Attached files
file | filename |
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EX-32.1 - EX-32.1 - Behringer Harvard Short-Term Liquidating Trust | v193452_ex32-1.htm |
EX-31.2 - EX-31.2 - Behringer Harvard Short-Term Liquidating Trust | v193452_ex31-2.htm |
EX-31.1 - EX-31.1 - Behringer Harvard Short-Term Liquidating Trust | v193452_ex31-1.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 June 30, 2010
OR
¨ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the transition period from ____________ to ____________
Commission
File Number: 000-51291
Behringer
Harvard Short-Term Opportunity
Fund
I LP
(Exact
Name of Registrant as Specified in Its Charter)
Texas
|
71-0897614
|
|
(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)
Registrant’s
telephone number, including area code: (866) 655-1620
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 ¨
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 ¨ No ¨
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. (check
one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨ (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 ¨ No x
BEHRINGER
HARVARD SHORT-TERM OPPORTUNITY FUND I LP
FORM
10-Q
Quarter
Ended June 30, 2010
Page
|
||
PART
I
|
||
FINANCIAL
INFORMATION
|
||
Item
1.
|
Financial
Statements (Unaudited).
|
|
Consolidated
Balance Sheets as of June 30, 2010 and December 31, 2009
|
3
|
|
Consolidated
Statements of Operations for the three and six months ended June 30, 2010
and 2009
|
4
|
|
Consolidated
Statements of Equity and Comprehensive Loss for the six months ended June
30, 2010 and 2009
|
5
|
|
Consolidated
Statements of Cash Flows for the six months ended June 30, 2010 and
2009
|
6
|
|
Notes
to Consolidated Financial Statements
|
7
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
22
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
31
|
Item
4.
|
Controls
and Procedures.
|
32
|
PART
II
|
||
OTHER
INFORMATION
|
||
Item
1.
|
Legal
Proceedings.
|
32
|
Item
1A.
|
Risk
Factors.
|
32
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
32
|
Item
3.
|
Defaults
Upon Senior Securities.
|
32
|
Item
4.
|
(Removed
and Reserved).
|
32
|
Item
5.
|
Other
Information.
|
33
|
Item
6.
|
Exhibits.
|
33
|
Signature
|
34
|
2
PART
I
FINANCIAL
INFORMATION
Item
1. Financial
Statements.
Behringer
Harvard Short-Term Opportunity Fund I LP
Consolidated
Balance Sheets
(Unaudited)
(in
thousands, except unit amounts)
June 30,
|
Decmber 31,
|
|||||||
2010
|
2009
|
|||||||
Assets
|
||||||||
Real
estate
|
||||||||
Land
|
$ | 30,085 | $ | 31,000 | ||||
Buildings
and improvements, net
|
102,205 | 101,960 | ||||||
Total
real estate
|
132,290 | 132,960 | ||||||
Real
estate inventory, net
|
56,107 | 53,770 | ||||||
Cash
and cash equivalents
|
1,841 | 1,964 | ||||||
Restricted
cash
|
3,458 | 2,520 | ||||||
Accounts
receivable, net
|
4,075 | 3,905 | ||||||
Prepaid
expenses and other assets
|
1,162 | 1,085 | ||||||
Furniture,
fixtures, and equipment, net
|
1,822 | 2,424 | ||||||
Deferred
financing fees, net
|
837 | 1,084 | ||||||
Lease
intangibles, net
|
2,864 | 3,297 | ||||||
Total
assets
|
$ | 204,456 | $ | 203,009 | ||||
Liabilities
and Equity
|
||||||||
Liabilities
|
||||||||
Notes
payable
|
$ | 148,177 | $ | 142,106 | ||||
Note
payable to related party
|
13,918 | 13,918 | ||||||
Accounts
payable
|
4,255 | 4,697 | ||||||
Payables
to related parties
|
1,838 | 1,165 | ||||||
Acquired
below-market leases, net
|
47 | 53 | ||||||
Accrued
liabilities
|
7,400 | 6,555 | ||||||
Capital
lease obligations
|
87 | 119 | ||||||
Total
liabilities
|
175,722 | 168,613 | ||||||
Commitments
and contingencies
|
||||||||
Equity
|
||||||||
Partners'
capital
|
||||||||
Limited
partners – 11,000,000 units authorized, 10,803,839 units issued and
outstanding at June 30, 2010 and December 31, 2009
|
2,518 | 11,846 | ||||||
General
partners
|
29,332 | 24,667 | ||||||
Partners'
capital
|
31,850 | 36,513 | ||||||
Noncontrolling
interest
|
(3,116 | ) | (2,117 | ) | ||||
Total
equity
|
28,734 | 34,396 | ||||||
Total
liabilities and equity
|
$ | 204,456 | $ | 203,009 |
See
Notes to Consolidated Financial Statements.
3
Behringer
Harvard Short-Term Opportunity Fund I LP
Consolidated
Statements of Operations
(Unaudited)
(in
thousands, except per unit amounts)
Three months
|
Three months
|
Six months
|
Six months
|
|||||||||||||
ended
|
ended
|
ended
|
ended
|
|||||||||||||
June 30, 2010
|
June 30, 2009
|
June 30, 2010
|
June 30, 2009
|
|||||||||||||
Revenues
|
||||||||||||||||
Rental
revenue
|
$ | 2,452 | $ | 2,020 | $ | 4,874 | $ | 4,268 | ||||||||
Hotel
revenue
|
3,266 | 3,392 | 6,386 | 6,319 | ||||||||||||
Real
estate inventory sales
|
830 | - | 830 | - | ||||||||||||
Total
revenues
|
6,548 | 5,412 | 12,090 | 10,587 | ||||||||||||
Expenses
|
||||||||||||||||
Property
operating expenses
|
4,026 | 4,308 | 7,891 | 8,162 | ||||||||||||
Asset
impairment loss
|
2,774 | - | 2,774 | - | ||||||||||||
Inventory
valuation adjustment
|
- | - | 1,667 | - | ||||||||||||
Interest
expense, net
|
1,401 | 1,715 | 2,838 | 3,376 | ||||||||||||
Real
estate taxes, net
|
706 | 401 | 1,476 | 1,057 | ||||||||||||
Property
and asset management fees
|
437 | 475 | 877 | 929 | ||||||||||||
General
and administrative
|
259 | 427 | 482 | 900 | ||||||||||||
Advertising
costs
|
66 | 45 | 118 | 146 | ||||||||||||
Depreciation
and amortization
|
1,739 | 1,590 | 3,400 | 3,135 | ||||||||||||
Cost
of real estate inventory sales
|
843 | - | 843 | - | ||||||||||||
Total
expenses
|
12,251 | 8,961 | 22,366 | 17,705 | ||||||||||||
Interest
income
|
38 | 5 | 68 | 11 | ||||||||||||
Loss
on derivative instrument, net
|
(4 | ) | (89 | ) | (38 | ) | (272 | ) | ||||||||
Loss
from continuing operations before income taxes and noncontrolling
interest
|
(5,669 | ) | (3,633 | ) | (10,246 | ) | (7,379 | ) | ||||||||
Provision
for income taxes
|
(42 | ) | (73 | ) | (81 | ) | (121 | ) | ||||||||
Loss
from continuing operations before noncontrolling interest
|
(5,711 | ) | (3,706 | ) | (10,327 | ) | (7,500 | ) | ||||||||
Discontinued
operations
|
||||||||||||||||
Income
from discontinued operations
|
- | 1 | - | 8 | ||||||||||||
Net
loss
|
$ | (5,711 | ) | $ | (3,705 | ) | $ | (10,327 | ) | $ | (7,492 | ) | ||||
Noncontrolling
interest in continuing operations
|
465 | 573 | 999 | 1,155 | ||||||||||||
Noncontrolling
interest in discontinued operations
|
- | (9 | ) | - | (11 | ) | ||||||||||
Net
loss attributable to noncontrolling interest
|
465 | 564 | 999 | 1,144 | ||||||||||||
Net
loss attributable to the Partnership
|
$ | (5,246 | ) | $ | (3,141 | ) | $ | (9,328 | ) | $ | (6,348 | ) | ||||
Amounts
attributable to the Partnership
|
||||||||||||||||
Continuing
operations
|
$ | (5,246 | ) | $ | (3,133 | ) | $ | (9,328 | ) | $ | (6,345 | ) | ||||
Discontinued
operations
|
- | (8 | ) | - | (3 | ) | ||||||||||
Net
loss attributable to the Partnership
|
$ | (5,246 | ) | $ | (3,141 | ) | $ | (9,328 | ) | $ | (6,348 | ) | ||||
Basic
and diluted weighted average limited partnership units
outstanding
|
10,804 | 10,804 | 10,804 | 10,804 | ||||||||||||
Net
loss per limited partnership unit - basic and diluted
|
||||||||||||||||
Loss
from continuing operations attributable to the Partnership
|
$ | (0.49 | ) | $ | (0.29 | ) | $ | (0.86 | ) | $ | (0.59 | ) | ||||
Income
from discontinued operations attributable to the
Partnership
|
- | - | - | - | ||||||||||||
Basic
and diluted net loss per limited partnership unit
|
$ | (0.49 | ) | $ | (0.29 | ) | $ | (0.86 | ) | $ | (0.59 | ) |
See
Notes to Consolidated Financial Statements.
