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EXCEL - IDEA: XBRL DOCUMENT - Lightstone Value Plus Real Estate Investment Trust V, Inc.Financial_Report.xls
EX-31.2 - PRIN FIN OFFCR CERT- 2014 10-K - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex312cfocert-201410xk.htm
EX-32.1 - PEO CERT - 2014 10-K - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex321peocert201410-k.htm
EX-10.1 - EX 10.1 LAKEWOOD FLATS PSA - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex101lakewoodflatspsa.htm
EX-32.2 - CFO CERT 2014 10-K - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex3221350cert_cfo201410k.htm
EX-21.1 - OP II LIST OF SUBSIDIARIES - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex211listofsubs-201410xk.htm
EX-10.2 - LAKEWOOD FLATS LOAN AGREEMENT - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex102loanagreementlakewood.htm
EX-31.1 - PRIN EXEC OFFCR CERT- 2014 10-K - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex311ceocert-201410xk.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2014
Commission File Number: 000-53650
Behringer Harvard Opportunity REIT II, Inc.
(Exact name of registrant as specified in its charter)
Maryland
20-8198863
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
15601 Dallas Parkway, Suite 600, Addison, Texas
75001
(Address of principal executive offices)
(Zip Code)
(866) 655-3600
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.0001 par value per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act). Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

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 ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 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 ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer o                    Accelerated filer o    
Non-accelerated filer (Do not check if a smaller reporting company)    o    Smaller reporting company ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

There is no established market for the Registrant's common stock. The Registrant has adopted an Amended and Restated Policy for Estimation of Common Stock Value pursuant to which it has estimated the per share value of its common stock.  As of August 1, 2013, the estimated per share value was $10.09.  As of October 31, 2014, the estimated per share value was $9.72. For a full description of the methodologies used to estimate the value of the Registrant's common stock as of August 1, 2013 and October 31, 2014 see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Market Information" included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2013 and this Annual Report on Form 10-K, respectively. There were approximately 25,988,620 shares of common stock held by non-affiliates as of June 30, 2014, the last business day of the Registrant's most recently completed second fiscal quarter. As of February 28, 2015, the registrant had 25,732,304 shares of common stock outstanding.
 



BEHRINGER HARVARD OPPORTUNITY REIT II, INC.
FORM 10-K
Year Ended December 31, 2014
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K 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 Behringer Harvard Opportunity REIT II, Inc. and our subsidiaries (which may be referred to herein as the "Company," "we," "us" or "our"), including our ability to rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, to sell our assets when we believe advantageous to achieve our investment objectives, our anticipated capital expenditures, the amount and timing of anticipated future special cash distributions to our stockholders, the estimated per share value of our common stock 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 stockholders 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 "Risk Factors" in this Annual Report on Form 10-K and the factors described below:
market and economic challenges experienced by the U.S. and global economies or real estate industry as a whole and the local economic conditions in the markets in which our investments are located;
the availability of cash flow from operating activities for special distributions, if any;
conflicts of interest arising out of our relationships with our advisor and its affiliates;
our ability to retain our executive officers and other key personnel of our advisor, our property manager and their affiliates;
our level of debt and the terms and limitations imposed on us by our debt agreements;
the availability of credit generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions and requirements of that debt;
our ability to make accretive investments in a diversified portfolio of assets;
future changes in market factors that could affect the ultimate performance of our development or redevelopment projects, including but not limited to construction costs, plan or design changes, schedule delays, availability of construction financing, performance of developers, contractors and consultants and growth in rental rates and operating costs;
our ability to secure leases at favorable rental rates;
our ability to sell our assets at a price and on a timeline consistent with our investment objectives;
unfavorable changes in laws or regulations impacting our business, our assets or our key relationships; and
factors that could affect our ability to qualify as a real estate investment trust.
Forward-looking statements in this Annual Report on Form 10-K reflect our management's view only as of the date of this Report, and may ultimately prove to be incorrect. 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, except as required by applicable law. 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 Annual Report on Form 10-K 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.



PART I
Item 1.    Business
Organization
Behringer Harvard Opportunity REIT II, Inc. (which may be referred to as the "Company," "we," "us," or "our") was organized as a Maryland corporation on January 9, 2007 and has elected to be taxed, and currently qualifies, as a real estate investment trust ("REIT") for federal income tax purposes.
We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis. In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines. We have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality and multifamily. We have purchased existing, income-producing properties, and newly-constructed properties. We have also invested in a mortgage loan and a mezzanine loan. Although we acquired one property in 2014, we are not actively seeking to purchase additional assets at this time, but may invest capital in our current assets in order to position them for sale in the normal course of business. We intend to hold the various real properties in which we invest until such time as our Advisor determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met. As of December 31, 2014, we had acquired 21 investments, including a mezzanine loan and a mortgage loan. Of these 21 investments, we sold seven investments prior to December 31, 2014 and received the early prepayment of a mortgage loan that we had originated. In addition, we sold eight of the nine medical office buildings comprising the Florida MOB Portfolio during 2013. We sold our 1875 Lawrence office building on May 30, 2014 and Babcock Self Storage ("Babcock") and Alte Jakobstraße ("AJS") on January 8, 2015 and February 21, 2015, respectively. Babcock and AJS are classified as real estate held for sale on our consolidated balance sheet at December 31, 2014.
Substantially all of our business is conducted through Behringer Harvard Opportunity OP II LP, a limited partnership organized in Delaware ("Behringer Harvard Opportunity OP II"). As of December 31, 2014, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, was the sole general partner of Behringer Harvard Opportunity OP II and owned a 0.1% partnership interest in Behringer Harvard Opportunity OP II. As of December 31, 2014, our wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of Behringer Harvard Opportunity OP II and owned the remaining 99.9% interest in Behringer Harvard Opportunity OP II.
We are externally managed and advised by Behringer Harvard Opportunity Advisors II, LLC (the "Advisor"), a Texas limited liability company. The Advisor is responsible for managing our day-to-day affairs and for identifying and making acquisitions and investments on our behalf.
Our office is located at 15601 Dallas Parkway, Suite 600, Addison, Texas 75001, and our toll-free telephone number is (866) 655-3600. The name Behringer Harvard is the property of Behringer Harvard Holdings, LLC ("Behringer") and is used by permission.
Public Offerings of Common Stock
We commenced an initial public offering of up to 125,000,000 shares of our common stock on January 21, 2008 (the "Initial Offering"), of which 25,000,000 shares were offered pursuant to our distribution reinvestment plan (the "DRP"). On July 3, 2011, the Initial Offering terminated in accordance with its terms. On July 5, 2011, we commenced a follow-on public offering of up to 75,000,000 shares of our common stock (the "Follow-On Offering" and, together with the Initial Offering, the "Offerings"), of which 25,000,000 shares were offered pursuant to the DRP. We terminated the primary component of the Follow-On Offering effective March 15, 2012 and the DRP component effective April 3, 2012. We raised gross offering proceeds of approximately $265.3 million from the sale of approximately 26.7 million shares under the Offerings, including shares sold under the DRP.
In connection with our initial capitalization, on January 19, 2007, we issued 22,471 shares of our common stock and 1,000 shares of our convertible stock to Behringer. On April 22, 2010, Behringer transferred its shares of convertible stock to one of its affiliates.
As of December 31, 2014, we had issued 26.7 million shares of our common stock, including the 22,471 shares owned by Behringer and 2.2 million shares issued through the DRP. As of December 31, 2014, we had redeemed 0.9 million shares of our common stock and had 25.8 million shares of common stock outstanding. As of December 31, 2014, we had 1,000 shares of convertible stock held by an affiliate of Behringer.

4


Our common stock is not currently listed on a national securities exchange.  The timing of a liquidity event will depend upon then prevailing market conditions. We currently intend to consider the process of disposing of our assets, liquidating, and distributing the net proceeds to our stockholders no later than three to six years after the termination of the initial offering, which occurred on July 3, 2011.  Economic or market conditions may, however, result in different holding periods for different assets. If we do not begin an orderly liquidation, we may seek to have our shares listed on a national securities exchange or seek alternative liquidation opportunities.
2014 Highlights
During 2014, we completed the following key transactions:
We sold 1875 Lawrence on May 30 for a contract sales price of approximately $46.7 million. A portion of the proceeds from the sale was used to fully satisfy the existing indebtedness of approximately $15.6 million associated with the office building.
We acquired a 100% interest in Lakewood Flats, a 435-unit multifamily community in Dallas, Texas on October 10 from an unaffiliated third party. The contract purchase price for the property was approximately $60.5 million. In connection with the purchase, we entered into a loan for approximately $33.5 million.
On September 18, we paid a special cash distribution of $13 million, $0.50 per share of common stock, funded from proceeds of asset sales.
For further information regarding our consolidated real estate properties, see Item 2.
Investment Objectives
Our primary investment objectives are:
to realize growth in the value of our investments within three to six years of the termination of the Initial Offering;
to preserve, protect and return our investors' capital contribution;
to grow net cash from operations such that more cash is available for special distributions to investors; and
to enable our investors to realize a return of their investment by beginning the process of liquidating and distributing cash to investors or by listing our shares for trading on a national securities exchange within three to six years after termination of the Initial Offering.
Investment Policies
We have invested in commercial properties, such as office, industrial, retail, hospitality, multifamily, existing, income-producing properties, and newly-constructed properties that were initially identified as opportunistic and value-add investments with significant possibilities for capital appreciation due to their property specific characteristics or their market characteristics.
We intend to hold our assets for a period of three to six years from the termination of the Initial Offering. We believe that holding our assets for this period will enable us to capitalize on the potential for increased income and capital appreciation of assets while also providing a level of liquidity consistent with our investment strategy and fund life. However, economic or market conditions may influence us to hold our investments for different periods of time.
We have generally made our real estate investments in fee title or a long-term leasehold estate through Behringer Harvard Opportunity OP II or indirectly through limited liability companies or through investments in joint ventures, partnerships, co-tenancies, or other co-ownership arrangements with the developers of the properties, affiliates of the Advisor, or other persons.
Borrowing Policies
There is no limitation on the amount we may invest in or borrow related to any single property or other investment. Under our charter, the maximum amount of our indebtedness cannot exceed 300% of our "net assets" (as defined by the Statement of Policy Regarding Real Estate Investment Trusts adopted by the North American Securities Administrators Association on May 7, 2007 (the "NASAA REIT Guidelines")) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors. In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests. Our board of directors must review our aggregate borrowings at least quarterly. As of December 31, 2014, we had an aggregate debt leverage ratio of approximately 50.7% of the aggregate value of our assets.

