comprised of an increase in restricted cash related to our properties.  Cash provided by investing activities for the three months ended March 31, 2009 was $0.1 million and was comprised of changes in restricted cash of $0.2 million, partially offset by capital expenditures for real estate of $0.1 million.

 

Cash provided by financing activities for the three months ended March 31, 2010 was $7.3 million and consisted primarily of proceeds from notes payable, net of payments, of $3.4 million and contributions from our general partner, Behringer Advisors II, of $3.9 million.  Cash provided by financing activities was $6.6 million for the three months ended March 31, 2009 and consisted primarily of proceeds from notes payable, net of payments, of $7.3 million, partially offset by distributions of $0.8 million.

 

Liquidity and Capital Resources

 

Our cash and cash equivalents were $1.6 million at March 31, 2010.  Our principal demands for funds will be for the payment of capital improvements, operating expenses and for the payment of our outstanding indebtedness.  Generally, these cash needs are currently expected to be met from borrowings and proceeds from the disposition of properties, as set forth in more detail below.

 

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.  In light of cash needs required to meet maturing debt obligations and our ongoing operating capital needs, our General Partners determined it necessary to discontinue payment of monthly distributions beginning with the 2009 third quarter.  We do not anticipate that payment of distributions will resume in the near-term.  Our General Partners, in their discretion, may also defer fees payable by us to them and make supplemental payments to us or to our limited partners, or otherwise support our 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.

 

25

---

 

 

Distributions paid in the three months ended March 31, 2009 were approximately $0.8 million.  We discontinued payment of monthly distributions beginning with the 2009 third quarter.  For the three months ended March 31, 2009, we had negative cash flow from operating activities of approximately $6.5 million.  Accordingly, cash amounts distributed to our limited partners for the three months ended March 31, 2009 exceeded cash flow from operating activities, which difference was funded from our borrowings.

 

The recent 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.  A continuing market downturn could reduce cash flow, cause us to incur additional losses, and cause us not to be in compliance with lender covenants.  As of March 31, 2010, of our $159.4 million in debt, $97.8 million is subject to variable interest rates, excluding those notes subject to minimum interest rates, $38.0 million of which is effectively fixed by an interest rate swap agreement. As of March 31, 2010, $38.8 million of the outstanding balance of our notes payable matures within the next twelve months.   We are working with lenders to either extend the maturity dates of the loans or refinance the loans under different terms.  Of that amount, only $5.5 million of the notes payable agreements contain a provision to extend the maturity date for at least one additional year if certain conditions are met.  We currently expect to use additional borrowings and proceeds from the disposition of properties to continue making our scheduled debt service payments until the maturity dates of the loans are extended, the loans are refinanced, or the outstanding balance of the loans are completely paid off.  There is no guaranty that we will be able to refinance our borrowings with more or less favorable terms or extend the maturity dates of such loans.  In addition, 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 primary objectives will be to continue to preserve capital, as well as sustain and enhance property values, while continuing to focus on the disposition of our properties.  Given current market conditions, however, the life of this investment program will extend beyond its original anticipated liquidation date.

 

Our 30% noncontrolling partner previously entered into multiple loan agreements with the Mockingbird Commons Partnership, an entity in which we have a 70% direct and indirect ownership interest, totaling $1.3 million.  All of these loans matured prior to December 31, 2009 with interest rates ranging from 6% to 12%.  Nonpayment of the outstanding balances due and payable on the maturity dates of the loan agreements constitute an event of default.  As a result, past due amounts under the loan agreements bear interest up to 18% per annum during the default period.  All of these loans are unsecured and are subordinate to payment of any mortgage debt.  We believe that we are in compliance with all other covenants under these loan agreements.

 

On April 15, 2008, Behringer Harvard Northwest Highway LP, our wholly-owned subsidiary, entered into five separate loan agreements with Dallas City Bank.  The total outstanding balance under these loans was $5.5 million at March 31, 2010.  Proceeds from the loans were used to construct five luxury homes at Bretton Woods.  All principal balances, together with all accrued, but unpaid interest were due and payable on April 15, 2010, the maturity dates.  We are currently in negotiations with the lender to further extend the maturity date of these loan agreements.