4
Behringer
Harvard Short-Term Opportunity Fund I LP
Consolidated
Statements of Equity and Comprehensive Loss
(Unaudited)
(in
thousands)
Accumulated
|
||||||||||||||||||||||||||||||||
Comprehensive
|
||||||||||||||||||||||||||||||||
General Partners
|
Limited Partners
|
Loss
|
||||||||||||||||||||||||||||||
Accumulated
|
Number of
|
Accumulated
|
Attributable to
|
Noncontrolling
|
||||||||||||||||||||||||||||
Contributions
|
Losses
|
Units
|
Contributions
|
Losses
|
the Partnership
|
Interest
|
Total
|
|||||||||||||||||||||||||
Balance
as of January 1, 2010
|
$ | 24,667 | $ | - | 10,804 | $ | 74,522 | $ | (62,676 | ) | $ | (62,676 | ) | $ | (2,117 | ) | $ | 34,396 | ||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||
Net
loss
|
(9,328 | ) | (9,328 | ) | (999 | ) | (10,327 | ) | ||||||||||||||||||||||||
Total
comprehensive loss
|
(9,328 | ) | (999 | ) | (10,327 | ) | ||||||||||||||||||||||||||
Notes
receivable
|
(747 | ) | (747 | ) | ||||||||||||||||||||||||||||
Contributions
|
4,665 | 747 | 5,412 | |||||||||||||||||||||||||||||
Balance
as of June 30, 2010
|
$ | 29,332 | $ | - | 10,804 | $ | 74,522 | $ | (72,004 | ) | $ | (72,004 | ) | $ | (3,116 | ) | $ | 28,734 |
Accumulated
|
||||||||||||||||||||||||||||||||||||
Comprehensive
|
||||||||||||||||||||||||||||||||||||
General Partners
|
Limited Partners
|
Accumulated Other
|
Income (Loss)
|
|||||||||||||||||||||||||||||||||
Accumulated
|
Number of
|
Contributions/
|
Accumulated
|
Comprehensive
|
Attributable to
|
Noncontrolling
|
||||||||||||||||||||||||||||||
Contributions
|
Losses
|
Units
|
(Distributions)
|
Losses
|
Income (Loss)
|
the Partnership
|
Interest
|
Total
|
||||||||||||||||||||||||||||
Balance
as of January 1, 2009
|
$ | 9,208 | $ | - | 10,804 | $ | 76,039 | $ | (49,638 | ) | $ | (735 | ) | $ | (50,373 | ) | $ | 317 | $ | 35,191 | ||||||||||||||||
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||||||||||
Net
loss
|
(6,348 | ) | (6,348 | ) | (1,144 | ) | (7,492 | ) | ||||||||||||||||||||||||||||
Reclassifications
due to hedging activities
|
490 | 490 | - | 490 | ||||||||||||||||||||||||||||||||
Total
comprehensive income (loss)
|
(5,858 | ) | (1,144 | ) | (7,002 | ) | ||||||||||||||||||||||||||||||
Distributions
|
(1,517 | ) | (1,517 | ) | ||||||||||||||||||||||||||||||||
Balance
as of June 30, 2009
|
$ | 9,208 | $ | - | 10,804 | $ | 74,522 | $ | (55,986 | ) | $ | (245 | ) | $ | (56,231 | ) | $ | (827 | ) | $ | 26,672 |
See
Notes to Consolidated Financial Statements.
5
Behringer
Harvard Short-Term Opportunity Fund I LP
Consolidated
Statements of Cash Flows
(Unaudited)
(in
thousands)
Six months
|
Six months
|
|||||||
ended
|
ended
|
|||||||
June 30, 2010
|
June 30, 2009
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$ | (10,327 | ) | $ | (7,492 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
3,615 | 3,854 | ||||||
Asset
impairment loss
|
2,774 | - | ||||||
Inventory
valuation adjustment
|
1,667 | - | ||||||
Loss
on derivative instrument, net
|
38 | 272 | ||||||
Change
in real estate inventory
|
(6,967 | ) | (4,826 | ) | ||||
Change
in accounts receivable
|
(170 | ) | (385 | ) | ||||
Change
in prepaid expenses and other assets
|
(77 | ) | 225 | |||||
Change
in lease intangibles
|
(48 | ) | (23 | ) | ||||
Change
in accounts payable
|
61 | 150 | ||||||
Change
in accrued liabilities
|
(1,194 | ) | (2,571 | ) | ||||
Change
in payables or receivables with related parties
|
673 | 384 | ||||||
Cash
used in operating activities
|
(9,955 | ) | (10,412 | ) | ||||
Cash
flows from investing activities
|
||||||||
Capital
expenditures for real estate
|
(268 | ) | (140 | ) | ||||
Change
in restricted cash
|
(938 | ) | (39 | ) | ||||
Cash
used in investing activities
|
(1,206 | ) | (179 | ) | ||||
Cash
flows from financing activities
|
||||||||
Proceeds
from notes payable
|
7,312 | 833 | ||||||
Proceeds
from note payable to related party
|
- | 10,253 | ||||||
Payments
on notes payable
|
(895 | ) | (1,105 | ) | ||||
Payments
on capital lease obligations
|
(32 | ) | (29 | ) | ||||
Financing
costs
|
(12 | ) | (11 | ) | ||||
Distributions
|
- | (1,525 | ) | |||||
Contributions
from general partners
|
4,665 | - | ||||||
Cash
flows provided by financing activities
|
11,038 | 8,416 | ||||||
Net
change in cash and cash equivalents
|
(123 | ) | (2,175 | ) | ||||
Cash
and cash equivalents at beginning of period
|
1,964 | 4,584 | ||||||
Cash
and cash equivalents at end of period
|
$ | 1,841 | $ | 2,409 | ||||
Supplemental
disclosure:
|
||||||||
Interest
paid, net of amounts capitalized
|
$ | 1,816 | $ | 2,730 | ||||
Income
tax paid
|
$ | 149 | $ | 203 | ||||
Non-cash
investing activities:
|
||||||||
Notes
receivable from noncontrolling interest holder
|
$ | 747 | $ | - | ||||
Capital
expenditures for real estate in accrued liabilities
|
$ | 351 | $ | 8 | ||||
Reclassification
of real estate inventory to buildings
|
$ | 3,842 | $ | 8,086 | ||||
Non-cash
financing activities:
|
||||||||
Contributions
from noncontrolling interest holder
|
$ | 747 | $ | - | ||||
Payments
on note payable by third party in accrued liabilities
|
$ | 302 | $ | - |
See
Notes to Consolidated Financial Statements.
6
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
1.
|
Business
and Organization
|
Business
Behringer
Harvard Short-Term Opportunity 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 II LP
(“Behringer Advisors II”) 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 and was terminated on February 19, 2005 (the
“Offering”). The Offering was a best efforts continuous offering, and we
admitted new investors until the termination of the Offering in February
2005. 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. We
have used the proceeds from the Offering, after deducting offering expenses, to
acquire interests in twelve properties, including seven office building
properties, one shopping/service center, a hotel redevelopment with an adjoining
condominium development, two development properties and undeveloped land. We do
not actively engage in the business of operating the hotel. As of June 30,
2010, ten of the twelve properties we acquired remain in our portfolio. We are
not currently seeking to purchase additional properties for our
portfolio.
Our
Agreement of Limited Partnership, as amended (the “Partnership Agreement”),
provides that we will continue in existence until the earlier of December 31,
2017 or termination of the Partnership pursuant to the dissolution and
termination provisions of the Partnership Agreement.
During
the first six months of 2010, the U.S. and global economies continued to
experience the effects of a significant downturn that began in 2008. This
downturn includes disruptions in the broader financial and credit markets, weak
consumer confidence and high unemployment rates. These conditions have
contributed to weakened market conditions. 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.
If we are unable to sell a property when we determine to do so, it could have a
significant adverse effect on our cash flows and results of operations. 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. Given current market conditions, this investment
program’s life will extend beyond its original anticipated liquidation date. As
of June 30, 2010, $47.1 million of our notes payable and an additional $3.1
million in principal payments are due in the next twelve months. 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. Of the
$47.1 million of notes payable maturing in the next twelve months, only $4.5
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 and
an additional $9.4 million is nonrecourse to us, subject to standard carve-outs.
We have received indications from certain lenders who are currently willing to
extend or modify approximately 47% of the debt that is maturing in the next
twelve months. 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.
However, 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.
See Note 8, “Notes Payable” for additional information regarding our current
debt and Note 12, “Related Party Arrangements” for information regarding support
from our sponsor.
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, 2009, which was
filed with the Securities and Exchange Commission (“SEC”). Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted 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 June 30, 2010 and our consolidated statements of operations, equity
and cash flows for the periods ended June 30, 2010 and 2009 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 June
30, 2010 and December 31, 2009 and our consolidated results of operations and
cash flows for the periods ended June 30, 2010 and 2009. Such adjustments are of
a normal recurring nature.
7
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
We have
evaluated subsequent events for recognition or disclosure in our consolidated
financial statements.
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,
inventory valuation adjustments, 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 our
subsidiaries. All inter-company transactions, balances and profits have been
eliminated in consolidation. Interests in entities acquired are evaluated based
on GAAP, which includes the requirement to consolidate entities deemed to be
variable interest entities (“VIE”) in which we are the primary beneficiary. If
the interest in the entity is determined not to be a VIE, then the 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.