5


Disposition Policies
As each of our investments reaches what we believe to be the asset's optimum value during the expected life of the program, we will consider disposing of the investment and may do so for the purpose of distributing the net sale proceeds to our stockholders or satisfying obligations of the Company. We may also invest the proceeds in other assets, but do not anticipate doing so at this time. We have begun disposing of certain of our assets and anticipate that additional investment dispositions would be complete within six years after termination of the Initial Offering. Economic or market conditions may, however, result in different holding periods. A property may be sold before or after the expected holding period if, in the judgment of our Advisor and the independent board, the sale of the property is in the best interests of the Company and its stockholders.
Distribution Policy
In order to qualify as a REIT, we are required to distribute at least 90% of our annual REIT taxable income to our stockholders. Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous period, expectations of performance for future periods, including actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial condition, and other factors that our board deems relevant. The board's decision will be influenced, in substantial part, by its obligation to ensure that we maintain our status as a REIT. We cannot provide assurance that we will be able to achieve expected cash flows necessary to pay special distributions at any particular level, or at all. Many of the factors that can affect the availability and timing of special cash distributions to stockholders are beyond our control, and a change in any one factor could adversely affect our ability to pay future special distributions.
We have paid and may pay some or all of our distributions from sources other than operating cash flow. We have, for example, generated cash to pay distributions from financing activities, components of which include proceeds from the Offerings and borrowings (including borrowings secured by our assets) in anticipation of future operating cash flow. We have also utilized cash from refinancings and dispositions, the components of which may represent a return of capital and/or the gains on sale.
Historically, our board of directors declared distributions on a quarterly basis based on daily record dates, portions of which were paid on a monthly basis. On March 20, 2012, our board of directors declared a special distribution of $0.50 per share of common stock payable to our stockholders of record as of April 3, 2012 and determined to cease regular, monthly distributions in favor of payment of periodic special distributions. We did not pay any distributions in 2013.
On August 8, 2014, our board of directors declared another special cash distribution of $0.50 per share of common stock payable to our stockholders of record as of September 15, 2014. The total special cash distribution of $13 million, which represents a portion of proceeds from asset sales, was paid on September 18, 2014.
On March 18, 2015, our board of directors authorized a special cash distribution of $1.00 per share of common stock payable to stockholders of record as of March 30, 2015. The total special cash distribution of $25.7 million, which represents a portion of proceeds from asset sales, is to be paid on or about March 31, 2015.
Competition
We are subject to significant competition in seeking tenants for the leasing of our properties and buyers for the sale of our properties. We compete with many third parties engaged in real estate investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, hedge funds, governmental bodies, and other entities. We also face competition from other real estate investment programs for buyers and tenants that may be suitable for us. Many of our competitors have substantially greater financial and other resources than we have and may have substantially more operating experience than either us or the Advisor.
Regulations
Our investments are subject to various federal, state, and local laws, ordinances, and regulations (including those of foreign jurisdictions), including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution, and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all permits and approvals necessary under current law to operate our investments.

6


Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state, and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future.
Employees
We have no employees. The Advisor or other affiliates of Behringer perform a full range of real estate services for us, including property management, accounting, legal, asset management, wholesale brokerage, and investor relations services.
We are dependent on affiliates of Behringer for services that are essential to us, including property management, other general administrative responsibilities and potentially asset disposition decisions. In the event that these companies were unable to provide these services to us, we would be required to provide such services ourselves or obtain such services from other sources.
Financial Information About Industry Segments
Our current business consists of owning, managing, operating, leasing, acquiring, developing, investing in, and disposing of real estate assets. We internally evaluate all of our real estate assets as one industry segment, and, accordingly, we do not report segment information.
Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports with the Securities Exchange Commission (the "SEC"). We also have filed with the SEC registration statements in connection with the Offerings. Copies of our filings with the SEC may be obtained from our website at www.behringerinvestments.com or at the SEC's website at www.sec.gov. Access to these filings is free of charge. We are not incorporating our website or any information from the website into this Annual Report on Form 10-K.

7



Item 1A. Risk Factors
The factors described below represent the principal risks of an investment in our shares and that could cause our actual results to differ materially from those presented in our forward-looking statements. Other factors may exist that we do not consider to be significant based on information that is currently available or that we are not currently able to anticipate. Our stockholders may be referred to as "you" or "your" in this Item 1A, "Risk Factors" section.
Risks Related to an Investment in Behringer Harvard Opportunity REIT II, Inc.
There is no public trading market for your shares; therefore, it will be difficult for you to sell your shares. If you are able to sell your shares, you may have to sell them at a substantial discount from the estimated value per share.
There is no public market for your shares and our charter does not require our directors to provide liquidity to our stockholders by a specified date, or at all. In addition, if you are able to sell your shares, the price you receive for the sale of any shares of our common stock is likely to be less than the estimated value per share.
We have adopted a share redemption program; however, our share redemption program includes numerous restrictions on your ability to sell your shares to us, and our board of directors may reject any request for redemption of shares or amend, suspend or terminate our share redemption program at any time. From April 1, 2012 through May 15, 2014, our board of directors suspended accepting Ordinary Redemptions, or those redemptions not submitted upon a stockholder's death, qualifying disability or confinement to a long-term care facility (which are referred to as Exceptional Redemptions). Although our board of directors has resumed considering Ordinary Redemption requests, the cash available for redemptions (Ordinary and Exceptional) is limited to no more than $10 million in any twelve-month period. Our board of directors may determine to suspend accepting Ordinary Redemptions again at any point in the future and we can provide no assurances that the $10 million of funds available for redemptions will be sufficient to honor all redemption requests submitted.
Therefore, it will be difficult for you to sell your shares promptly or at all. You may not be able to sell your shares in the event of an emergency, and, if you are able to sell your shares, you may have to sell them at a substantial discount from the estimated value per share. It is also likely that your shares would not be accepted as the primary collateral for a loan.
We may not successfully implement our exit strategy, in which case you may have to hold your investment for an indefinite period.
Depending upon then prevailing market conditions, we intend to consider beginning the process of liquidating our assets and distributing the net proceeds to our stockholders within three to six years after the termination of the initial public offering (which occurred in July 2011). If we do not begin an orderly liquidation within that period, we may seek to have our shares listed on a national securities exchange. If we do not begin the process of liquidating or listing our shares by July 2017, our charter requires that we hold a stockholders meeting to vote on a proposal for our orderly liquidation unless a majority of our board of directors and a majority of our independent directors vote to defer such a meeting beyond the sixth anniversary of the termination of the initial public offering.
Market conditions and other factors could cause us to delay the commencement of our liquidation or to delay the listing of our shares on a national securities exchange beyond July 2017. If so, our board of directors and our independent directors may conclude that it is not in our best interests to hold a stockholders meeting for the purpose of voting on a proposal for our orderly liquidation. Our charter permits our board of directors, with the concurrence of a majority of our independent directors, to defer such a stockholder vote indefinitely. Therefore, if we are not successful in implementing our exit strategy, your shares will continue to be illiquid and you may, for an indefinite period of time, be unable to convert your investment into cash easily with minimum loss.
The estimated value per share of our common stock may not reflect the value that stockholders will receive for their investment.
On November 21, 2014, our board of directors approved an estimated value per share of our common stock of $9.72 based on the estimated value of our assets less the estimated value of our liabilities, divided by the number of shares outstanding, all as of October 31, 2014, as described under "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities-Market Information" included in Part II, Item 5. We provided this estimated value per share to assist broker-dealers in connection with their obligations under applicable Financial Industry Regulatory Authority (“FINRA”) rules with respect to customer account statements. As of March 30, 2015, the estimated value per share of our common stock will be reduced by $1.00 per share in accordance with the Amended and Restated Policy for Estimation of Common Stock Value (the "Valuation Policy") to take into account the special cash distribution authorized by our board of directors on March 18, 2015.

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The estimated value per share was based upon consultation with the Advisor and an independent, third-party valuation advisory firm engaged by us, using what the board of directors deemed to be appropriate valuation methodologies and assumptions under current circumstances in accordance with the Valuation Policy.
FINRA rules provide no guidance on the methodology an issuer must use to determine its estimated value per share. As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may prove later to be inaccurate or incomplete.  Further, different parties using different assumptions and estimates could derive a different estimated value per share, which could be significantly different from our board’s estimated value per share.  The estimated per share value determined by our board of directors neither represents the fair value of our assets less liabilities in accordance with generally accepted accounting principles in the U.S. ("GAAP"), nor does it represent the amount our shares would trade at on a national securities exchange or the amount a shareholder would obtain if he tried to sell his shares or if we liquidated our assets.  Accordingly, with respect to the estimated value per share, the Company can give no assurance that:

a stockholder would be able to resell his or her shares at this estimated value;
a stockholder would ultimately realize distributions per share equal to the Company’s estimated value per share upon liquidation of the Company’s assets and settlement of its liabilities or a sale of the Company;
the Company’s shares would trade at the estimated value per share on a national securities exchange; or
the methodologies used to estimate the Company’s value per share would be acceptable to FINRA or under ERISA for compliance with their respective reporting requirements.

Further, the value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to the real estate and finance markets. For a full description of the methodologies used to value our assets and liabilities in connection with the calculation of the estimated value per share, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information.”
We rely on affiliates of Behringer, including our Advisor, to manage our operations and our portfolio of real estate assets and any adverse changes in the financial health of Behringer could hinder our Advisor's ability to provide these services to us and consequently impair our operating results and negatively affect the return on your investment.
Behringer, through one or more of its subsidiaries, owns and controls our Advisor and our property manager. The operations of our Advisor and our property manager rely substantially on Behringer. Behringer is largely dependent upon the fees and other compensation that it receives from the public programs it sponsors (including us) to conduct its operations.
In August 2012, TIER REIT, Inc. (“TIER REIT”) (f/k/a Behringer Harvard REIT I, Inc.), a mature program sponsored by Behringer, completed a transition to self-management. As a result, TIER REIT no longer relies on Behringer acquisition or asset management services but continues to utilize Behringer for certain other administrative services such as human resources, shareholder services, and information technology as well as property management for which they pay Behringer certain fees. TIER REIT may terminate its administrative services agreement with Behringer and/or exercise a buy-out option with respect to its property management agreement on or after June 30, 2015. Monogram Residential Trust, Inc. (f/k/a Behringer Harvard Multifamily REIT I, Inc.) (“Monogram”), another public program sponsored by Behringer, completed a transition to a self-managed structure in June 2014. Monogram no longer relies on Behringer other than for shareholder services, although Behringer will continue to receive other fees after transition through June 2015.
Going forward, Behringer expects to rely on revenue from those service relationships, its current resources, including amounts received by Behringer as a result of and in connection with the self-management transactions described above, its balance sheet, and fee income from us and Behringer Harvard Opportunity REIT I, Inc., a mature program sponsored by Behringer that reported $314.5 million of assets as of December 31, 2014, and other newly sponsored programs that have not yet raised substantial capital. Behringer Harvard Opportunity REIT I is in its disposition phase and as it sells assets, the fees payable to Behringer will be reduced accordingly. If Behringer’s income and other resources are inadequate to cover its operating expenses, Behringer may need to secure additional capital or it may become unable to meet its obligations or may not be able to continue to provide the same level of service that we have received to date. If this occurs, we might be required to find alternative service providers, which could result in a significant disruption of our business and may adversely affect the value of your investment in us. Further, given the non-compete agreements in place with Behringer' employees and the non-solicitation agreements we have with our Advisor and property manager, it would be difficult for us to utilize any current employees that provide services to us.