 

Generally, our notes payable mature approximately three to five years from origination.  Most of our borrowings are on a recourse basis to us, meaning that the liability for repayment is not limited to any particular asset.  The majority of our notes payable require payments of interest only, with all unpaid principal and interest due at maturity.  Our loan agreements stipulate that we comply with certain reporting and financial covenants.  These covenants include, among other things, notifying the lender of any change in management and maintaining minimum net worth and liquidity.

 

We have not made the full required mortgage payments on the Plaza Skillman Loan for several months.  We expect to continue making partial mortgage payments until the loan is restructured or modified.  The loan matures on April 11, 2011 and the outstanding principal balance was approximately $9.4 million at March 31, 2010.  Failure to make the full mortgage payment constitutes a default under the debt agreement and, absent a waiver or modification of the debt agreement, the lender may accelerate maturity with all unpaid interest and principal immediately due and payable.  Additionally, as stated above, the Bretton Woods loans at Dallas City Bank matured on April 15, 2010.  While negotiations with the lender continue, nonpayment of the outstanding principal balance of $5.5 million on April 15, 2010 constitutes an event of default.  We are currently in negotiations with the lenders to waive the events of noncompliance or modify the loan agreements.  However, there are no assurances that we will be successful in our negotiations with the lenders, which could result in foreclosure or a transfer of ownership of the properties to the lenders.  We have no cross default provisions in any of our debt agreements.  As a result, the above events of default create no additional defaults under our other loan agreements.

 

We believe that we were in compliance with all other debt covenants under our loan agreements at March 31, 2010.  Each loan, with the exception of the Mockingbird Commons Partnership Loans and the Amended BHH Loan, is secured by the associated real property.  In addition, with the exception of the Mockingbird Commons Partnership Loans, the Amended BHH Loan and Plaza Skillman Loan, all loans are unconditionally guaranteed by us.

 

26

---

 

 

Net Operating Income

 

Net operating income (“NOI”) is a non-GAAP financial measure that is defined as total revenue less property operating expenses, real estate taxes, property management fees and advertising costs.  We believe that NOI provides an accurate measure of the operating performance of our operating assets because NOI excludes certain items that are not associated with management of our 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 loss attributable to the Partnership in accordance with GAAP has been provided.  Our calculations of NOI for the three months ended March 31, 2010 and 2009 are presented below (in thousands).

		Three months				Three months
		ended				ended
		March 31, 2010				March 31, 2009
Total revenues		$	5,542			$	5,175
Operating expenses
Property operating expenses			3,865				3,854
Real estate taxes, net			770				656
Property and asset management fees			440				454
Advertising costs			52				101
Less:  Asset management fees			(218	)			(236	)
Total operating expenses			4,909				4,829
Net operating income		$	633			$	346
Reconciliation to Net loss
Net operating income		$	633			$	346
Less:  Depreciation and amortization			(1,661	)			(1,545	)
General and administrative expenses			(223	)			(473	)
Interest expense, net			(1,437	)			(1,661	)
Asset management fees			(218	)			(236	)
Inventory valuation adjustment			(1,667	)			-
Provision for income taxes			(39	)			(48	)
Add:   Interest income			30				6
Loss on derivative instruments, net			(34	)			(183	)
Income (loss) from discontinued operations			-				7
Net loss		$	(4,616	)		$	(3,787	)

 

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, adjustments for gains from the sale of assets and gains on the sale of discontinued operations, debt service and capital improvements (“Net Cash From Operations”).  Our calculations of Net Cash From Operations for the three months ended March 31, 2010 and 2009 are presented below (in thousands):

 

27

---

 

		Three months ended				Three months ended
		March 31, 2010				March 31, 2009
Net loss		$	(4,616	)		$	(3,787	)
Net loss attributable to noncontrolling interest			534				580
Adjustments
Real estate depreciation and amortization (1)			1,440				1,365
Inventory valuation adjustment (1)			1,667				-
Debt service, net of amounts capitalized (1)			(1,103	)			(1,095	)
Capital improvements (1)(2)			(55	)			(81	)
Net cash from operations		$	(2,133	)		$	(3,018	)

---

(1)	Represents our ownership portion of the properties that we consolidate.

 

(2)	Amounts for 2010 and 2009 include building improvements, tenant improvements and furniture and fixtures.