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 and any noncontrolling interest 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
commercial office buildings is depreciated over the estimated useful life of 25
years using the straight-line method and hotels/mixed-use properties are
depreciated over the estimated useful life of 39 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 option 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 our evaluation of the specific
characteristics of each tenant’s lease and our overall relationship with that
respective tenant. The aggregate value for tenant improvements and leasing
commissions is based on estimates of these costs incurred at inception of the
acquired leases, amortized through the date of acquisition. The aggregate value
of in-place leases acquired and tenant relationships is determined by applying a
fair value model. The estimates of fair value of in-place leases include an
estimate of carrying costs during the expected lease-up periods for the
respective spaces considering current market conditions. In estimating the
carrying costs that would have otherwise been incurred had the leases not been
in place, we include such items as real estate taxes, insurance and other
operating expenses as well as lost rental revenue during the expected lease-up
period based on current market conditions. The estimates of the fair value of
tenant relationships also include costs to execute similar leases including
leasing commissions, legal fees and tenant improvements as well as an estimate
of the likelihood of renewal as determined by management on a tenant-by-tenant
basis.
8
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
We
determine the fair value of assumed debt by calculating the net present value of
the scheduled note payments using interest rates for debt with similar terms and
remaining maturities that we believe we could obtain. Any difference between the
fair value and stated value of the assumed debt is recorded as a discount or
premium and amortized over the remaining life of the loan.
We
amortize the value of in-place leases, in-place tenant improvements and in-place
leasing commissions to expense over the 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
in-place lease value and tenant relationship intangibles would be charged to
expense.
Anticipated
amortization associated with acquired lease intangibles for the period from July
1 through December 31, 2010 and for each of the following four years ended
December 31 is as follows (in thousands):
July
1 - December 31, 2010
|
$ | 71 | ||
2011
|
77 | |||
2012
|
43 | |||
2013
|
43 | |||
2014
|
43 |
Accumulated
depreciation and amortization related to direct investments in real estate
assets and related lease intangibles were as follows (in
thousands):
Buildings and
|
Lease
|
Acquired Below-
|
||||||||||
As of June 30, 2010
|
Improvements
|
Intangibles
|
Market Leases
|
|||||||||
Cost
|
$ | 121,343 | $ | 5,180 | $ | (128 | ) | |||||
Less:
depreciation and amortization
|
(19,138 | ) | (2,316 | ) | 81 | |||||||
Net
|
$ | 102,205 | $ | 2,864 | $ | (47 | ) | |||||
Buildings
and
|
Lease
|
Acquired
Below-
|
||||||||||
As of December 31, 2009
|
Improvements
|
Intangibles
|
Market Leases
|
|||||||||
Cost
|
$ | 118,743 | $ | 5,339 | $ | (131 | ) | |||||
Less:
depreciation and amortization
|
(16,783 | ) | (2,042 | ) | 78 | |||||||
Net
|
$ | 101,960 | $ | 3,297 | $ | (53 | ) |
Due to
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. As a result of
the leasing program, approximately $3.8 million in costs were reclassified from
real estate inventory to buildings on our consolidated balance sheet during the
six months ended June 30, 2010. 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.
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.
At our
wholly owned shopping/service center in Dallas, Texas (“Plaza Skillman”) we
received notice that tenants representing approximately 25,000 square feet would
not be renewing or extending their lease. As a result of the significant drop in
occupancy, we recognized a $2.8 million impairment charge related to the
property for the three months ended June 30, 2010. There were no impairment
charges for the three months ended March 31, 2010 and six months ended June
30, 2009. However, real estate values may continue to have fluctuations due to,
among other things, the current economic environment and, as a result, there can
be no assurance we will not have impairments in the future. Any such charges
could have an adverse effect on our consolidated financial position and
operations.
9
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
Real
Estate Inventory
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.
Inventory
Valuation Adjustment
For real
estate inventory, at each reporting date, management compares the estimated fair
value less costs to sell to the carrying value. An adjustment is recorded to the
extent that the fair value less costs to sell is less than the carrying value.
We determine the estimated fair value based on comparable sales in the normal
course of business under existing and anticipated market conditions. This
evaluation takes into consideration factors such as current selling prices,
estimated future selling prices, costs spent to date, estimated additional
future costs, appraisals and management’s plans for the property. Estimates used
in the determination of the estimated fair value of real estate inventory are
based on factors known to management at the time such estimates are
made.
During
the first six months of 2010, the U.S. housing market and related condominium
sector continued to experience the nationwide downturn that began in 2006. The
housing market has experienced an oversupply of homes available for sale,
reduced demand, deterioration in the credit markets, rising foreclosure activity
due to relatively high unemployment and generally weak conditions in the overall
economy. These factors contributed to weakened demand for new homes, slower than
expected sales and reduced selling prices. As a result of our evaluations, for
the three months ended March 31, 2010, we recognized inventory valuation
adjustments of $1.7 million related to the constructed luxury homes and
developed land lots at Bretton Woods. We recognized no inventory valuation
adjustments for the three months ended June 30, 2010 and the three and six
months ended June 30, 2009. 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. Any
such charges could have an adverse effect on our consolidated financial
position.
Cash
and Cash Equivalents
We
consider investments with original maturities of three months or less to be cash
equivalents.
Restricted
Cash
Restricted
cash includes monies to be held in escrow for insurance, taxes and other
reserves for our consolidated properties as required by our
lenders.
Accounts
Receivable
Accounts
receivable primarily consists of receivables from hotel guests and tenants
related to our properties. Our allowance for doubtful accounts associated with
accounts receivable was $0.1 million at June 30, 2010 and December 31,
2009.
Prepaid
Expenses and Other Assets
Prepaid expenses and other assets
include hotel inventory, prepaid directors’ and officers’ insurance, prepaid
advertising, as well as prepaid insurance. Hotel inventory consists of food,
beverages, linens, glassware, china and silverware and is carried at the lower
of cost or market value.
Furniture,
Fixtures and Equipment
Furniture,
fixtures and equipment are recorded at cost and depreciation is calculated using
the straight-line method over the estimated useful lives of the assets.
Equipment, furniture and fixtures, and computer software are depreciated over 3
to 5 year lives. Maintenance and repairs are charged to operations as incurred
while renewals or improvements to such assets are capitalized. Accumulated
depreciation associated with our furniture, fixtures and equipment totaled $5.0
million and $4.3 million at June 30, 2010 and December 31, 2009,
respectively.
10
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
Deferred
Financing Fees
Deferred financing fees are recorded at
cost and are amortized using a straight-line method that approximates the
effective interest method over the life of the related debt. Accumulated
amortization associated with deferred financing fees was $0.6 million and $0.8
million at June 30, 2010 and December 31, 2009, respectively.
Derivative
Financial Instruments
Our
objective in using derivatives is to add stability to interest expense and to
manage our exposure to interest rate movements or other identified risks. To
accomplish this objective, we use interest rate swaps as part of our cash flow
hedging strategy. Interest rate swaps designated as cash flow hedges are entered
into to limit our exposure to increases in the London Interbank Offer Rate
(“LIBOR”) above a “strike rate” on certain of our floating-rate
debt.
We
measure our derivative instruments and hedging activities at fair value and
record them as an asset or liability, depending on our rights or obligations
under the applicable derivative contract. For derivatives designated as fair
value hedges, the changes in the fair value of both the derivative instrument
and the hedged items are recorded in earnings. Derivatives used to hedge the
exposure to variability in expected future cash flows, or other types of
forecasted transactions, are considered cash flow hedges. For derivatives
designated as cash flow hedges, the effective portions of changes in the fair
value of the derivative are reported in accumulated other comprehensive income
(loss) (“OCI”) and are subsequently reclassified into earnings when the hedged
item affects earnings. Changes in the fair value of derivative instruments not
designated as hedges and ineffective portions of hedges are recognized in
earnings in the affected period. We assess the effectiveness of each hedging
relationship by comparing the changes in the fair value or cash flows of the
derivative
hedging instrument with the changes in the fair value or cash flows of the
designated hedged item or transaction.
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 decrease to rental revenues due
to straight-line rent adjustments for each of the six months ended June 30, 2010
and 2009 was approximately $0.1 million. As discussed above, 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. 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.
We also
recognize revenue from the operations of a hotel. Hotel revenues consisting of
guest room, food and beverage, and other revenue are derived from the operations
of the boutique hotel portion of Hotel Palomar and Residences and are recognized
as the services are rendered.
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 ten
percent (10%) 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:
11
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
|
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.
|
Concentration
of Credit Risk
We have
cash and cash equivalents in excess of federally insured levels on deposit in
financial institutions. We regularly monitor the financial stability of these
financial institutions and believe that we are not exposed to any significant
credit risk in cash and cash equivalents. We have diversified our cash and cash
equivalents between several banking institutions in an attempt to minimize
exposure to any one of these entities.
Reportable
Segments
We have
determined that we have one reportable segment, with activities related to the
ownership, development and management of real estate assets. Our income
producing properties generated 100% of our consolidated revenues for the six
months ended June 30, 2010 and 2009. Our chief operating decision maker
evaluates operating performance on an individual property level. Therefore, our
properties are aggregated into one reportable segment.