9


If we lose or are unable to obtain key personnel, our ability to implement our investment strategies could be delayed or hindered.
Our success depends to a significant degree upon the continued contributions of certain executive officers and other key personnel, of us, our Advisor and its affiliates, including S. Jason Hall and Terri Warren Reynolds, each of whom would be difficult to replace. We do not have employment agreements with our executive officers and other key personnel, and we cannot guarantee that they will remain affiliated with us. Also, our executive officers and key personnel do not have employment agreements with our Advisor, and we cannot guarantee that such persons will remain affiliated with our Advisor. In October 2014 and January 2015, our Chief Financial Officer and Chief Executive Officer, respectively, resigned their positions with us and Behringer. The departure of these executive officers, as well as the departure of any of our key personnel, could cause our operating results to suffer. We do not intend to separately maintain key person life insurance on any of our key personnel.
Further, we believe that our future success depends, in large part, upon our Advisor's and its affiliates' ability to hire and retain highly skilled managerial and operational personnel. We appointed S. Jason Hall to serve as our Chief Financial Officer in October 2014 in addition to his position as our Chief Accounting Officer and Treasurer. On March 18, 2015, our board of directors appointed Thomas P. Kennedy as our President effective April 1, 2015. Competition for persons with these skills is intense, and we cannot assure you that our Advisor will be successful in attracting and retaining such skilled personnel.
In addition, we have established, and intend in the future to establish, strategic relationships with firms that have special expertise in certain services or as to assets both nationally and in certain geographic regions. Maintaining these relationships will be important for us to manage and liquidate our assets. We cannot assure you that we will be successful in attracting and retaining such strategic relationships. If we lose or are unable to obtain the services of key personnel or do not establish or maintain appropriate strategic relationships, our ability to implement our investment strategies could be delayed or hindered.
We are restricted in our ability to replace our property manager, an affiliate of our Advisor.
Under the terms of our property management agreement, we may terminate the agreement upon 30 days' notice in the event of, and only in the event of, a showing of misconduct, negligence, or deliberate malfeasance by the property manager in performing its duties. Our board of directors may find the performance of our property manager to be unsatisfactory. However, unsatisfactory performance by the property manager may not constitute "misconduct, negligence, or deliberate malfeasance." As a result, we may be unable to terminate the property management agreement, which may have an adverse effect on the management and profitability of our properties.
Payment of fees to our Advisor and its affiliates will reduce cash available for investment and may adversely affect the return on your investment.
Our Advisor and its affiliates will perform services for us in connection with, among other things, the management and leasing of our properties, the servicing of our mortgage, bridge, mezzanine or other loans, the administration of our other investments and the disposition of our assets. They will be paid substantial fees for these services. These fees will reduce the amount of cash available for investment and may adversely affect the return on your investment.
Our stockholders may not be able to sell their shares under our share redemption program and, if our stockholders are able to sell their shares under the program, they may not be able to recover the amount of their investment in our shares.
Our board of directors has adopted a share redemption program that permits stockholders to sell their shares back to us, subject to the significant conditions and limitations of the program. Our board of directors can amend the provisions of our share redemption program without the approval of our stockholders. The terms on which we redeem shares may differ between Ordinary Redemptions and Exceptional Redemptions. From April 1, 2012 to May 15, 2014 our board of directors suspended accepting Ordinary Redemptions. Although our board of directors has resumed considering Ordinary Redemption requests, the cash available for redemptions (Ordinary and Exceptional) is limited to no more than $10 million in any twelve-month period. Our board of directors may determine to suspend accepting redemptions at any time, and we can provide no assurances that the $10 million of funds available for redemptions will be sufficient to honor all redemption requests submitted.
Any shares approved for redemption will be redeemed on a periodic basis as determined from time to time by our board of directors, and no less frequently than annually. We will not redeem, during any twelve-month period, more than 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption. Further, we have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency. The redemption limitations apply to all redemptions, whether Ordinary or Exceptional Redemptions. These limits may prevent us from accommodating all redemption requests made in any year or for a specific redemption date.

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Under our share redemption program, the purchase price per share for the redeemed shares submitted as an Ordinary Redemption and an Exceptional Redemption will equal the lesser of 80% and 90%, respectively, of:
the current estimated value per share (the "Valuation") as determined in accordance with the Valuation Policy; and
the difference of (a) the average price per share the original purchaser or purchasers of shares paid to us for all of his or her shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock) less (b) the aggregate distributions per share of any net sale proceeds from the sale of one or more of our assets, or other special distributions so designated by the board of directors, distributed to stockholders prior to the redemption date and declared from the date of first issue of such redeemed shares.
On November 21, 2014, our board of directors approved an estimated value per share of our common stock of $9.72 as of October 31, 2014. As of March 30, 2015, the estimated value per share of our common stock will be reduced by $1.00 per share in accordance with the Valuation Policy to take into account the special cash distribution authorized by our board of directors on March 18, 2015. For a full description of the methodologies and assumptions used to value our assets and liabilities in connection with the calculation of the estimated value per share, see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities - Market Information." The value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to the real estate and finance markets. As such, other than with respect to the payment of any special cash distributions, which will reduce the estimated per share value, the estimated value per share does not take into account developments in our portfolio since November 21, 2014.
We currently expect to engage our Advisor and/or an independent valuation firm to update our estimated value per share annually, but we are not required to update our estimated value per share more frequently than every 18 months. Upon updating our estimated value per share, the redemption price per share will also change. Because of the restrictions of our share redemption program, our stockholders may not be able to sell their shares under the program, and if stockholders are able to sell their shares, depending upon the then current redemption price, they may not recover the amount of their investment in us.
Risks Related to Our Business
Development projects in which we invest may not be completed successfully or on time, and guarantors of the projects may not have the financial resources to perform their obligations under the guaranties they provide.
We have made and may make equity investments in, acquire options to purchase interests in or make mezzanine loans to the owners of real estate development projects. Our return on these investments is dependent upon the projects being completed successfully, on budget and on time. To help ensure performance by the developers of properties that are under construction, completion of these properties is generally guaranteed either by a completion bond or performance bond. Our Advisor may rely upon the substantial net worth of the contractor or developer or a personal guarantee accompanied by financial statements showing a substantial net worth provided by an affiliate of the entity entering into the construction or development contract as an alternative to a completion bond or performance bond. For a particular investment, we may obtain guaranties that the project will be completed on time, on budget and in accordance with the plans and specifications and that the mezzanine loan will be repaid. However, we may not obtain such guaranties and cannot ensure that the guarantors will have the financial resources to perform their obligations under the guaranties they provide. We intend to manage these risks by ensuring, to the best of our ability, that we invest in projects with reputable, experienced and resourceful developers. If we are unable to manage these risks effectively, our results of operations, financial condition and your overall investment return will be adversely affected.
We provided a mezzanine loan for a multifamily development located in Denver, Colorado (“Prospect Park”). The initial loan amount was $13.7 million. The loan is secured by all of the membership interests of the borrower and subordinate to the senior construction lender (the “Senior Lender”). The owners of the developer provided us with a personal guaranty guaranteeing completion of the project and payment of cost overruns. Due to projected cost overruns in excess of the initial construction budget, an event of default was declared by the Senior Lender on April 28, 2014. In accordance with our rights under the mezzanine loan, we also declared an event of default on May 5, 2014. In order to remedy the events of default, the following terms were agreed upon, based on negotiations between the developer and borrower, the Senior Lender and us: (i) the borrower and developer covered cost overruns totaling $6.6 million; (ii) we increased our financing by $1.5 million to $15.3 million; and (iii) the Senior Lender increased the amount they financed by $4.4 million to $40 million. We may need to fund additional amounts in the future if the developer incurs additional cost overruns or construction delays.

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We are uncertain of our sources for funding of future capital needs, which could adversely affect the value of our investments.
Our ability to fund future property capital needs, such as tenant improvements, leasing commissions, and capital expenditures, will depend on our ability to borrow, to sell assets or interests in assets, and to generate additional cash flows from operations. We will establish capital reserves on a property-by-property basis, as we deem appropriate. In addition to any reserves we establish, a lender may require escrow of capital reserves in excess of our established reserves. If these reserves are insufficient to meet our cash needs, we may have to obtain financing from either affiliated or unaffiliated sources to fund our cash requirements. Accordingly, in the event that we develop a need for additional capital in the future for the improvement of our properties or for any other reason, we have not identified any sources for such funding, and we cannot assure you that such sources of funding will be available to us for potential capital needs.
We may suffer adverse consequences due to the financial difficulties, bankruptcy or insolvency of our tenants.
Economic conditions may cause the tenants in properties we own to experience financial difficulties, including bankruptcy, insolvency or a general downturn in their business. We cannot assure you that any tenant that files for bankruptcy protection will continue to pay us rent. A bankruptcy filing by, or relating to, one of our tenants or a lease guarantor would bar efforts by us to collect pre-bankruptcy debts from that tenant or lease guarantor, or its property, unless we receive an order permitting us to do so from the bankruptcy court. In addition, we cannot evict a tenant solely because of bankruptcy. The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full. If, however, a lease is rejected by a tenant in bankruptcy, we would have only a general, unsecured claim for damages. An unsecured claim would only be paid to the extent that funds are available and only in the same percentage as is paid to all other holders of general, unsecured claims. Restrictions under the bankruptcy laws further limit the amount of any other claims that we can make if a lease is rejected. As a result, it is likely that we would recover substantially less than the full value of the remaining rent during the term.
Market disruptions may adversely impact aspects of our operating results and operating condition.
Our business may be affected by market and economic challenges experienced by the U.S. and global economies or the real estate industry as a whole or by the local economic conditions in the markets which our properties are located. These conditions may materially affect the value and performance of our properties, and may affect our ability to pay special cash distributions, the availability or the terms of financing that we have or may anticipate utilizing, and our ability to make principal and interest payments on, or refinance, any outstanding debt when due. These challenging economic conditions may also impact the ability of certain of our tenants to enter into new leasing transactions or satisfy rental payments under existing leases. Specifically, global market disruptions may have many consequences including, but not limited to, these listed below:
the financial condition of our tenants may be adversely affected, which may result in us having to increase concessions, reduce rental rates or make capital improvements beyond those contemplated at the time we acquired the properties in order to maintain occupancy levels or to negotiate for reduced space needs, which may result in a decrease in our occupancy levels;
significant job losses may occur, which may decrease demand for our office space, our multifamily communities and our hospitality properties and result in lower occupancy levels, which will result in decreased revenues and which could diminish the value of our properties, which depend, in part, upon the cash flow generated by our properties;
an increase in the number of bankruptcies or insolvency proceedings of our tenants and lease guarantors, which could delay our efforts to collect rent and any past due balances under the relevant leases and ultimately could preclude collection of these sums;
credit spreads for major sources of capital may widen as investors demand higher risk premiums, resulting in lenders increasing the cost for debt financing;
our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could result in our investment operations generating lower overall economic returns and a reduced level of cash flow, which could potentially impact our ability to make special cash distributions to our stockholders, reduce our ability to pursue acquisition opportunities if any, and increase our interest expense;
a reduction in the amount of capital that is available to finance real estate, which, in turn, could lead to a decline in real estate values generally, slow real estate transaction activity, reduce the loan to value ratio upon which lenders are willing to lend, and result in difficulty refinancing our debt;
the value of certain of our properties may have decreased below the amounts we paid for them, which may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans;

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one or more counterparties to our derivative financial instruments could default on their obligations to us, or could fail, increasing the risk that we may not realize the benefits of these instruments; and
the value and liquidity of our short-term investments could be reduced as a result of the dislocation of the markets for our short-term investments and increased volatility in market rates for such investments or other factors.
The ongoing Eurozone crisis may have an adverse effect on investments in Europe and the break-up of the Eurozone, or the exit of any member state, would create uncertainty and could affect our investments directly.
We owned interests in two properties located in Germany at December 31, 2014, one of which was sold on February 21, 2015. The ongoing situation relating to the sovereign debt and weak financial health of several countries and the overall European financial system, together with the risk of contagion to other, more financially stable countries, has exacerbated the difficult global financial situation. The situation has also raised a number of uncertainties regarding the stability and overall standing of the European Monetary Union. Any further deterioration in the global or Eurozone economy could have a significant adverse effect on our activities and the value of our German assets.
In addition, if we hold any assets that are denominated in Euros (including loans secured on such assets), such as assets in continental Europe, further deterioration in the Eurozone economy could have a material adverse effect on the value of our investment in such assets and amplify the currency risks faced by us.
If any country were to leave the Eurozone, or if the Eurozone were to break up entirely, the treatment of debt obligations previously denominated in Euros is uncertain. A number of issues would be raised, such as whether obligations which are expressed to be payable in Euros would be re-denominated into a new currency. The answer to this and other questions is uncertain and would depend on the way in which the break-up occurred and also on the nature of the transaction: the law governing it; which courts have jurisdiction in relation to it; the place of payment; and the place of incorporation of the payor. If we held any investments in Euros at the time of any Eurozone exits or break-up, this uncertainty and potential re-denomination could have a material adverse effect on the value of our investments and the income from them.
Your investment may be subject to additional risks related to our international investments.
We have purchased real estate assets located outside the United States. These investments may be affected by factors peculiar to the laws of the jurisdiction in which the borrower or the property is located. These laws may expose us to risks that are different from and in addition to those commonly found in the United States. Foreign investments could be subject to the following risks:
governmental laws, rules and policies, including laws relating to the foreign ownership of real property or mortgages and laws relating to the ability of foreign persons or corporations to remove profits earned from activities within the country to the person's or corporation's country of origin;
variations in currency exchange rates;
adverse market conditions caused by inflation or other changes in national or local economic conditions;
changes in relative interest rates;
changes in the availability, cost and terms of mortgage funds resulting from varying national economic policies;
changes in real estate and other tax rates, the tax treatment of transaction structures and other changes in operating expenses in a particular country where we have an investment;
our REIT tax status not being respected under foreign laws, in which case any income or gains from foreign sources would likely be subject to foreign taxes, withholding taxes, transfer taxes, and value added taxes;
lack of uniform accounting standards (including availability of information in accordance with U.S. GAAP);
changes in land use and zoning laws;
more stringent environmental laws or changes in such laws;
changes in the social stability or other political, economic or diplomatic developments in or affecting a country where we have an investment;
we, our sponsor and its affiliates have relatively less experience with respect to investing in real property or other investments outside the United States as compared to domestic investments; and
legal and logistical barriers to enforcing our contractual rights.
Any of these risks could have an adverse effect on our business, results of operations and the overall return on your investment.