 

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.  We will also consider the current state of the general economy, and whether waiting to dispose of a property will allow us to realize additional value for our limited partners.  We are currently preparing and assessing properties for potential sale, although we do not have a definite timetable.  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, 2017, or earlier if our General Partners determine to liquidate us, or, 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 units 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 properties.  However, at 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 sales proceeds will not be reinvested but will be distributed to the partners.  Thus, we are intended to be self-liquidating in nature.  Our Partnership Agreement prohibits us from reinvesting proceeds from the sale or refinancing of our properties.  Our General Partners may also determine not to distribute net sales proceeds if such proceeds are:

 

·

held as working capital reserves; or

 

·

used to make improvements to existing properties.

 

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 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.

 

28

---

 

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

We may be exposed to interest rate changes primarily from variable interest rate debt incurred to acquire and develop properties, issue loans and make other permitted investments.  Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, we borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates.  With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.  We may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps or floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate portion of our variable rate debt.  Of our approximately $159.4 million in notes payable at March 31, 2010, approximately $97.8 million represented debt subject to variable interest rates, excluding those notes subject to minimum interest rates.  If our variable interest rates increased 100 basis points, excluding the $38.0 million of debt effectively fixed by an interest rate swap agreement, we estimate that total annual interest expense would increase by approximately $0.6 million.

 

A 100 basis point decrease in interest rates would result in a $45,000 net decrease in the fair value of our interest rate swap.  A 100 basis point increase in interest rates would result in a $130,000 net increase in the fair value of our interest rate swap.

 

At March 31, 2010, we did not have any foreign operations and thus were not exposed 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 Exchange Act, the management of Behringer Advisors II, our general partner, including the Chief Executive Officer and Chief Financial Officer of our general partner, evaluated as of March 31, 2010 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 II, our general partner, concluded that our disclosure controls and procedures, as of March 31, 2010, 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 management, including the Chief Executive Officer and Chief Financial Officer of Behringer Advisors II, 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 systems 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 March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

We are not party to, and none of our properties are subject to, any material pending legal proceedings.

 

Item 1A.

Risk Factors.

 

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

29

---

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

 None.

 

Item 3.

Defaults Upon Senior Securities.

 

We have not made the full required mortgage payments on the Plaza Skillman Loan due for several months.  We expect to continue making partial mortgage payments until the loan is restructured or modified.  The loan matures on April 11, 2011 and the outstanding principal balance was approximately $9.4 million at March 31, 2010.  Failure to make the full mortgage payment constitutes a default under the debt agreement and, absent a waiver or modification of the debt agreement, the lender may accelerate maturity with all unpaid interest and principal immediately due and payable.  Additionally, as stated above, the Bretton Woods loans at Dallas City Bank matured on April 15, 2010.  While negotiations with the lender continue, nonpayment of the outstanding principal balance of $5.5 million on April 15, 2010 constitutes an event of default.  We are currently in negotiations with the lenders to waive the events of noncompliance or modify the loan agreements.  However, there are no assurances that we will be successful in our negotiations with the lenders, which could result in foreclosure or a transfer of ownership of the properties to the lenders.  We have no cross default provisions in any of our debt agreements.

 

Item 4.

(Removed and Reserved).

 

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.

 

30

---

 

 

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 Short-Term Opportunity Fund I LP
	By:	Behringer Harvard Advisors II LP
		Co-General Partner
Dated:  May 17, 2010		By:	/s/ Gary S. Bresky
		Gary S. Bresky
		Chief Financial Officer
		(Principal Financial Officer)

 

31

---

 

 

Index to Exhibits

 

Exhibit Number		Description
3.1		Second Amended and Restated Agreement of Limited Partnership of the Registrant dated September 5, 2008 (previously filed in and incorporated by reference to Form 8-K filed on September 5, 2008)
3.2		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. 333-100125, filed on September 27, 2002)
4.1		Subscription Agreement and Subscription Agreement Signature Page (previously filed in and incorporated by reference to Exhibit C 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. 333-100125, filed on June 3, 2003)
31.1*		Rule 13a-14(a) or Rule 15d-14(a) Certification
31.2*		Rule 13a-14(a) or Rule 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.

 

32

---