Noncontrolling
Interest
We hold a
direct or indirect majority controlling interest in certain real estate
partnerships and thus, consolidate the accounts with and into our accounts.
Noncontrolling interests in partnerships represents the third-party partners’
proportionate share of the equity in consolidated real estate partnerships.
Income and losses are allocated to noncontrolling interest holders based on
their weighted average percentage ownership during the year.
During
the six months ended June 30, 2010, we issued notes receivable totaling $0.7
million to our 30% noncontrolling interest partner in Mockingbird Commons LLC
(“Mockingbird Commons Partnership”). Proceeds from the notes receivable were
recognized as capital contributions and contra-equity to the minority interest
partner on our consolidated statement of equity and comprehensive loss for the
six months ended June 30, 2010.
Income
Taxes
As a
limited partnership, we are generally 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 six months ended June 30, 2010, we recognized a provision for
current tax expense of approximately $83,000 and a deferred tax benefit of
approximately $2,000 related to the Texas margin tax. For the six months ended
June 30, 2009, we recognized a provision for current tax expense of
approximately $122,000 and a deferred tax benefit of approximately $1,000
related to the Texas margin tax. The Partnership does not have any entity level
uncertain tax positions.
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.
Net
Income (Loss) Per Limited Partnership Unit
Net
income (loss) per limited partnership unit is calculated by dividing the net
income (loss) allocated to limited partners for each period by the weighted
average number of limited partnership units outstanding during such period. Net
income (loss) 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
|
There
have been no changes during the first six months of 2010 related to new
accounting pronouncements, including the expected dates of adoption and
estimated effects on our consolidated financial statements, from those disclosed
in our 2009 Annual Report on Form 10-K.
12
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
5.
|
Fair
Value Measurements
|
Fair
value is a market-based measurement, not an entity-specific measurement.
Therefore, a fair value measurement should be determined based on the
assumptions that market participants would use in pricing the asset or
liability. As a basis for considering market participant assumptions in fair
value measurements, a fair value hierarchy was established by the Financial
Accounting Standards Board that distinguishes between market participant
assumptions based on market data obtained from sources independent of the
reporting entity (observable inputs that are classified within Levels 1 and 2 of
the hierarchy) and the reporting entity’s own assumptions about market
participant assumptions (unobservable inputs classified within Level 3 of the
hierarchy).
Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that we have the ability to access. Level 2 inputs are inputs
other than quoted prices included in Level 1 that are observable for the asset
or liability, either directly or indirectly. Level 2 inputs may include quoted
prices for similar assets and liabilities in active markets, as well as inputs
that are observable for the asset or liability (other than quoted prices), such
as interest rates, foreign exchange rates, and yield curves that are observable
at commonly quoted intervals. Level 3 inputs are unobservable inputs for the
asset or liability, which are typically based on an entity’s own assumptions, as
there is little, if any, related market activity. In instances where the
determination of the fair value measurement is based on inputs from different
levels of the fair value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the lowest level input
that is significant to the fair value measurement in its entirety. Our
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to
the asset or liability.
Recurring
Fair Value Measurements
Derivative
financial instruments
Currently,
we use interest rate swaps to manage our interest rate risk. The fair values of
interest rate swaps are determined using the market standard methodology of
netting the discounted future fixed cash receipts (or payments) and the
discounted expected variable cash payments (or receipts). The variable
cash payments (or receipts) are based on an expectation of future interest rates
(forward curves) derived from observable market interest rate
curves.
We
incorporate credit valuation adjustments to appropriately reflect both our own
nonperformance risk and the respective counterparty’s nonperformance risk in the
fair value measurements. In adjusting the fair value of our derivative contracts
for the effect of nonperformance risk, we have considered the impact of netting
and any applicable credit enhancements, such as collateral postings, thresholds,
mutual puts, and guarantees.
Although
we have determined that the majority of the inputs used to value our derivatives
fall within Level 2 of the fair value hierarchy, the credit valuation
adjustments associated with our derivatives utilize Level 3 inputs, such as
estimates of current credit spreads, to evaluate the likelihood of default by
itself and its counterparties. However, as of June 30, 2010, we have assessed
the significance of the impact of the credit valuation adjustments on the
overall valuation of our derivative positions and have determined that the
credit valuation adjustments are not significant to the overall valuation of our
derivatives. As a result, we have determined that our derivative valuations in
their entirety are classified in Level 2 of the fair value
hierarchy.
The
following table sets forth our financial assets and (liabilities) measured at
fair value on a recurring basis, which equals book value, by level within the
fair value hierarchy as of June 30, 2010 and December 31, 2009 (in thousands).
Our derivative financial instruments are classified in “Accrued liabilities” on
our consolidated balance sheet at June 30, 2010 and December 31, 2009. See Note
9, “Derivative Instruments and Hedging Activities” for additional information
regarding our hedging activity.
June 30, 2010
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
Derivative
financial instruments
|
$ | - | $ | (246 | ) | $ | - | $ | (246 | ) | ||||||
December 31, 2009
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
Derivative
financial instruments
|
$ | - | $ | (879 | ) | $ | - | $ | (879 | ) |
13
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
Nonrecurring
Fair Value Measurements
Asset
Impairment Losses
We
recognized an impairment charge of $2.8 million related to our Plaza Skillman
property for the three months ended June 30, 2010 as a result of learning that
tenants would not be renewing or extending leases that totaled approximately
25,000 square feet. The inputs used to calculate the fair value of this asset
included projected cash flows and a risk-adjusted rate of return that we
estimated would be used by a market participant in valuing this
asset.
Inventory
Valuation Adjustment
During
the first six months of 2010, the housing market and related condominium sales
continued to experience difficult conditions and as a result we evaluated our
real estate inventory for potential impairment. As a result of our evaluations,
we recognized inventory valuation adjustments of $1.7 million related to the
constructed luxury homes and developed land lots at Bretton Woods for the three
months ended March 31, 2010. The inputs used to calculate the fair value of
these assets included current selling prices, estimated future selling prices,
costs spent to date, estimated additional future costs and
appraisals.
The
following fair value hierarchy table presents information about our assets
measured at fair value on a nonrecurring basis during the six months ended June
30, 2010 (in thousands). There were no amounts recognized for our assets
measured at fair value on a nonrecurring basis during the six months ended June
30, 2009.
Total
|
Gain
|
|||||||||||||||||||
June 30, 2010
|
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
(Loss)
|
|||||||||||||||
Real
estate
|
$ | - | $ | - | $ | 7,440 | $ | 7,440 | $ | (2,774 | ) | |||||||||
Real
estate inventory, net
|
- | - | 7,107 | 7,107 | (1,667 | ) | ||||||||||||||
Total
|
$ | - | $ | - | $ | 14,547 | $ | 14,547 | $ | (4,441 | ) |
Fair
Value Disclosures
Fair
value of financial instruments
As of
June 30, 2010 and December 31, 2009, management estimated the carrying
value of cash and cash equivalents, restricted cash, accounts receivable,
accounts payable and accrued expenses were at amounts that reasonably
approximated their fair value based on their short-term maturities.
The notes
payable and capital lease obligations totaling approximately $162.2 million and
$156.1 million as of June 30, 2010 and December 31, 2009,
respectively, have a fair value of approximately $161.3 million and $155.0
million, respectively, based upon interest rates for mortgages and capital
leases with similar terms and remaining maturities that we believe the
Partnership could obtain.
The fair
value estimates presented herein are based on information available to our
management as of June 30, 2010 and December 31, 2009. We determined the above
disclosure of estimated fair values using available market information and
appropriate valuation methodologies. However, considerable judgment is necessary
to interpret market data and develop the related estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that could be realized upon disposition of the financial
instruments. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Although our management is not aware of any factors that would significantly
affect the estimated fair value amount, such amount has not been comprehensively
revalued for purposes of these consolidated financial statements since that
date, and current estimates of fair value may differ significantly from the
amounts presented herein.