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If our sponsor, our Advisor or its affiliates waive or defer certain fees due to them, our results of operations and special distributions may be artificially high.
From time to time, our sponsor, our Advisor or its affiliates may agree to waive or defer all or a portion of the acquisition, asset management or other fees, compensation or incentives due to them, pay general administrative expenses, or otherwise supplement stockholder returns in order to increase the amount of cash available to support our operations. As a result, our net income and the amount available for special distributions may be artificially higher than normal and could be misleading in years when our sponsor, our Advisor, or its affiliates waive or defer such fees and incentives.
Your interest in Behringer Harvard Opportunity REIT II will be diluted if we or Behringer Harvard Opportunity OP II issues additional securities.
Stockholders do not have preemptive rights to any shares issued by us in the future. Our charter currently has authorized 400,001,000 shares of capital stock, of which 350,000,000 shares are designated as common stock, 1,000 shares are designated as convertible stock and 50,000,000 are designated as preferred stock. Subject to any limitations set forth under Maryland law, our board of directors may amend our charter to increase the number of authorized shares of capital stock, increase or decrease the number of shares of any class or series of stock designated, and may classify or reclassify any unissued shares without the necessity of obtaining stockholder approval. Shares will be issued in the discretion of our board of directors. Stockholders will likely experience dilution of their equity investment in us in the event that we: (1) sell shares of our common stock in the future, including those issued pursuant to the distribution reinvestment plan; (2) sell securities that are convertible into shares of our common stock; (3) issue shares of our common stock in a private offering of securities to institutional investors; (4) issue shares of common stock upon the conversion of our convertible stock; (5) issue shares of common stock upon the exercise of any options granted to our independent directors or employees of our Advisor and BHO II Management, our management company and an affiliate of our Advisor, or their affiliates; (6) issue shares to our Advisor, its successors or assigns, in payment of an outstanding fee obligation as set forth under our advisory management agreement; or (7) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of Behringer Harvard Opportunity OP II. In addition, the partnership agreement for Behringer Harvard Opportunity OP II contains provisions that allow, under certain circumstances, other entities, including other Behringer-sponsored programs, to merge into or cause the exchange or conversion of their interest for interests of Behringer Harvard Opportunity OP II. Because the limited partnership interests of Behringer Harvard Opportunity OP II may be exchanged for shares of our common stock, any merger, exchange or conversion between Behringer Harvard Opportunity OP II and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders.
Risks Related to Conflicts of Interest
We will be subject to conflicts of interest arising out of our relationships with our Advisor and its affiliates, including the material conflicts discussed below.
The Advisor and its affiliates, including all of our executive officers and some of our directors, will face conflicts of interest caused by their compensation arrangements with us, which could result in actions that are not in the long-term best interests of our stockholders.
Our Advisor and its affiliates and our property manager, are entitled to substantial fees from us under the terms of the advisory management agreement and property management agreement. These fees could influence our Advisor's advice to us, as well as the judgment of affiliates of our Advisor performing services for us. Among other matters, these compensation arrangements could affect their judgment with respect to:
the continuation, renewal or enforcement of our agreements with our Advisor and its affiliates, including the advisory management agreement and the property management agreement;
property sales, which reduce the asset management fee payable to our Advisor and may result in the issuance to our Advisor of shares of our common stock through the conversion of our convertible stock;
properties we acquired from third parties, which entitled our Advisor to acquisition fees and asset management fees;
borrowings on properties we have acquired, which borrowings have increased the acquisition, asset management and deferred financing fees payable to our Advisor;
borrowings to refinance our existing indebtedness, which increases the debt financing fees payable to our Advisor;
determining the compensation paid to employees for services provided to us, which could be influenced in part by whether or not the Advisor is reimbursed by us for the related salaries and benefits;
whether we seek to internalize our management functions, which internalization could result in our retaining some of our Advisor's key officers and employees for compensation that is greater than that which they currently earn or which could require additional payments to affiliates of our Advisor to purchase the assets and operations of our Advisor;

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public offerings of equity by us, which may entitle Behringer Securities, LP ("Behringer Securities"), a subsidiary of Behringer, to dealer manager fees and will likely entitle our Advisor to increased acquisition and asset management fees;
whether and when we seek to list our common stock on a national securities exchange, which listing could entitle our Advisor to the issuance of shares of our common stock through the conversion of our convertible stock; and
whether and when we seek to sell the company or its assets, which sale may result in the issuance of shares of our common stock to our Advisor through the conversion of our convertible stock.
The fees our Advisor receives in connection with transactions involving the purchase and management of an asset are based on the value of the investment, and not based on the quality of the investment or the quality of the services rendered to us. This may influence our Advisor to recommend riskier transactions to us.
In addition, the conversion feature of our convertible stock could cause us to make different investment or disposition decisions than we would otherwise make in order to avoid the stock conversion.
Our officers face conflicts of interest related to the positions they hold with entities affiliated with our Advisor, which could diminish the value of the services they provide to us.
Certain of our executive officers are also officers of our sponsor, Behringer, our Advisor, our property manager and other entities affiliated with our Advisor, including the advisors and fiduciaries to other Behringer-sponsored programs. As a result, these individuals owe fiduciary duties to these other entities and their investors, which may conflict with the fiduciary duties that they owe to us and our stockholders. Their loyalties to these other entities and investors could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to (i) allocation of management time and services between us and the other entities, (ii) the timing and terms of the investment in or sale of an asset, (iii) development of our properties by affiliates of our Advisor, (iv) investments with affiliates of our Advisor, (v) compensation to our Advisor, and (vi) our relationship with our property manager. If we do not successfully implement our business strategy, we may be unable to maintain or increase the value of our assets and the overall return on your investment may be reduced.
Our Advisor's executive officers and key personnel and the executive officers and key personnel of Behringer-affiliated entities that conduct our day-to-day operations will face competing demands on their time, and this may cause our investment returns to suffer.
We rely upon the executive officers of our Advisor and the executive officers and employees of Behringer affiliated entities to conduct our day-to-day operations. These persons also conduct the day-to-day operations of other Behringer-sponsored programs and may have other business interests as well. Because these persons have competing interests on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and resources to our business than is necessary or appropriate. If this occurs, the returns on our investments may suffer.
Because other Behringer-sponsored real estate programs use investment strategies that are similar to ours, our executive officers, our Advisor and its executive officers face conflicts of interest relating to the leasing and disposition of properties, and such conflicts may not be resolved in our favor.
There may be periods during which one or more Behringer-sponsored programs are seeking to dispose of similar properties and other real estate-related investments. As a result, we may be trying to sell our properties and other real estate-related investments at the same time as one or more of the other Behringer-sponsored programs managed by officers and employees of our Advisor and/or its affiliates, and these other Behringer-sponsored programs may use disposition strategies that are similar to ours. Our executive officers and the executive officers of our Advisor are also the executive officers of other Behringer-sponsored REITs and their advisors, the general partners of Behringer-sponsored partnerships and/or the advisors or fiduciaries of other Behringer-sponsored programs, and these entities are and will be under common control. In the event these conflicts arise, we cannot assure you that our best interests will be met when officers and employees acting on behalf of our Advisor and on behalf of advisors and managers of other Behringer-sponsored programs decide whether to pursue a specific buyer of real estate on our behalf or on behalf of another Behringer-sponsored program or affiliate of our Advisor, which may have a disposition strategy that is similar to ours. In addition, we have acquired properties in geographic areas where other Behringer-sponsored programs own properties. If one of the other Behringer-sponsored programs attracts a tenant for which we are competing, we could suffer a loss of revenue due to delays in locating another suitable tenant. You will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved.

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Your investment will be diluted upon conversion of the convertible stock.
In connection with our organization, Behringer, an affiliate of our Advisor, purchased 1,000 shares of our convertible stock for an aggregate purchase price of $1,000. Behringer transferred its shares of convertible stock to one of its affiliates on April 2, 2010. Under limited circumstances, these shares may be converted into shares of our common stock, resulting in dilution of our stockholders' interest in us. Our convertible stock will convert into shares of common stock on one of two events. First, it will convert if we have paid distributions to common stockholders such that aggregate distributions are equal to 100% of the price at which we sold our outstanding shares of common stock plus an amount sufficient to produce a 10% cumulative, non-compounded, annual return at that price. Alternatively, the convertible stock will convert if we list our shares of common stock on a national securities exchange and, on the 31st trading day after listing, the value of our company based on the average trading price of our shares of common stock since the listing, plus prior distributions, combine to meet the same 10% return threshold for our common stockholders. Each of these two events is a "Triggering Event." Upon a Triggering Event, our convertible stock will, unless our advisory management agreement with our Advisor has been terminated or not renewed on account of a material breach by our Advisor, generally convert into shares of common stock with a value equal to the lesser of (A) 20% of the excess of our enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of our common stock over the aggregate issue price of those outstanding shares plus a 10% cumulative, non-compounded, annual return on the issue price of those outstanding shares or (B) 15% of the excess of our enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of our common stock over the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares. However, if our advisory management agreement with our Advisor expires without renewal or is terminated (other than because of a material breach by our Advisor) prior to a Triggering Event, then upon a Triggering Event the holder of the convertible stock will be entitled to a prorated portion of the number of shares of common stock determined by the foregoing calculation, where such proration is based on the percentage of time we were advised by our Advisor. As a result, following conversion, the holder of the convertible stock will be entitled to a portion of amounts distributable to our stockholders, which such amounts distributable to the holder could be significant.
Our Advisor can influence whether we terminate the advisory management agreement or allow it to expire without renewal, or whether our common stock is listed for trading on a national securities exchange. Accordingly, our Advisor can influence both the conversion of the convertible stock and the resulting dilution of other stockholders' interests.
General Risks Related to Investments in Real Estate
Our opportunistic and value-add property-acquisition strategy involved a higher risk of loss than more conservative investment strategies.
Our strategy for acquiring properties involved the acquisition of properties in markets that are depressed or overbuilt, and/or have high growth potential in real estate lease rates and sale prices. As a result of our investment in these types of markets, we will face increased risks relating to changes in local market conditions and increased competition for similar properties in the same market, as well as increased risks that these markets will not recover and the value of our properties in these markets will not increase, or will decrease, over time. For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the value of our real estate properties, and as a result, your overall investment return may be adversely affected. Our approach to acquiring and operating income-producing properties involved more risk than comparable real estate programs that have a targeted holding period for investments that is longer than ours, utilize leverage to a lesser degree and/or employ more conservative investment strategies.
Our revenue and net income may vary significantly from one period to another due to opportunity-oriented investments, which could increase the variability of our cash available to support our operations.
Our opportunistic and value-add property investment strategy has included investments in properties in various phases of development, redevelopment or repositioning, which may cause our revenues and net income to fluctuate significantly from one period to another. Projects do not produce revenue while in development or redevelopment. During any period when our projects in development or redevelopment or those with significant capital requirements increase without a corresponding increase in stable revenue-producing properties, our revenues and net income will likely decrease. Many factors may have a negative impact on the level of revenues or net income produced by our portfolio of properties and projects, including higher than expected construction costs, failure to complete projects on a timely basis, failure of the properties to perform at expected levels upon completion of development or redevelopment, and increased borrowings necessary to fund higher than expected construction or other costs related to the project. Further, our net income and shareholders' equity could be negatively affected during periods with large portfolio investments, which generally require large cash outlays and may require the incurrence of additional financing. Any such reduction in our revenues and net income during such periods could cause a resulting decrease in our cash available to support our operations during the same periods.