14
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
6.
|
Real
Estate
|
As of
June 30, 2010, we wholly owned the following properties:
Approx. Rentable
|
||||||
Property Name
|
Location
|
Square Footage
|
Description
|
|||
5050
Quorum
|
Dallas,
Texas
|
133,799
|
seven-story
office building
|
|||
Plaza
Skillman
|
Dallas,
Texas
|
98,764
|
shopping/service
center
|
|||
250/290
John Carpenter Freeway
|
Irving,
Texas
|
539,000
|
three-building
office complex
|
|||
Landmark
I
|
Dallas,
Texas
|
122,273
|
two-story
office building
|
|||
Landmark
II
|
Dallas,
Texas
|
135,154
|
two-story
office building
|
|||
Cassidy
Ridge
|
Telluride,
Colorado
|
land
|
development
property
|
|||
Melissa
Land
|
Melissa,
Texas
|
land
|
land
|
|||
Bretton
Woods
|
Dallas,
Texas
|
land
|
developed
property
|
As of
June 30, 2010, we owned interests in the following properties through separate
limited partnerships or joint venture agreements:
Approx. Rentable
|
Ownership
|
||||||||
Property Name
|
Location
|
Square Footage
|
Description
|
Interest
|
|||||
1221
Coit Road
|
Dallas,
Texas
|
125,030
|
two-story
office building
|
90.00
|
% | ||||
Hotel
Palomar and Residences
|
Dallas,
Texas
|
475,000
|
redevelopment
property
|
70.00
|
% |
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;
|
|
·
|
we
have no plans for any material renovations, improvements or development of
our properties, except in accordance with planned
budgets;
|
|
·
|
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.
|
7.
|
Capitalized
Costs
|
On March
3, 2005, we acquired an 80% interest in Bretton Woods, and on February 27, 2008,
we acquired the remaining 20% interest. The site was originally planned for
development into high-end residential lots for future sale to luxury home
builders. Our plans for this land changed slightly in 2008 in that we decided to
construct five speculative homes on this property while selling the remaining
open lots to luxury home builders. Development construction of the land was
completed in April 2007. Construction of the luxury homes with an exclusive home
builder began during the first quarter of 2008 and was completed during the
quarter ended June 30, 2009. We capitalized certain costs associated with
Bretton Woods development and construction. As a result of the completed
construction of speculative homes during the quarter ended June 30, 2009,
additional costs have not been capitalized. For the six months ended June 30,
2009, we capitalized a total of $0.7 million in costs associated with the
development of Bretton Woods to real estate inventory. During the six months
ended June 30, 2009, we capitalized approximately $54,000 in interest
costs.
On May
15, 2006, we acquired a 100% interest in Cassidy Ridge, a 1.56 acre site in
Telluride, Colorado on which we plan to construct 23 luxury condominium units.
Certain costs associated with Cassidy Ridge development were capitalized and
will continue to be capitalized by us until construction is completed, which is
expected to be in late 2010. For the six months ended June 30, 2010 and 2009 we
capitalized a total of $8.6 million and $5.2 million, respectively, in costs
associated with the development of Cassidy Ridge to real estate inventory.
During the six months ended June 30, 2010 and 2009, we capitalized $0.9 million
and $0.6 million, respectively, in interest costs for Cassidy
Ridge.
15
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
8.
|
Notes
Payable
|
The
following table sets forth the carrying values of our notes payable on our
consolidated properties as of June 30, 2010 and December 31, 2009 (dollar
amounts in thousands):
Balance
|
Interest
|
Maturity
|
||||||||||||
Description
|
June 30, 2010
|
December 31, 2009
|
Rate
|
Date
|
||||||||||
5050
Quorum Loan - Sterling Bank
|
$ | 10,000 | $ | 10,000 |
7.0%
|
1/23/2011
|
||||||||
1222
Coit Road Loan - Meridian Bank Texas
|
4,000 | 4,000 |
7.0%
(1)
|
12/4/2011
|
||||||||||
Plaza
Skillman Loan - IPTV
|
9,366 | 9,436 |
7.34%
|
4/11/2011
|
||||||||||
Plaza
Skillman Loan - unamortized premium
|
206 | 250 |
4/11/2011
|
|||||||||||
Hotel
Palomar and Residences - Credit Union Liquidity Services
|
24,950 | 24,950 |
Prime
+ 1.0%
(2)
|
10/1/2011
|
||||||||||
Hotel
Palomar and Residences - Bank of America
|
41,218 | 41,218 |
30-day
LIBOR + 1.75%
(3)
|
12/21/2012
|
||||||||||
Mockingbird
Commons Partnership Loans
|
1,294 | 1,294 |
18.0%
|
10/9/2009
|
||||||||||
Bretton
Woods Loan - Citibank, N.A.
|
1,306 | 1,306 |
6.0%
(4)
|
7/15/2011
|
||||||||||
Bretton
Woods Loans - Dallas City Bank
|
4,455 | 5,521 |
6.0%
(5)
|
4/15/2010
(8)
|
||||||||||
Landmark
I Loan - State Farm Bank
|
10,450 | 10,450 |
30-day
LIBOR + 1.4%
(3)
|
10/1/2010
(8)
|
||||||||||
Landmark
II Loan - State Farm Bank
|
11,550 | 11,550 |
30-day
LIBOR + 1.4%
(3)
|
10/1/2010
(8)
|
||||||||||
Melissa
Land Loan - Dallas City Bank
|
1,650 | 1,710 |
5.5%
(6)
|
7/29/2012
|
||||||||||
Cassidy
Ridge Loan - Credit Union Liquidity Services
|
18,082 | 10,771 |
6.5%
(7)
|
|
10/1/2011
|
|||||||||
Revolver
Agreement - Bank of America
|
9,650 | 9,650 |
30-day
LIBOR + 3.5%
(3)
|
12/21/2012
|
||||||||||
Notes
payable
|
148,177 | 142,106 | ||||||||||||
Amended
BHH Loan - related party
|
13,918 | 13,918 |
5.0%
|
11/13/2012
|
||||||||||
$ | 162,095 | $ | 156,024 |
(1)
|
Rate
is the higher of prime plus 1.0% or
7.0%.
|
(2)
|
Prime
rate at June 30, 2010 was 3.25%.
|
(3)
|
30-day
LIBOR was 0.3% at June 30, 2010.
|
(4)
|
Rate
is the higher of prime plus 2.0% or
6.0%.
|
(5)
|
Rate
is the higher of prime plus 0.5% or
6.0%.
|
(6)
|
Rate
is the higher of prime plus 0.5% or
5.5%.
|
(7)
|
Rate
is the higher of prime plus 1.5% or
6.5%.
|
(8)
|
We
are currently in negotiations with the lender to extend the loan
agreement.
|
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 a
rising cost of any available debt. A continuing market downturn could
reduce cash flow, cause us to incur additional losses, or cause us not to be in
compliance with lender covenants. As of June 30, 2010, of our
$162.1 million in debt, $97.8 million is subject to variable interest rates,
$38.0 million of which is effectively fixed by an interest rate swap
agreement. In addition, as of June 30, 2010, $47.1 million of our
notes payable and an additional $3.1 million in principal payments are due in
the next twelve months. Of that amount, only $4.5 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 and an additional $9.4
million is nonrecourse to us, subject to standard carve-outs. We have
received indications from certain lenders who are willing to extend or modify
approximately 47% of the debt that is maturing in the next twelve
months. We are working with all lenders, with respect to our debt due
within the next twelve months, to either extend the maturity dates of the loans
or refinance the loans under different terms. 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. However, 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.
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. These loan
agreements were superseded and replaced by an Agreement Regarding Advances
effective January 1, 2008, by which the loans were subordinated to the payment
of any mortgage debt. 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. We believe that we are in compliance with all other
covenants under these loan agreements.
16
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
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 $4.5 million at June 30, 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 or
modify these loan agreements.
Generally,
our notes payable mature approximately three to five years from
origination. Almost all of our borrowings are on a recourse basis to
us, meaning that the liability for repayment is not limited to any particular
asset. In addition, the Bank of America loan for Hotel Palomar and Residences
and the Revolver Agreement contain cross default provisions and are
cross-collateralized. The Credit Union Liquidity Services loans for Hotel
Palomar and Residences and Cassidy Ridge also contain cross default provisions
and are cross collateralized. 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, which
was recently sold to a new lender, for the past several months. We expect to
continue making partial mortgage payments until the loan is restructured or
modified. The loan, which is nonrecourse to us subject to standard carve-outs,
matures on April 11, 2011, and the outstanding principal balance was
approximately $9.4 million at June 30, 2010. Failure to make the full mortgage
payment constituted 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 on April 15, 2010 constituted 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 under these 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 June 30, 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 the Plaza Skillman Loan, all loans
are unconditionally guaranteed by us.
9.
|
Derivative
Instruments and Hedging Activities
|
We may be
exposed to the risk associated with variability of interest rates that might
impact our cash flows and results of operations. The hedging strategy
of entering into interest rate swaps, therefore, is to eliminate or reduce, to
the extent possible, the volatility of cash flows.
Interest
calculated on borrowings under our loan agreement related to Hotel Palomar and
Residences Bank of America Loan is based on the 30-day LIBOR plus an applicable
margin. In September 2007, we entered into an interest rate swap agreement
associated with the Hotel Palomar and Residences loan to hedge the volatility of
the designated benchmark interest rate, the 30-day LIBOR. The swap agreement was
designated as a hedging instrument. Accordingly, changes in the fair value of
the interest rate swap agreement were recorded in accumulated other
comprehensive income on the consolidated balance sheet. 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 associated with the Bank of America loan financing the
Hotel Palomar and Residences. As a result, changes in the fair value of the
amended interest rate swap and related interest expense are recognized in “Loss
on derivative instruments, net” on our consolidated statement of operations. For
the six months ended June 30, 2010 and 2009, we recorded a gain of $0.6 million
and $0.4 million, respectively, to adjust the carrying amount of the Hotel
Palomar and Residences interest rate swap to its fair value and $0.7 million for
each of the six months ended June 30, 2010 and 2009 for related interest
expense.
Derivative instruments
classified as liabilities were reported at their combined fair values of $0.2
million and $0.9 million in accrued liabilities at June 30, 2010 and December
31, 2009, respectively. Realized losses on interest rate derivatives for the
three and six months ended June 30, 2009 reflect a reclassification of
unrealized losses from accumulated other comprehensive loss of $0.2 million
and $0.5 million, respectively. This amortization of the unrealized loss held in
other comprehensive income to earnings took place over the remaining life of the
original interest rate swap agreement, which had a maturity date of September
2009.
17
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
The
following table summarizes the notional values of our derivative financial
instruments as of June 30, 2010. The notional values provide an indication of
the extent of our involvement in these instruments at June 30, 2010, but do not
represent exposure to credit, interest rate, or market risks (dollar amounts in
thousands):
Interest Swap
|
Interest Swap
|
||||||||||||||
Hedge Type
|
Notional Amount
|
Pay Rate
|
Receive Rate
|
Maturity
|
Fair Value
|
||||||||||
Interest
rate swap - fair value
|
$ | 38,000 | 3.77 | % |
30-day
LIBOR
|
September
6, 2010
|
$ | (246 | ) |
The table
below presents the fair value of our derivative financial instruments as well as
their classification on the consolidated Balance Sheet as of June 30, 2010 and
December 31, 2009 (in thousands).
As of June 30, 2010
|
As of December 31, 2009
|
||||||||||
Derivatives not designated
as hedging instruments
|
Balance Sheet
Location
|
Fair Value
|
Balance Sheet
Location
|
Fair Value
|
|||||||
Interest
rate swap
|
Accrued
liabilities
|
$ | (246 | ) |
Accrued
liabilities
|
$ | (879 | ) |
The
tables below present the effect of our derivative financial instruments on the
Consolidated Statements of Operations for the three and six months ended June
30, 2010 and 2009 (in thousands).
Amount of Gain or (Loss) on Derivatives
Recognized in Income
|
||||||||||
Derivatives not designated
|
Location of Gain or (Loss) on Derivatives
|
Three months ended June 30,
|
||||||||
as hedging instruments
|
Recognized in Income
|
2010
|
2009
|
|||||||
Interest
rate swap
|
Loss
on derivative instruments, net
|
$ | 330 | $ | 233 | |||||
Interest
rate swap
|
Interest
expense
|
- | (245 | ) | ||||||
Total
|
$ | 330 | $ | (12 | ) |
Amount of Gain or (Loss) on Derivatives
Recognized in Income
|
||||||||||
Derivatives not designated
|
Location of Gain or (Loss) on Derivatives
|
Six months ended June 30,
|
||||||||
as hedging instruments
|
Recognized in Income
|
2010
|
2009
|
|||||||
Interest
rate swap
|
Gain
on derivative instruments, net
|
$ | 633 | $ | 357 | |||||
Interest
rate swap
|
Interest
expense
|
- | (490 | ) | ||||||
Total
|
$ | 633 | $ | (133 | ) |
Credit
risk and collateral
Our
credit exposure related to interest rate instruments is represented by the fair
value of contracts with a net liability fair value at the reporting date. These
outstanding instruments may expose us to credit loss in the event of
nonperformance by the counterparties to the agreements. However, we have not
experienced any credit loss as a result of counterparty nonperformance in the
past. To manage credit risk, we select and periodically review counterparties
based on credit ratings and limit our exposure to any single counterparty. We
have an agreement with a derivative counterparty that incorporates the loan
covenant provisions of the related indebtedness. We would be in default on the
derivative instrument obligations covered by the agreement if we fail to comply
with the related loan covenant provisions. See Note 3, “Summary of Significant
Accounting Policies” and Note 5, “Fair Value Measurements” and Note 8, “Notes
Payable” for further information regarding our compliance with debt covenants
and our hedging instruments.
18
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
10.
|
Commitments
and Contingencies
|
We have
capital leases covering certain equipment. Future minimum lease payments for all
capital leases with initial or remaining terms of one year or more at June 30,
2010 are as follows (in thousands):
Amount
|
||||
July
1 - December 31, 2010
|
$ | 37 | ||
2011
|
56 | |||
Total
minimum future lease payments
|
93 | |||
Less:
amounts representing interest
|
6 | |||
Total
future lease principal payments
|
$ | 87 |
11.
|
Partners’
Capital
|
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. We declared monthly distributions totaling approximately $1.5 million
during the six months ended June 30, 2009, which represented a 3% annualized
rate of return based on an investment in our limited partnership units of $9.44
per unit as a result of special distributions of a portion of net proceeds from
the prior sale of properties. Our General Partners, in their discretion, may
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 our distributions may constitute a return of capital to our investors to the
extent that distributions exceed net cash from operations, or may be recognized
as taxable income by our investors.
12.
|
Related
Party Arrangements
|
The
General Partners and certain of their affiliates are entitled to receive fees
and compensation in connection with the management and sale of our assets, and
have received fees in the past in connection with the Offering and acquisitions.
Our General Partners have agreed that all of these fees and compensation will be
allocated to Behringer Advisors II since the day-to-day responsibilities of
serving as our general partner are performed by Behringer Advisors II through
the executive officers of its general partner.
For the
management and leasing of our properties, we pay HPT Management Services, LLC,
Behringer Harvard Short-Term Management Services, LLC or Behringer Harvard Real
Estate Services, LLC, or their affiliates (individually or collectively referred
to as “Property Manager”), affiliates of our General Partners, 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, 4.5% 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 (ten 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 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 each of the six months
ended June 30, 2010 and 2009, we incurred property management fees payable to
our Property Manager of $0.2 million of which approximately $2,000 is included
in income from discontinued operations for the six months ended June 30,
2009.
We pay
Behringer Advisors II 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 fee may be deferred and paid in a subsequent year. During the six
months ended June 30, 2010, we incurred asset management fees of $0.5 million,
of which approximately $94,000 was capitalized to real estate and approximately
$35,000 was waived. For the six months ended June 30, 2009, we incurred asset
management fees of $0.5 million of which approximately $43,000 was capitalized
to real estate inventory.
19
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
In
connection with the sale of our properties, we will pay to the General Partners
or their affiliates a real estate commission in an amount not exceeding the
lesser of: (a) 50% of the reasonable, customary and competitive real estate
brokerage commissions customarily paid for the sale of a comparable property in
light of the size, type and location of the property, or (b) 3% of the gross
sales price of each property, subordinated to distributions to limited partners
from the sale proceeds of an amount which, together with prior distributions to
the limited partners, will equal (1) 100% of their capital contributions plus
(2) a 10% annual cumulative (noncompounded) return of their net capital
contributions. Subordinated real estate commissions that are not payable at the
date of sale, because limited partners have not yet received their required
minimum distributions, will be deferred and paid at such time as these
subordination conditions have been satisfied. In addition, after the limited
partners have received a return of their net capital contributions and a 10%
annual cumulative (noncompounded) return on their net capital contributions,
then the General Partners are entitled to receive 15% of the remaining residual
proceeds available for distribution (a subordinated participation in net sale
proceeds and distributions); provided, however, that in no event will the
General Partners receive in the aggregate more than 15% of sale proceeds
remaining after the limited partners have received a return of their net capital
contributions. Since the conditions above have not been met at this time, we
incurred no such real estate commissions for the six months ended June 30, 2010
and 2009.
We may
reimburse Behringer Advisors II for costs and expenses paid or incurred to
provide services to us including direct expenses and the costs of salaries and
benefits of certain persons employed by those entities and performing services
for us, as permitted by our Partnership Agreement. For the six months ended June
30, 2010 we incurred such costs for administrative services totaling $0.2
million, all of which was waived. In addition, Behringer Advisors II or its
affiliates waived $4.7 million for reimbursement of operating expenses for the
six months ended June 30, 2010, which is classified as capital contributions on
our consolidated statement of equity and comprehensive loss. We incurred and
expensed $0.2 million in administrative services for the six months ended June
2009.
On
November 13, 2009, we entered into the Fourth Amended BHH Loan, pursuant to
which we may borrow a maximum of $40.0 million. The outstanding principal
balance under the Fourth Amended BHH Loan as of June 30, 2010 was $13.9 million.
On December 31, 2009, Behringer Holdings forgave $15.0 million of principal
borrowings and all accrued interest thereon which was accounted for as a capital
contribution by our General Partners. The Fourth Amended BHH Loan is unsecured
and bears interest at a rate of 5.0% per annum, with the accrued and unpaid
amount of interest payable until the principal amount of each advance under the
note is paid in full. The maturity date of all borrowings under the Fourth
Amended BHH Loan is November 13, 2012. All proceeds from such borrowings are
being used for cash flow needs related principally to working capital and
capital expenditures.
While it
is unclear when the overall economy will recover, we do not expect conditions to
improve in the near future. Management expects that the current volatility in
the capital markets will continue, at least in the short-term. As a result, we
expect that we will continue to require liquidity support from our sponsor
during 2010. Our sponsor, subject to their approval, may make available to us
additional funds under the Fourth Amended BHH Loan, potentially up to the
borrowing limits thereunder. There is no guarantee that our sponsor will provide
additional liquidity to us and if so, in what amounts.
At June
30, 2010, we had payables to related parties of approximately $1.8 million. This
balance consists primarily of interest accrued on the Fourth Amended BHH Loan
and management fees payable to our property managers.