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Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure you that we will be profitable or that we will realize growth in the value of our real estate properties.
Our operating results will be subject to risks generally incident to the ownership of real estate, including:
changes in general economic or local conditions;
changes in supply of or demand for similar or competing properties in an area;
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
the illiquidity of real estate investments generally;
changes in tax, real estate, environmental and zoning laws; and
periods of high interest rates and tight money supply.
For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the value of our real estate properties.
If our investment portfolio lacks diversification, downturns relating to certain geographic regions, types of assets, industries or business sectors may have a more significant adverse impact on our assets and your overall investment return than if we had a diversified investment portfolio.
We are not required to observe specific diversification criteria. Therefore, our investments in target assets may be concentrated in certain asset types that are subject to higher risk of foreclosure, or secured by assets concentrated in a limited number of geographic locations or industries. For the year ended December 31, 2014, excluding assets held for sale and 1875 Lawrence sold in 2014, 36% and 23% of our total revenues were derived from our properties located in Hawaii and Florida, respectively. Additionally, excluding assets held for sale and 1875 Lawrence, 37%, 36%, 18% and 9% of our total revenues for the year ended December 31, 2014 were from our four asset types, multifamily, hotel, student housing and office buildings, respectively. At December 31, 2014, 13 non-cancelable leases representing 55% of our annualized base rent for our consolidated office properties, excluding AJS, were concentrated in the health care and social assistance industry. To the extent that our portfolio is concentrated in limited geographic regions, types of assets, industries or business sectors, downturns relating generally to such region, type of asset, industry or business sector may leave our profitability vulnerable to a downturn in such areas as a result of tenants defaulting on their lease obligations at a number of our properties within a short time period, which may reduce our net income and the value of our common stock and accordingly reduce our stockholders' overall return.
Properties that have significant vacancies could be difficult to sell, which could diminish the return on your investment.
A property may incur vacancies either by the continued default of tenants under their leases or the expiration of tenant leases. If vacancies continue for a long period of time, we may suffer reduced revenues. In addition, the value of the property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.
Many of our investments will be dependent on tenants for revenue; lease expirations and terminations could adversely affect our operations and your overall investment return.
The success of our real property investments often will be materially dependent on the occupancy rates of our properties and the financial stability of our tenants. Leases at our consolidated office properties representing 1% and 18% of our annualized base rent and 1% and 22% of our rentable square footage will expire by the end of 2015 and 2016, respectively. This does not include AJS which was classified as held for sale at December 31, 2014. If we are unable to renew or extend the expiring leases under similar terms or are unable to negotiate new leases, or if our tenants default on lease payments, it would negatively impact our liquidity and consequently adversely affect our ability to fund our ongoing operations. A default by a significant tenant on its lease payments to us would cause us to lose the revenue associated with such lease and cause us to have to find an alternative source of revenue to meet mortgage payments and prevent a foreclosure if the property is subject to a mortgage. In the event of a tenant default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting our property. If significant leases are terminated, we cannot assure you that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. Additionally, loans that we make generally will relate to real estate. As a result, the borrower's ability to repay the loan may be dependent on the financial stability of the tenants leasing the related real estate.

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We may be unable to sell a property if or when we decide to do so, which could adversely impact our cash flow and results of operations.
We intend to hold the various real properties in which we invest until such time as our Advisor determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met. Otherwise, our Advisor, subject to approval of our board of directors, may exercise its 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 liquidation. If we do not begin the process of liquidating our assets or listing our shares within six years of the termination of our initial public offering, our charter requires that we hold a stockholders meeting to vote on a proposal for our orderly liquidation unless a majority of our board of directors and a majority of our independent directors vote to defer such a meeting beyond the sixth anniversary of the termination of the initial public offering. The real estate market is affected, as discussed above, by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any asset for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of an asset. If we are unable to sell an asset when we determine to do so, it could have a significant adverse effect on our cash flow and results of operations.
Our co-venture partners, co-tenants or other partners in co-ownership arrangements could take actions that decrease the value of an investment to us and lower your overall return.
We may enter into joint ventures, tenant-in-common investments or other co-ownership arrangements with other Behringer programs or third parties with investment objectives similar to ours for the acquisition, development or improvement of properties, as well as the acquisition of real estate-related investments. We may also invest in and develop properties in joint ventures or in partnerships, co-tenancies or other co-ownership arrangements with the sellers of the properties, affiliates of the sellers, developers or other persons.
Such investments may involve risks not otherwise present with other forms of real estate investment, including, for example:
the possibility that our co-venturer, co-tenant or partner in an investment might become bankrupt;
the possibility that the investment requires additional capital that we and/or our partner do not have, which lack of capital could affect the performance of the investment and/or dilute our interest if the partner were to contribute our share of the capital;
the possibility that a co-venturer, co-tenant or partner in an investment might breach a loan agreement or other agreement or otherwise, by action or inaction, act in a way detrimental to us or the investment;
that such co-venturer, co-tenant or partner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals;
the possibility that we may incur liabilities as the result of the action taken by our partner or co-investor;
that such co-venturer, co-tenant or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our policy with respect to qualifying and maintaining our qualification as a REIT; or
that such partner may exercise buy/sell rights that force us to either acquire the entire investment, or dispose of our share, at a time and price that may not be consistent with our investment objectives.
Any of the above might subject a property to liabilities in excess of those contemplated and thus reduce our returns on that investment.
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage may adversely affect your returns.
Our Advisor will attempt to ensure that all of our properties are adequately insured to cover casualty losses. The nature of the activities at certain properties we have invested in, such as student housing, will expose us and our operators to potential liability for personal injuries and property damage claims. In addition, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, pollution, environmental matters or extreme weather conditions such as hurricanes, floods and snowstorms that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims. Mortgage lenders generally insist that specific coverage against terrorism be purchased by commercial property owners as a condition for providing mortgage, bridge or mezzanine loans. It is uncertain whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure you that we will have

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adequate coverage for such losses. In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by the amount of any such uninsured loss. In addition, other than the capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property, and we cannot assure you that any such sources of funding will be available to us for such purposes in the future. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that may adversely affect the overall return on your investment.
Our operating results may be negatively affected by potential development and construction delays and result in increased costs and risks, which could diminish the return on your investment.
We have invested in the acquisition, development and/or redevelopment of properties upon which we will develop and construct improvements. We could incur substantial capital obligations in connection with these types of investments. We will be subject to risks relating to uncertainties associated with rezoning for development and environmental concerns of governmental entities and/or community groups and our builder's ability to control construction costs or to build in conformity with plans, specifications and timetables. The builder's failure to perform may necessitate legal action by us to rescind the purchase or the construction contract or to compel performance. Performance may also be affected or delayed by conditions beyond the builder's control. Delays in completion of construction could also give tenants the right to terminate preconstruction leases for space at a newly developed project. We may incur additional risks when we make periodic progress payments or other advances to such builders prior to completion of construction. These and other such factors can result in increased costs of a project or loss of our investment. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. Furthermore, we must rely upon projections of rental income and expenses and estimates of the fair market value of property upon completion of construction when agreeing upon a price to be paid for the property at the time of acquisition of the property. If our projections are inaccurate, we may pay too much for a property, and the return on our investment could suffer.
Failure to succeed in new markets or in new property classes may have adverse consequences on our performance.
We have from time to time commenced development activity or invested outside of our existing market areas or the property classes of our primary focus if appropriate opportunities arise. Our historical experience in our existing markets in developing, owning and operating certain classes of property does not ensure that we will be able to operate successfully in new markets, should we choose to enter them, or that we will be successful in new property classes. We may be exposed to a variety of risks if we choose to enter new markets, including an inability to evaluate accurately local market conditions, to obtain land for development or to identify appropriate investment opportunities, to hire and retain key personnel, and a lack of familiarity with local governmental and permitting procedures.
In addition, we may abandon opportunities to enter new markets or invest in new classes of property that we have begun to explore for any reason and may, as a result, fail to recover expenses already incurred.
If we set aside insufficient capital reserves, we may be required to defer necessary capital improvements.
If we do not have enough capital reserves to supply needed funds for capital improvements throughout the life of the investment in a property, and there is insufficient cash available from our operations, we may be required to defer necessary improvements to the property, which may cause the property to suffer from a greater risk of obsolescence or a decline in value, or a greater risk of decreased cash flow as a result of fewer potential tenants being attracted to the property. If this happens, we may not be able to maintain projected rental rates for affected properties, and our results of operations may be negatively impacted.
Our student-housing properties are subject to an annual leasing cycle, short lease-up period, seasonal cash flows, changing university admission and housing policies, and other risks inherent in the student-housing industry, any of which could have a negative impact on your investment.
Student-housing properties generally have short-term leases of 12 months, ten months, nine months, or shorter. As a result, we may experience significantly reduced cash flows during the summer months from student-housing properties while most students are on vacation. Furthermore, student-housing properties must be almost entirely re-leased each year, exposing us to increased leasing risk. Student-housing properties are also typically leased during a limited leasing season that usually begins in August and ends in June of the following year. We would, therefore, be highly dependent on the effectiveness of our marketing and leasing efforts and personnel during this season.
Changes in university admission policies could also adversely affect us. For example, if a university reduces the number of student admissions or requires that a certain class of students, such as freshman, live in a university-owned facility, the demand for units at our student-housing properties may be reduced and our occupancy rates may decline. We rely on our relationships with colleges and universities for referrals of prospective student residents or for mailing lists of prospective

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student residents and their parents. Many of these colleges and universities own and operate their own competing on-campus facilities. Any failure to maintain good relationships with these colleges and universities could therefore have a material adverse effect on our ability to market our properties to students and their families.
Federal and state laws require colleges to publish and distribute reports of on-campus crime statistics, which may result in negative publicity and media coverage associated with crimes occurring on or in the vicinity of any student-housing properties. Reports of crime or other negative publicity regarding the safety of the students residing on, or near, our student-housing properties may have an adverse effect on our business.
We may face significant competition from university-owned student housing and from other residential properties that are in close proximity to student-housing properties we own, which could have a negative impact on our results of operations.
On-campus student housing has certain inherent advantages over off-campus student housing in terms of physical proximity to the university campus and integration of on-campus facilities into the academic community. Colleges and universities can generally avoid real estate taxes and borrow funds at lower interest rates than us.
We have invested in apartment communities with short-term apartment leases, which may expose us to the effects of declining market rent more quickly and could have a negative impact on our results of operations.
We expect that substantially all of our apartment leases will be for a term of one year or less. Because these leases generally permit the residents to leave at the end of the lease term without penalty, our rental revenues may be impacted by declines in market rents more quickly than if our leases were for longer terms.
To the extent we have invested in apartment communities, we will face competition from other apartment communities and the increased affordability of single-family homes, which may limit our profitability and returns to our stockholders.
Any apartment communities we have acquired will most likely compete with numerous housing alternatives in attracting residents, including other apartment communities, as well as single family homes and condominiums available to rent or purchase.
The residential apartment community industry is highly competitive. This competition could reduce occupancy levels and revenues at our apartment communities, which would adversely affect our operations. We expect to face competition from many sources, including from other apartment communities both in the immediate vicinity and the broader geographic market where our apartment communities are located. Overbuilding of apartment communities may occur. If so, this will increase the number of apartment units available and may decrease occupancy and apartment rental rates. In addition, increases in operating costs due to inflation may not be offset by increased apartment rental rates. We may be required to expend substantial sums to attract new residents.
To the extent we invest in apartment communities, we may face increased competition from single-family homes and condominiums for rent or purchase, which could limit our ability to retain residents, lease apartment units or increase or maintain rents.
Any apartment communities we have invested in may compete with numerous housing alternatives in attracting residents, including single-family homes and condominiums available for rent or purchase. Such competitive housing alternatives may become more prevalent in a particular area because of the tightening of mortgage lending underwriting criteria, homeowner foreclosures, the decline in single-family home and condominium sales, and the lack of available credit. The number of single-family homes and condominiums for rent in a particular area could limit our ability to retain residents, lease apartment units, or increase or maintain rents.
In addition, the increasing affordability of single-family homes and condominiums available to purchase caused by declining mortgage interest rates and government programs to promote home ownership could adversely affect our ability to retain our residents, lease apartment units and increase or maintain rental rates.
Our failure to integrate acquired communities and new personnel could create inefficiencies and reduce the return of your investment.
To grow successfully, we must be able to apply our experience in managing real estate to a larger number of properties. In addition, we must be able to integrate new management and operations personnel as our organization grows in size and complexity. Failures in either area will result in inefficiencies that could adversely affect our expected return on our investments and our overall profitability.

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BHO II Management's failure to integrate its subcontractors into BHO II Management's operations in an efficient manner could reduce the return on your investment.
BHO II Management may rely on multiple subcontractors for on-site property management of our properties. If BHO II Management is unable to integrate these subcontractors into its operations in an efficient manner, BHO II Management may have to expend substantial time and money coordinating with these subcontractors, which could be a negative impact on the revenues generated from such properties.
We are dependent on the third-party managers of our hotel properties.
In order to qualify as a REIT, we will not be able to operate our hotel properties or participate in the decisions affecting the daily operations of our hotels. We will lease our hotel or any hotels we acquire to a taxable REIT subsidiary ("TRS") in which we may own up to a 100% interest. Our TRS will enter into management agreements with eligible independent contractors that are not our subsidiaries or otherwise controlled by us to manage the hotels. Thus, independent hotel operators, under management agreements with our TRS, will control the daily operations of our hotels.
We will depend on these independent management companies to adequately operate our hotels as provided in the management agreements. We will not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel (for instance, setting room rates). Thus, even if we believe our hotels are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, revenue per available room ("RevPar") and average daily rates ("ADR"), we may not be able to force the management company to change its method of operation of our hotels. We can only seek redress if a management company violates the terms of the applicable management agreement with the TRS, and then only to the extent of the remedies provided for under the terms of the management agreement. In the event that we need to replace any of our management companies, we may be required by the terms of the management agreement to pay substantial termination fees and may experience significant disruptions at the affected hotels.
We may have to make significant capital expenditures to maintain our lodging properties.
Hotels have an ongoing need for renovations and other capital improvements, including replacements of furniture, fixtures and equipment. Generally, we will be responsible for the costs of these capital improvements, which give rise to the following risks:
cost overruns and delays;
renovations can be disruptive to operations and can displace revenue at the hotels, including revenue lost while rooms under renovation are out of service;
the cost of funding renovations and the possibility that financing for these renovations may not be available on attractive terms; and
the risk that the return on our investment in these capital improvements will not be what we expect.
If we have insufficient cash flow from operations to fund needed capital expenditures, then we will need to borrow to fund future capital improvements.
General economic conditions and discretionary consumer spending may affect certain of the properties we have acquired and lower the return on your investment.
The operations of certain properties in which we have invested, such as our hotel property, will depend upon a number of factors relating to discretionary consumer spending. Unfavorable local, regional or national economic developments or uncertainties regarding future economic prospects as a result of terrorist attacks, military activity or natural disasters could reduce consumer spending in the markets in which we own properties and adversely affect the operation of those properties. Consumer spending on luxury goods, travel and other leisure activities such as boating, skiing and health and spa activities may decline as a result of lower consumer confidence levels, even if prevailing economic conditions are favorable. In an economic downturn, consumer discretionary spending levels generally decline, at times resulting in disproportionately large reductions in expenditures on luxury goods, travel and other leisure activities. Certain of the classes of properties that we own may be unable to maintain their profitability during periods of adverse economic conditions or low consumer confidence, which could in turn affect the ability of operators to make scheduled rent payments to us.
Seasonal revenue variations in certain asset classes will require the operators of such assets to manage cash flow properly over time to meet their non-seasonal scheduled rent payments to us.
Certain of the properties in which we have invested, including our hotel property, are generally seasonal in nature. As a result of the seasonal nature of certain industries that may be conducted on properties we acquire, these businesses will experience seasonal variations in revenues that may require our operators to supplement revenue at their properties in order to be able to make scheduled rent payments to us. The failure of an operator or a tenant to manage its cash flow properly may

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result in such operator or tenant having insufficient cash on hand to make its scheduled payments to us during seasonally slow periods, which may adversely affect our cash available for special distributions to stockholders.
Adverse weather conditions may affect operations of certain of the properties we own or reduce our operators' ability to make scheduled rent payments to us, which could reduce our cash flow from such investments.
Adverse weather conditions may influence revenues at our hotel investment. These adverse weather conditions include hurricanes, tropical storms, high winds, heat waves, drought (or merely reduced rainfall levels), excessive rain and floods. For example, adverse weather could reduce the number of people that visit our hotel property. Our hotel property may be susceptible to damage from weather conditions such as hurricanes, which damage (including but not limited to property damage and loss of revenue) is not generally insurable at commercially reasonable rates. Poor weather conditions could also disrupt operations at our hotel property and may adversely affect both the value of our investment and the ability of our tenants and operators to make their scheduled rent payments to us.
Security breaches through cyber-attacks, cyber-intrusions, or otherwise, could disrupt our IT networks and related systems. 
Risks associated with security breaches, whether through cyber-attacks or cyber-intrusions over the Internet, malware, computer viruses, attachments to e-mails, or otherwise, against persons inside our organization, persons with access to systems inside our organization, the U.S. government, financial markets or institutions, or major businesses, including tenants, could disrupt or disable networks and related systems, other critical infrastructures, and the normal operation of business.  The risk of a security breach or disruption, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments, and cyber-terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased.  Even though we may not be specifically targeted, cyber-attacks on the U.S. government, financial markets, financial institutions, or other major businesses, including tenants, could disrupt our normal business operations and networks, which may in turn have a material adverse impact on our financial condition and results of operations.
IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations.  They also may be critical to the operations of certain of our tenants.  Further, our Advisor provides our IT services, and there can be no assurance that their security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging.  Even the most well protected information, networks, systems, and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected.  While, to date, we have not experienced a cyber-attack or cyber-intrusion, neither our Advisor nor we may be able to anticipate or implement adequate security barriers or other preventive measures.  A security breach or other significant disruption involving our IT networks and related systems could:
disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our tenants;
result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting deadlines;
result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;
result in the unauthorized access to, and destruction, loss, theft, misappropriation, or release of proprietary, confidential, sensitive, or otherwise valuable information of ours or others, which others could use to compete against us or for disruptive, destructive, or otherwise harmful purposes and outcomes;
result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space;
require significant management attention and resources to remedy any damages that result;
subject us to claims for breach of contract, damages, credits, penalties, or termination of leases or other agreements; or
damage our reputation among our tenants and stockholders generally.
Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition, and cash flows.
The costs of compliance with environmental laws and other governmental laws and regulations may adversely affect our income.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with

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disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent such property or to use the property as collateral for future borrowing.
Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. For example, various federal, regional and state laws and regulations have been implemented or are under consideration to mitigate the effects of climate change caused by greenhouse gas emissions. Among other things, "green" building codes may seek to reduce emissions through the imposition of standards for design, construction materials, water and energy usage and efficiency, and waste management. We are not aware of any such existing requirements that we believe will have a material impact on our current operations. However, future requirements could increase the costs of maintaining or improving our existing properties or developing new properties.
Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.
Under various federal, state and local environmental laws, ordinances and regulations (including those of foreign jurisdictions), a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances.
In addition, when excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our projects could require us to undertake a costly remediation program to contain or remove the mold from the affected property or development project, which would reduce our operating results.
The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, amounts available for special distributions to you.
We must comply with the Fair Housing Amendment Act, with respect to our investments in apartment communities, which may decrease our cash flow from operations.
We also must comply with the Fair Housing Amendment Act of 1988 ("FHAA"), which requires that apartment communities first occupied after March 13, 1991 be accessible to handicapped residents and visitors. Compliance with the FHAA could require removal of structural barriers to handicapped access in a community, including the interiors of apartment units covered under the FHAA. Recently, there has been heightened scrutiny of multifamily housing communities for compliance with the requirements of the FHAA and an increasing number of substantial enforcement actions and private lawsuits have been brought against apartment communities to ensure compliance with these requirements. Noncompliance with the FHAA could result in the imposition of fines, awards of damages to private litigants, payment of attorneys' fees and other costs to plaintiffs, substantial litigation costs and substantial costs of remediation.
If we sell properties by providing financing to purchasers, we will bear the risk of default by the purchaser.
When we decide to sell any of our properties, we intend to use commercially reasonable efforts to sell them for cash or in exchange for other property. However, in some instances we may sell our properties by providing financing to purchasers. If we provide financing to purchasers, we will bear the risk of default by the purchaser and will be subject to remedies provided by law, which could negatively impact our operating results. There are no limitations or restrictions on our ability to take purchase money obligations. We may, therefore, take a purchase money obligation secured by a mortgage as partial payment for the purchase price of a property. The terms of payment to us generally will be affected by custom in the area where the property being sold is located and the then-prevailing economic conditions. If we receive promissory notes or other property in lieu of cash from property sales, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling

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price, and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our results of operations.
Risks Associated with Debt Financing
We incur mortgage indebtedness and other borrowings, which increases our business risks.
We have acquired real properties and other real estate-related investments by using either existing financing or borrowing new funds. We also may borrow funds for payment of special cash distributions to stockholders, in particular if necessary to satisfy the requirement that we distribute to stockholders at least 90% of our annual REIT taxable income, or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes and/or avoid federal income tax.
There is no limitation on the amount we may invest in or borrow related to any single property or other investment. Under our charter, the maximum amount of our indebtedness shall not exceed 300% of our "net assets" (as defined in our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors.
In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests. Our policy limitation, however, does not apply to individual real estate assets. For these purposes, the value of our assets is based on methodologies and policies determined by the board of directors and may include, but do not require, independent appraisals.
We do not intend to incur mortgage debt on a particular real property unless we believe the property's projected cash flow is sufficient to service the mortgage debt. However, if there is a shortfall in cash flow available to service our mortgage debt, then our cash flow from operations will be adversely affected. In addition, incurring mortgage debt increases the risk of loss because (1) loss in investment value is generally borne entirely by the borrower until such time as the investment value declines below the principal balance of the associated debt and (2) defaults on indebtedness secured by a property may result in foreclosure actions initiated by lenders and our loss of the property securing the loan that is in default. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds from the foreclosure. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one real property may be affected by a default. If any of our properties are foreclosed upon due to a default, your overall investment return will be adversely affected. In addition, because our goal is to be in a position to liquidate our assets within three to six years after the termination of the initial public offering, our approach to investing in properties utilizing leverage in order to accomplish our investment objectives over this period of time may present more risks to investors than comparable real estate programs that have a longer intended duration and that do not utilize borrowing to the same degree.
If mortgage debt is unavailable at reasonable rates, we may not be able to refinance our properties, which could reduce the overall return on your investment.
When we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the properties are refinanced, we may not be able to finance the properties at reasonable rates and our income could be reduced. If this occurs, it would reduce the overall return on your investment, and it may prevent us from borrowing more money.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make special cash distributions to our stockholders.
In connection with obtaining financing, a lender could impose restrictions on us that affect our ability to incur additional debt and our special distribution and operating policies. In general, we expect our loan agreements to restrict our ability to encumber or otherwise transfer our interest in the respective property without the prior consent of the lender. Loan documents we enter may contain other customary negative covenants that may limit our ability to further mortgage the property, discontinue insurance coverage, replace Behringer Harvard Opportunity Advisors II, LLC as our Advisor or impose other limitations. Any such restriction or limitation may have an adverse effect on our operations and our ability to make special distributions to you.