We are
dependent on Behringer Advisors II, our Property Manager, or their affiliates,
for certain services that are essential to us, including 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.
|
Discontinued
Operations
|
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 and six months ended June 30, 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 and six months
ended June 30, 2009 (in thousands):
20
Behringer
Harvard Short-Term Opportunity Fund I LP
Notes
to Consolidated Financial Statements
(Unaudited)
Three months
|
Six months
|
|||||||
ended
|
ended
|
|||||||
June 30, 2009
|
June 30, 2009
|
|||||||
Rental
revenue
|
$ | 25 | $ | 28 | ||||
Expenses
|
||||||||
Property
operating expenses
|
7 | 9 | ||||||
Real
estate taxes
|
17 | 10 | ||||||
Property
and asset management fees
|
- | 1 | ||||||
Total
expenses
|
24 | 20 | ||||||
Net
income
|
1 | 8 | ||||||
Noncontrolling
interest
|
(9 | ) | (11 | ) | ||||
Loss
from discontinued operations attributable to the
Partnership
|
$ | (8 | ) | $ | (3 | ) |
*****
21
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;
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·
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the
availability of cash flow from operating activities for distributions and
capital expenditures;
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·
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our
level of debt and the terms and limitations imposed on us by our debt
agreements;
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·
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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;
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·
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the
need to invest additional equity in connection with debt refinancings as a
result of reduced asset values and requirements to reduce overall
leverage;
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·
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future
increases in interest rates;
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·
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impairment
charges;
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·
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our
ability to retain the executive officers and other key personnel of our
advisor, our property manager and their
affiliates;
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·
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conflicts
of interest arising out of our relationships with our advisor and its
affiliates;
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·
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changes
in the level of financial assistance or support provided by our sponsor or
its affiliates: and
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·
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unfavorable
changes in laws or regulations impacting our business or our
assets.
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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.
22
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 June 30,
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.
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.
23
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.
Real
Estate Inventory
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 six months of 2010, the U.S. and global economies continued to
experience the effects of a significant downturn that began in 2008. This
downturn 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 third quarter of 2010. The
national vacancy percentage for office space increased from 14.5% in the fourth
quarter of 2008 to 19.6% in the first quarter 2010. Additionally, the
hospitality industry continues to be negatively affected by the current economic
recession. In addition to reduced occupancy, according to Smith Travel Research,
the national Average Daily Rate (“ADR”) has continued to decline as compared to
the prior year and we expect that Hotel Palomar will continue to experience the
effects of the current economic recession. This weakening of the hospitality
industry is expected to continue throughout 2010 and is not expected to recover
until 2011.
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.
Although the June 2010 unemployment rate in Texas rose slightly from the same
period a year ago, it is still well below the national rate. Office vacancy
rates in the Dallas-Fort Worth market continued to rise through 2009 and,
according to the Federal Reserve Bank of Dallas, stood at 18.2% in the first
quarter of 2010. The Dallas-Fort Worth area is expected to experience modest
leasing volume in the near future.
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.
Results
of Operations
Three
months ended June 30, 2010 as compared to the three months ended June 30,
2009
We had
eight wholly-owned properties and interests in two properties through
investments in partnerships and joint ventures as of June 30, 2010 and 2009. All
investments in partnerships and joint ventures were consolidated with and into
our accounts for the three months ended June 30, 2010 and 2009.
24
Due to
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. Our strategy
for the project continues to be to sell the units. We had leased all available
units as of June 30, 2010.
Continuing
Operations
Rental Revenue. Rental
revenue for the three months ended June 30, 2010 and 2009 was $2.5 million and
$2.0 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 June 30, 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 June 30, 2010 and 2009 was $3.3 million and $3.4
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.
Real Estate Inventory Sales Revenue.
Real estate inventory sales revenue for the three months ended June 30,
2010 was $0.8 million and was comprised of revenue generated by the sale of home
inventory at Bretton Woods. As mentioned previously, the U.S. housing market and
related condominium sector continued to experience a nationwide downturn. The
housing market has experienced an oversupply of homes available for sale,
reduced demand, deterioration in the credit markets, rising foreclosure activity
due to relatively high unemployment and generally weak conditions in the overall
economy.
Property Operating Expenses.
Property operating expenses for the three months ended June 30, 2010 and
2009 were $4.0 million and $4.3 million, respectively, and were comprised of
expenses related to the daily operations of our properties. The decrease in
property operating expenses is primarily a result of cost saving measures
implemented at Hotel Palomar. We expect property operating expenses to remain at
current levels unless we are able to lease-up available space and lodging demand
increases.
Asset Impairment Loss. Asset
impairment loss for the three months ended June 30, 2010 was $2.8 million. We
received notice that tenants representing approximately 25,000 square feet at
our Plaza Skillman property would not be renewing or extending their lease. As a
result of the significant drop in occupancy, we recognized an impairment charge
related to the property for the three months ended June 30, 2010. 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 June 30, 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 June
30, 2010 and 2009 we capitalized interest costs of $0.5 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 June 30,
2009, we capitalized interest costs of $6,000 for Bretton Woods. Interest
expense for the three months ended June 30, 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 June 30,
2010 and 2009 were $0.8 million and $0.4 million, respectively, and were
comprised of real estate taxes from each of our properties. The increase for the
three months ended June 30, 2010 is primarily due to higher property valuations
in 2010 compared 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 each of the three months ended
June 30, 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 June 30, 2010. No fees were waived during
the three months ended June 30, 2009. We expect property and asset
management fees to remain relatively unchanged in the near
future.
25
General and Administrative Expenses.
General and administrative expenses for each of the three months ended
June 30, 2010 and 2009 were $0.3 million and $0.4 million, respectively.
The decrease for the three months ended June 30, 2010 is primarily due to a
reduction in administrative services costs to our advisor and tax preparation
fees. 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. 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
June 30, 2010 and 2009 were $1.7 million and $1.6 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 June 30, 2010 and 2009 was $4,000 and $89,000, respectively. We entered
into an amended swap agreement in October 2008 associated with the Hotel Palomar
and Residences loan with Bank of America. 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 June 30, 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 June 30, 2009 represents final settlements related to operations of 4245 N.
Central which was sold on September 30, 2008.
Six
months ended June 30, 2010 as compared to the six months ended June 30,
2009
Continuing
Operations
Rental Revenue. Rental
revenue for the six months ended June 30, 2010 and 2009 was $4.9 million and
$4.3 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 six months ended June 30, 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 six months ended June 30, 2010 and 2009 was $6.4 million and $6.3
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.
Real Estate Inventory Sales Revenue.
Real estate inventory sales revenue for the six months ended June 30,
2010 was $0.8 million and was comprised of revenue generated by the sale of home
inventory at Bretton Woods. As mentioned previously, the U.S. housing market and
related condominium sector continued to experience a nationwide downturn. The
housing market has experienced an oversupply of homes available for sale,
reduced demand, deterioration in the credit markets, rising foreclosure activity
due to relatively high unemployment and generally weak conditions in the overall
economy.
Property Operating Expenses.
Property operating expenses for the six months ended June 30, 2010 and
2009 were $7.9 million and $8.2 million, respectively, and were comprised of
expenses related to the daily operations of our properties. The decrease in
property operating expenses is primarily a result of cost saving measures
implemented at Hotel Palomar. We expect property operating expenses to remain at
current levels unless we are able to lease-up available space and lodging demand
increases.
Asset Impairment Loss. Asset
impairment loss for the six months ended June 30, 2010 was $2.8 million. We
received notice that tenants representing approximately 25,000 square feet at
our Plaza Skillman property would not be renewing or extending their lease. As a
result of the significant drop in occupancy, we recognized an impairment charge
related to the property for the six months ended June 30, 2010. 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.
26
Inventory Valuation Adjustment.
The inventory valuation adjustment for the six months ended June 30, 2010
was $1.7 million and was composed of adjustments related to the constructed
luxury homes and developed land lots at Bretton Woods. During the first six
months of 2010, the U.S. housing market and related condominium sector continued
to experience its nationwide downturn. 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 six months ended June 30, 2010 and
2009 was $2.8 million and $3.4 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 six months ended
June 30, 2010 and 2009 we capitalized interest costs of $0.9 million and
$0.6 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 six months ended June
30, 2009, we capitalized interest costs of $54,000 for Bretton Woods. Interest
expense for the six months ended June 30, 2009 also includes the
reclassification of approximately $0.5 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 six months ended June 30, 2010
and 2009 were $1.5 million and $1.1 million, respectively, and were comprised of
real estate taxes from each of our properties. The increase for the six months
ended June 30, 2010 is primarily due to higher property valuations in 2010
compared 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 each of the six months ended
June 30, 2010 and 2009 were $0.9 million and were comprised of property and
asset management fees from our consolidated properties. Asset management fees of
approximately $35,000 were waived by Behringer Advisors II for the six months
ended June 30, 2010. We expect property and
asset management fees to remain relatively constant in the near
future.
General and Administrative Expenses.
General and administrative expenses for the six months ended June 30,
2010 and 2009 were $0.5 million and $0.9 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. The decrease for the six
months ended June 30, 2010
is primarily the result of reduced administrative services costs to our advisor
as well as lower 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 six months ended
June 30, 2010 and 2009 were $3.4 million and $3.1 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 six months
ended June 30, 2010 and 2009 was $38,000 and $272,000, respectively. We entered
into an amended swap agreement in October 2008 associated with the Hotel Palomar
and Residences loan with Bank of America. 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 six months ended June 30, 2010 and 2009 was $1.0 million and $1.1
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 six months ended
June 30, 2009 represents final settlements related to operations of 4245 N.
Central which was sold on September 30, 2008.
27
Cash
Flow Analysis
Cash used
in operating activities for the six months ended June 30, 2010 was $10.0 million
and was comprised primarily of the net loss of $10.3 million, adjusted for
depreciation and amortization of $3.6 million, asset impairment loss of $2.8
million and inventory valuation adjustments of $1.7 million, and an increase in
real estate inventory of $7.0 million. Cash used in operating activities for the
six months ended June 30, 2009 was $10.4 million and was comprised primarily of
the net loss of $7.5 million, adjusted for depreciation and amortization of $3.9
million, an increase in real estate inventory of $4.8 million and changes in
working capital accounts of $2.2 million.
Cash used
in investing activities for the six months ended June 30, 2010 was $1.2 million
and was primarily comprised of an increase in restricted cash related to our
properties. Cash used in investing activities for the six months ended June 30,
2009 was $0.2 million and was primarily comprised of capital expenditures for
real estate of $0.1 million.
Cash
provided by financing activities for the six months ended June 30, 2010 was
$11.0 million and consisted primarily of proceeds from notes payable, net of
payments, of $6.4 million and contributions from our general partner, Behringer
Advisors II, of $4.7 million. Cash provided by financing activities was $8.4
million for the six months ended June 30, 2009 and consisted primarily of
proceeds from notes payable, net of payments, of $10.0 million, partially offset
by distributions of $1.5 million.
Liquidity
and Capital Resources
Our cash
and cash equivalents were $1.8 million at June 30, 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.
Distributions
paid in the six months ended June 30, 2009 were approximately $1.5 million. For
the six months ended June 30, 2009, we had negative cash flow from operating
activities of approximately $10.4 million. Accordingly, cash amounts distributed
to our limited partners for the six months ended June 30, 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 June 30, 2010, of our $162.1 million in
debt, $97.8 million is subject to variable interest rates, $38.0 million of
which is effectively fixed by an interest rate swap agreement. As of
June 30, 2010, $47.1 million of our notes payable and $3.1 million in
principal payments are due in 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 $4.5 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 and an additional $9.4 million is
nonrecourse to us subject tp standard carve-outs. We have received indications
from certain lenders who are willing to extend or modify approximately 47%
of the debt that is maturing in the next twelve months. 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. However, 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.
While it
is unclear when the overall economy will recover, we do not expect conditions to
improve in the near future. Management expects that the current volatility in
the capital markets will continue, at least in the short-term. As a result, we
expect that we will continue to require liquidity support from our sponsor
during 2010. Our sponsor, subject to their approval, may make available to us
additional funds under the Fourth Amended BHH Loan, potentially up to the
borrowing limits thereunder. The outstanding principal balance under the loan
agreement was $13.9 million at June 30, 2010. There is no guarantee that our
sponsor will provide additional liquidity to us and if so, in what
amounts.
28
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. These loan
agreements were superseded and replaced by an Agreement Regarding Advances
effective January 1, 2008, by which the loans were subordinated to the payment
of any mortgage debt. 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. 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 $4.5 million at June 30, 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 or
modify these loan agreements.
Generally,
our notes payable mature approximately three to five years from
origination. Almost all of our borrowings are on a recourse basis to us,
meaning that the liability for repayment is not limited to any particular asset.
In addition, the Bank of America loan for Hotel Palomar and Residences and the
Revolver Agreement contain cross default provisions and are
cross-collateralized. The Credit Union Liquidity Services loans for Hotel
Palomar and Residences and Cassidy Ridge also contain cross default provisions
and are cross collateralized. 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, which is nonrecourse to us, matures
on April 11, 2011 and the outstanding principal balance was approximately $9.4
million at June 30, 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 on April 15, 2010 constituted 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 under these 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 June 30, 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.
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, advertising costs and cost of real estate inventory sales. 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 and six months ended June 30,
2010 and 2009 are presented below (in thousands).
29
Three months
|
Three months
|
Six months
|
Six months
|
|||||||||||||
ended
|
ended
|
ended
|
ended
|
|||||||||||||
June 30, 2010
|
June 30, 2009
|
June 30, 2010
|
June 30, 2009
|
|||||||||||||
Total
revenues
|
$ | 6,548 | $ | 5,412 | $ | 12,090 | $ | 10,587 | ||||||||
Operating
expenses
|
||||||||||||||||
Property operating expenses
|
4,026 | 4,308 | 7,891 | 8,162 | ||||||||||||
Real estate taxes, net
|
706 | 401 | 1,476 | 1,057 | ||||||||||||
Property and asset management fees
|
437 | 475 | 877 | 929 | ||||||||||||
Advertising costs
|
66 | 45 | 118 | 146 | ||||||||||||
Cost of real estate inventory sales
|
843 | - | 843 | - | ||||||||||||
Less: Asset management fees
|
(219 | ) | (235 | ) | (437 | ) | (471 | ) | ||||||||
Total
operating expenses
|
5,859 | 4,994 | 10,768 | 9,823 | ||||||||||||
Net
operating income
|
$ | 689 | $ | 418 | $ | 1,322 | $ | 764 | ||||||||
Reconciliation to Net loss
|
||||||||||||||||
Net
operating income
|
$ | 689 | $ | 418 | $ | 1,322 | $ | 764 | ||||||||
Less:
Depreciation and amortization
|
(1,739 | ) | (1,590 | ) | (3,400 | ) | (3,135 | ) | ||||||||
General and administrative expenses
|
(259 | ) | (427 | ) | (482 | ) | (900 | ) | ||||||||
Interest expense, net
|
(1,401 | ) | (1,715 | ) | (2,838 | ) | (3,376 | ) | ||||||||
Asset management fees
|
(219 | ) | (235 | ) | (437 | ) | (471 | ) | ||||||||
Asset impairment loss
|
(2,774 | ) | - | (2,774 | ) | - | ||||||||||
Inventory valuation adjustment
|
- | - | (1,667 | ) | - | |||||||||||
Provision for income taxes
|
(42 | ) | (73 | ) | (81 | ) | (121 | ) | ||||||||
Add:
Interest income
|
38 | 5 | 68 | 11 | ||||||||||||
Loss on derivative instruments, net
|
(4 | ) | (89 | ) | (38 | ) | (272 | ) | ||||||||
Income from discontinued operations
|
- | 1 | - | 8 | ||||||||||||
Net
loss
|
$ | (5,711 | ) | $ | (3,705 | ) | $ | (10,327 | ) | $ | (7,492 | ) |
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 and six months ended June 30, 2010 and 2009 are
presented below (in thousands):
Three months
|
Three months
|
Six months
|
Six months
|
|||||||||||||
ended
|
ended
|
ended
|
ended
|
|||||||||||||
June 30, 2010
|
June 30, 2009
|
June 30, 2010
|
June 30, 2009
|
|||||||||||||
Net
loss
|
$ | (5,711 | ) | $ | (3,705 | ) | $ | (10,327 | ) | $ | (7,492 | ) | ||||
Net
loss attributable to noncontrolling interest
|
465 | 564 | 999 | 1,144 | ||||||||||||
Adjustments
|
||||||||||||||||
Real
estate depreciation and amortization (1)
|
1,512 | 1,398 | 2,953 | 2,763 | ||||||||||||
Asset
impairment loss
|
- | - | 2,774 | - | ||||||||||||
Inventory
valuation adjustment
|
- | - | 1,667 | - | ||||||||||||
Debt
service, net of amounts capitalized (1)
|
(870 | ) | (1,671 | ) | (1,973 | ) | (2,766 | ) | ||||||||
Capital
improvements (1)(2)
|
(195 | ) | (56 | ) | (250 | ) | (137 | ) | ||||||||
Net
cash from operations
|
$ | (4,799 | ) | $ | (3,470 | ) | $ | (4,157 | ) | $ | (6,488 | ) |
30
(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.
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 $162.1 million in
notes payable at June 30, 2010, approximately $97.8 million represented debt
subject to variable 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.
31
A 100
basis point decrease in interest rates would result in a $29,000 net decrease in
the fair value of our interest rate swap. A 100 basis point increase in interest
rates would result in a $66,000 net increase in the fair value of our interest
rate swap.
At June
30, 2010, we did not have any foreign operations and thus were not exposed to
foreign currency fluctuations.
Item 4.
|
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 June 30, 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 June 30, 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 June 30, 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.
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 for the past several months. We
expect to continue making partial mortgage payments until the loan is
restructured or modified. The loan, which is nonrecouse to us subject to certain
carve-outs, matures on April 11, 2011 and the outstanding principal balance
was approximately $9.4 million at June 30, 2010. Failure to make the full
mortgage payment constituted 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, the Bretton
Woods loans at Dallas City Bank matured on April 15, 2010 and the outstanding
principal balance was approximately $4.5 million at June 30, 2010. While
negotiations with the lender continue, nonpayment of the outstanding principal
balance at April 15, 2010 constituted 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 under these debt agreements.
Item 4.
|
(Removed
and Reserved).
|
32
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.
33
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:
August 16, 2010
|
By:
|
/s/ Gary S. Bresky
|
|
Gary
S. Bresky
|
|||
Chief
Financial Officer
|
|||
(Principal
Financial Officer)
|
34
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.
35