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Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds available for special cash distribution to our stockholders.
We may finance our property acquisitions using interest-only mortgage indebtedness. During the interest-only period, the amount of each scheduled payment will be less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan will not be reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we will be required either to make scheduled payments of amortized principal and interest or to make a lump-sum or "balloon" payment at maturity. These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan. If the mortgage loan has an adjustable interest rate, the amount of our scheduled payments also may increase at a time of rising interest rates. Increased payments and substantial principal or balloon maturity payments will reduce the funds available for special cash distribution to our stockholders because cash otherwise available for special distributions will be required to pay principal and interest associated with these mortgage loans.
Increases in interest rates could increase the amount of our debt payments and adversely affect the overall return on your investment.
We may incur indebtedness that bears interest at a variable rate. In addition, from time to time we may pay mortgage loans or finance and refinance our properties in a rising interest rate environment. Accordingly, increases in interest rates could increase our interest costs, which could have an adverse effect on our operating cash flow. In addition, if rising interest rates cause us to need additional capital to repay indebtedness in accordance with its terms or otherwise, we may need to liquidate one or more of our investments at times that may not permit realization of the maximum return on such investments. Prolonged interest rate increases could also negatively impact our ability to make investments with positive economic returns.
If we enter into financing arrangements involving balloon payment obligations, it may adversely affect the overall return on your investment.
Some of our financing arrangements may require us to make a lump-sum or balloon payment at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the property. At the time the balloon payment is due, we may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. The effect of a refinancing or sale could affect the rate of return to stockholders and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT and/or avoid federal income tax. Any of these results would have a significant, negative impact on your investment.
We have broad authority to incur debt, and high debt levels could decrease the value of your investment.
Our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets, but we may exceed this limit under some circumstances. Such debt may be at a level that is higher than real estate investment trusts with similar investment objectives or criteria. High debt levels could cause us to incur higher interest charges, could result in higher debt service payments, and could be accompanied by restrictive covenants. These factors could result in a decline in the value of your investment.
Risks Associated with Investments in Mortgage, Bridge and Mezzanine Loans
We have relatively less experience investing in mortgage, bridge, mezzanine or other loans as compared to investing directly in real property, which could adversely affect our return on loan investments.
The experience of our Advisor and its affiliates with respect to investing in mortgage, bridge, mezzanine or other loans is not as extensive as it is with respect to investments directly in real properties. However, we may continue to make such loan investments to the extent our Advisor determines that it is advantageous to us due to the state of the real estate market or in order to diversify our investment portfolio. Our less extensive experience with respect to mortgage, bridge, mezzanine or other loans could adversely affect our return on loan investments.
Our mortgage, bridge or mezzanine loans may be impacted by unfavorable real estate market conditions, which could decrease the value of those loans and the return on your investment.
We have invested in mortgage, bridge or mezzanine loans, and we are at risk of defaults on those loans caused by many conditions beyond our control, including local and other economic conditions affecting real estate values and interest rate levels. We do not know whether the values of the property securing the loans will remain at the levels existing on the dates we originated of the loans. If the values of the underlying properties decline, our risk will increase because of the lower value of the security associated with such loans.

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We have invested in a mezzanine loan in a multifamily development located in the energy hub of Denver, Colorado. The energy sector recently experienced a significant decline in oil prices, which could have an adverse impact on the results at this multifamily investment. Denver is headquarters to a number of energy companies. Job layoffs as a result of the downturn in oil prices could reduce the number of tenants available to lease a unit at the development project, which is not expected to be completed until the end of 2015.
Our mortgage, bridge or mezzanine loans will be subject to interest rate fluctuations, which could reduce our returns as compared to market interest rates and reduce the value of the loans in the event we sell them.
We have invested in fixed-rate, long-term mortgage, bridge or mezzanine loans. If interest rates rise, the loans could yield a return lower than then-current market rates. If interest rates decrease, we will be adversely affected to the extent that mortgage, bridge or mezzanine loans are prepaid, because we may not be able to make new loans at the previously higher interest rate. If we invest in variable-rate loans and interest rates decrease, our revenues also decrease. When interest rates increase on our variable-rate loans, the value of the loans we own at such time would decrease, which would lower the proceeds we would receive in the event we sell such assets. For these reasons, our returns on these types of loans and the value of your investment will be subject to fluctuations in interest rates.
Delays in liquidating defaulted mortgage, mezzanine or bridge loans could reduce our investment returns.
If there are defaults under our loans, we may not be able to repossess and sell quickly any properties securing such loans. The resulting time delay could reduce the value of our investment in the defaulted loans. An action to foreclose on a property securing a loan is regulated by state statutes and regulations and is subject to many of the delays and expenses of any lawsuit brought in connection with the foreclosure if the defendant raises defenses or counterclaims. In the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the loan.
The mezzanine loans in which we have invested involve greater risks of loss than senior loans secured by income-producing real properties.
We have invested in mezzanine loans that take the form of subordinated loans secured by second mortgages on the underlying real property or loans secured by a pledge of the ownership interests of either the entity owning the real property or the entity that owns the interest in the entity owning the real property. These types of investments involve a higher degree of risk than long-term senior mortgage lending secured by income producing real property because the investment may become unsecured as a result of foreclosure by the senior lender. If borrowers of these loans are real estate developers, our investments may involve additional risks, including dependence for repayment on successful completion and operation of the project, difficulties in estimating construction or rehabilitation costs and loan terms that often require little or no amortization. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of the entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our loan or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through "standstill periods"), and control decisions made in bankruptcy proceedings relating to borrowers. As a result, we may not recover some or all of our investment.
Returns on our mortgage, bridge or mezzanine loans may be limited by regulations.
The mortgage, bridge or mezzanine loans in which we invest, or that we may make, may be subject to regulation by federal, state and local authorities and/or regulation by foreign jurisdictions and subject to various laws and judicial and administrative decisions. We may determine not to make mortgage, bridge or mezzanine loans in any jurisdiction in which we believe we have not complied in all material respects with applicable requirements. If we decide not to make mortgage, bridge or mezzanine loans in several jurisdictions, it could reduce the amount of income we would otherwise receive.
Foreclosures create additional ownership risks that could adversely impact our returns on mortgage investments.
If we acquire property by foreclosure following defaults under our mortgage, bridge or mezzanine loans, we will have the economic and liability risks as the owner.
The liquidation of our assets may be delayed as a result of our investment in mortgage, bridge or mezzanine loans, which could delay special cash distributions to our stockholders.
The mezzanine and bridge loans we may purchase will be particularly illiquid investments due to their short life, their unsuitability for securitization and the greater difficulty of recoupment in the event of a borrower's default. If our Advisor determines that it is in our best interests to make or invest in mortgage, bridge or mezzanine loans, any intended liquidation of

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us may be delayed beyond the time of the sale of all of our properties until all mortgage, bridge or mezzanine loans expire or are sold, because we may enter into mortgage, bridge or mezzanine loans with terms that expire after the date we intend to have sold all of our properties.
Risks Related to Our Operations
To hedge against exchange rate and interest rate fluctuations, we may use derivative financial instruments that may be costly and ineffective and may reduce the overall returns on your investment and affect cash available for special distributions to our stockholders.
We may use derivative financial instruments to hedge exposures to changes in exchange rates and interest rates on loans secured by our assets and investments in commercial mortgage-backed securities ("CMBS"). Derivative instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions will be determined in light of the facts and circumstances existing at the time of the hedge and may differ from time to time. Our hedging may fail to protect or could adversely affect us because, among other things:
interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
available interest rate hedging products may not correspond directly with the interest rate risk for which protection is sought;
the duration of the hedge may not match the duration of the related liability or asset;
the amount of income that a REIT may earn from hedging transactions to offset losses due to fluctuations in interest rates is limited by federal tax provisions governing REITs;
the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;
the party owing money in the hedging transaction may default on its obligation to pay; and
we may purchase a hedge that turns out not to be necessary, i.e., a hedge that is out of the money.
Any hedging activity we engage in may adversely affect our earnings, which could adversely affect cash available for special distributions to our stockholders. Therefore, while we may enter into such transactions to seek to reduce interest rate risks, unanticipated changes in interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the interest rate risk sought to be hedged. Any such imperfect correlation may prevent us from achieving the intended accounting treatment and may expose us to risk of loss.
To the extent that we use derivative financial instruments to hedge against exchange rate and interest rate fluctuations, we will be exposed to credit risk, basis risk and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. If we are unable to manage these risks effectively, our results of operations, financial condition and your overall investment return will be adversely affected.
Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs.
The cost of using hedging instruments increases as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising and hedging costs have increased. In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory, commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. It may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. We

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cannot be certain that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate, inflation and/or currency risks will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges (1) interest rate risk on liabilities incurred to carry or acquire real estate or (2) risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the REIT 75% or 95% gross income tests, and such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income for purposes of both the REIT 75% and 95% gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.
There can be no assurance that the direct or indirect effects of the Dodd-Frank Act and other applicable non-US regulations will not have an adverse effect on our interest rate hedging activities.
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“the Dodd-Frank Act”) imposed additional regulations on derivatives markets and transactions. Such regulations and, to the extent we trade with counterparties organized in non-US jurisdictions, any applicable regulations in those jurisdictions, are still being implemented, and will affect our interest rate hedging activities. While the full impact of regulation on our interest rate hedging activities cannot be fully assessed until all final implementing rules and regulations are promulgated, such regulation may affect our ability to enter into hedging or other risk management transactions, may increase our costs in entering into such transactions, and/or may result in us entering into such transactions on less favorable terms than prior to implementation of such regulation. For example, subject to an exception under the Dodd-Frank Act for “end-users” of swaps upon which we may seek to rely, we may be required to clear certain interest rate hedging transactions by submitting them to a derivatives clearing organization. In addition, to the extent we are required to clear any such transactions, we will be required to, among other things, post margin in connection with such transactions. The occurrence of any of the foregoing events may have an adverse effect on our business and our stockholders’ return.
We could be negatively impacted by the elimination of Fannie Mae or Freddie Mac.
Fannie Mae and Freddie Mac are a major source of financing for secured multifamily real estate. We and other multifamily companies have utilized Fannie Mae and Freddie Mac to finance growth by purchasing or guaranteeing apartment loans. In May 2014, the U.S. Senate Banking Committee approved legislation to wind down Fannie Mae and Freddie Mac and redesign the U.S. mortgage finance system, which legislation has to date not been acted on in the broader Senate. A final decision by the government to eliminate Fannie Mae or Freddie Mac or reduce their role in the mortgage market, or otherwise restructure the U.S. mortgage finance system, may adversely affect interest rates, capital availability, and the development and potential sales of multifamily communities, and in particular could adversely affect our ability to dispose of our multifamily assets upon our liquidation.
Risks Related to Our Corporate Structure
A limit on the number of shares a person may own may discourage a takeover.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% of our outstanding shares of common or preferred stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide stockholders with the opportunity to receive a control premium for their shares.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of the holders of our current common stock or discourage a third party from acquiring us.
Our charter permits our board of directors to issue up to 400,001,000 shares of capital stock. Our board of directors, without any action by our stockholders, may (1) increase or decrease the aggregate number of shares, (2) increase or decrease the number of shares of any class or series we have authority to issue or (3) classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, or terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of such stock with terms and conditions that could subordinate the rights of the holders of our current common stock or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary

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transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired.
Under Maryland law, "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
any person who beneficially owns 10% or more of the voting power of the then outstanding voting stock of the corporation; or
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the expiration of the five-year period described above, any business combination between a Maryland corporation and an interested stockholder must generally be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
80% of the votes entitled to be cast by holders of the then outstanding shares of voting stock of the corporation; and
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation, other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if the corporation's common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. Maryland law also permits various exemptions from these provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Maryland law also limits the ability of a third party to buy a large stake in us and exercise voting power in electing directors.
Maryland law provides a second anti-takeover statute, the Control Share Acquisition Act, which provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by the corporation's disinterested stockholders by a vote of two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by interested stockholders, that is, by the acquirer, by officers or by directors who are employees of the corporation, are excluded from the vote on whether to accord voting rights to the control shares. "Control shares" are voting shares of stock that would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of control shares. The control share acquisition statute does not apply to (1) shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (2) acquisitions approved or exempted by a corporation's charter or bylaws. Our bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions by any person of shares of our stock. We can offer no assurance that this provision will not be amended or eliminated at any time in the future. This statute could have the effect of discouraging offers from third parties to acquire us and increasing the difficulty of successfully completing this type of offer by anyone other than our affiliates or any of their affiliates.
Our charter includes an anti-takeover provision that may discourage a stockholder from launching a tender offer for our shares.
Our charter provides that any tender offer made by a stockholder, including any "mini-tender" offer, must comply with most provisions of Regulation 14D of the Exchange Act. The offering stockholder must provide us notice of such tender offer at least ten business days before initiating the tender offer. If the offering stockholder does not comply with these requirements,

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we will have the right to redeem that stockholder's shares and any shares acquired in such tender offer. In addition, the non-complying stockholder shall be responsible for all of our expenses in connection with that stockholder's noncompliance. This provision of our charter may discourage a stockholder from initiating a tender offer for our shares and prevent you from receiving a premium price for your shares in such a transaction.
Stockholders have limited control over changes in our policies and operations.
Our board of directors determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Under our charter and the Maryland General Corporation Law, our stockholders currently have a right to vote only on the following matters:
the election or removal of directors;
any amendment of our charter, except that our board of directors may amend our charter without stockholder approval to:
change our name;
increase or decrease the aggregate number of our shares;
increase or decrease the number of our shares of any class or series that we have the authority to issue;
classify or reclassify any unissued shares by setting or changing the preferences, conversion or other rights, restrictions, limitations as to distributions, qualifications or terms and conditions of redemption of such shares;
effect reverse stock splits; and
after the listing of our shares of common stock on a national securities exchange, opting into any of the provisions of Subtitle 8 of Title 3 of the Maryland General Corporation Law;
our liquidation and dissolution; and
our being a party to any merger, consolidation, sale or other disposition of substantially all of our assets (notwithstanding that Maryland law may not require stockholder approval).
All other matters are subject to the discretion of our board of directors.
Our board of directors may change our investment policies and objectives generally and at the individual investment level without stockholder approval, which could alter the nature of your investment.
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interests of the stockholders. In addition to our investment policies and objectives, we may also change our stated strategy for any investment in an individual property. These policies may change over time. The methods of implementing our investment policies may also vary, as new investment techniques are developed. Our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our board of directors without the approval of our stockholders. As a result, the nature of your investment could change without your consent.
Our rights and the rights of our shareholders to take action against our directors and officers are limited.
Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter eliminates our directors' and officers' liability to us and our shareholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. In addition, our charter requires us to indemnify our directors and officers to the maximum extent permitted by Maryland law for liability actually incurred in connection with any proceeding to which they may be made, or threatened to be made, a party, except to the extent that the act or omission of the director or officer was material to the matter giving rise to the proceeding and was either committed in bad faith or was the result of active and deliberate dishonesty, the director or officer actually received an improper personal benefit in money, property or services, or, in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. As a result, we and our shareholders may have more limited rights against our directors and officers than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.

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Federal Income Tax Risks
Failure to qualify as a REIT would adversely affect our operations and our ability to make special cash distributions.
In order for us to qualify as a REIT, we must satisfy certain requirements set forth in the Internal Revenue Code and Treasury Regulations and various factual matters and circumstances that are not entirely within our control. We intend to structure our activities in a manner designed to satisfy all of these requirements. However, if certain of our operations were to be recharacterized by the Internal Revenue Service, such recharacterization could jeopardize our ability to satisfy all of the requirements for qualification as a REIT and may affect our ability to continue to qualify as a REIT. In addition, new legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualifying as a REIT or the federal income tax consequences of qualifying.
Our qualification as a REIT depends upon our ability to meet, through investments, actual operating results, special distributions and satisfaction of specific stockholder rules, the various tests imposed by the Internal Revenue Code. We cannot assure you that we will satisfy the REIT requirements in the future. If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax on our taxable income for that year at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends-paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax. Our failure to qualify as a REIT would adversely affect the return on your investment.
Qualification as a REIT is subject to the satisfaction of tax requirements and various factual matters and circumstances that are not entirely within our control. New legislation, regulations, administrative interpretations or court decisions could change the tax laws with respect to qualification as a REIT or the federal income tax consequences of being a REIT. Our failure to qualify as a REIT would adversely affect your return on your investment.
Our investment strategy may cause us to incur penalty taxes, lose our REIT status, or own and sell properties through taxable REIT subsidiaries, each of which would diminish the return to our stockholders.
In light of our opportunistic and value-add investment strategy, it is possible that one or more sales of our properties may be considered "prohibited transactions" under the Internal Revenue Code. Any subdivision of property, such as the sale of condominiums, would almost certainly be considered such a prohibited transaction. If we are deemed to have engaged in a "prohibited transaction" (i.e., we sell a property held by us primarily for sale in the ordinary course of our trade or business) all income that we derive from such sale would be subject to a 100% penalty tax. The Internal Revenue Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% penalty tax. A principal requirement of the safe harbor is that the REIT must hold the applicable property for not less than two years prior to its sale. Given our opportunistic and value-add investment strategy, the sale of one or more of our properties may not fall within the prohibited transaction safe harbor.
If we desire to sell a property pursuant to a transaction that does not fall within the safe harbor, we may be able to avoid the 100% penalty tax if we acquired the property through a TRS or acquired the property and transferred it to a TRS for a non-tax business purpose prior to the sale (i.e., for a reason other than the avoidance of taxes). However, there may be circumstances that prevent us from using a TRS in a transaction that does not qualify for the safe harbor. Additionally, even if it is possible to effect a property disposition through a TRS, we may decide to forgo the use of a TRS in a transaction that does not meet the safe harbor, based on our own internal analysis, the opinion of counsel or the opinion of other tax advisors that the disposition will not be subject to the 100% penalty tax. In cases where a property disposition is not effected through a TRS, the Internal Revenue Service could successfully assert that the disposition constitutes a prohibited transaction, in which event all of the net income from the sale of such property will be payable as a tax and none of the proceeds from such sale will be distributable by us to our stockholders or available for investment by us.
If we acquire a property that we anticipate will not fall within the safe harbor from the 100% penalty tax upon disposition, then we may acquire such property through a TRS in order to avoid the possibility that the sale of such property will be a prohibited transaction and subject to the 100% penalty tax. If we already own such a property directly or indirectly through an entity other than a TRS, we may contribute the property to a TRS if there is another, non-tax related business purpose for the contribution of such property to the TRS. Following the transfer of the property to a TRS, the TRS will operate the property and may sell such property and distribute the net proceeds from such sale to us, and we may distribute the net proceeds distributed to us by the TRS to our stockholders. Though a sale of the property by a TRS likely would eliminate the danger of the application of the 100% penalty tax, the TRS itself would be subject to a tax at the federal level, and potentially at the state and local levels, on the gain realized by it from the sale of the property, as well as on the income earned while the property is operated by the TRS. This tax obligation would diminish the amount of the proceeds from the sale of such property

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that would be distributable to our stockholders. As a result, the amount available for distribution to our stockholders would be substantially less than if the REIT had not operated and sold such property through the TRS and such transaction was not successfully characterized as a prohibited transaction. The maximum federal corporate income tax rate currently is 35%. Federal, state and local corporate income tax rates may be increased in the future, and any such increase would reduce the amount of the net proceeds available for distribution by us to our stockholders from the sale of property through a TRS after the effective date of any increase in such tax rates.
As a REIT, the value of the non-mortgage securities we hold in all of our TRSs may not exceed 25% of the value of all of our assets at the end of any calendar quarter. If the Internal Revenue Service were to determine that the value of our interests in all of our TRSs exceeded this limit at the end of any calendar quarter, then we would fail to qualify as a REIT. If we determine it to be in our best interests to own a substantial number of our properties through one or more TRSs, then it is possible that the Internal Revenue Service may conclude that the value of our interests in our TRSs exceeds 25% of the value of our total assets at the end of any calendar quarter and therefore cause us to fail to qualify as a REIT. Additionally, as a REIT, no more than 25% of our gross income with respect to any year may be from sources other than real estate. Distributions paid to us from a TRS are considered to be non-real estate income. Therefore, we may fail to qualify as a REIT if distributions from all of our TRSs, when aggregated with all other non-real estate income with respect to any one year, are more than 25% of our gross income with respect to such year. We will use all reasonable efforts to structure our activities in a manner intended to satisfy the requirements for our continued qualification as a REIT. Our failure to qualify as a REIT would adversely affect the return on your investment.
Certain fees paid to us may affect our REIT status.
Income received in the nature of fees or noncustomary services, in some cases, may not qualify as rental income and could be characterized by the Internal Revenue Service as non-qualifying income for purposes of satisfying the "income tests" required for REIT qualification. If this income were, in fact, treated as non-qualifying, and if the aggregate of such income and any other non-qualifying income in any taxable year ever exceeded 5% of our gross revenues for such year, we could lose our REIT status for that taxable year and the four taxable years following the year of losing our REIT status. We will use commercially reasonable efforts to structure our activities in a manner intended to satisfy the requirements for our continued qualification as a REIT. Our failure to qualify as a REIT would adversely affect the return on your investment.
If our operating partnership fails to maintain its status as a partnership, its income may be subject to taxation, which would reduce the cash available to us for special distributions to our stockholders.
We intend to maintain the status of Behringer Harvard Opportunity OP II, our operating partnership, as a partnership for federal income tax purposes. However, if the Internal Revenue Service were to successfully challenge the status of the operating partnership as an entity taxable as a partnership, Behringer Harvard Opportunity OP II would be taxable as a corporation. In such event, this would reduce the amount of distributions that the operating partnership could make to us. This could also result in our losing REIT status, and becoming subject to a corporate level tax on our income. This would substantially reduce the cash available to us to make special distributions and the return on your investment. In addition, if any of the partnerships or limited liability companies through which the operating partnership owns its properties, in whole or in part, loses its characterization as a partnership for federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the operating partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain REIT status.
In certain circumstances, we may be subject to federal and state taxes, which would reduce our cash available for special distributions to our stockholders.
Even if we qualify and maintain our status as a REIT, we may become subject to federal and state taxes, including alternative minimum tax ("AMT"). For example, if we have net income from a "prohibited transaction," such income will be subject to a 100% penalty tax. We may not be able to make sufficient special distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our assets and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. We may also be subject to state and local taxes, including potentially the "margin tax" in the State of Texas, on our income or property, either directly or at the level of the operating partnership or at the level of the other companies through which we indirectly own our assets. Any federal or state taxes paid by us will reduce the cash available to us for special distributions to our stockholders.
For the year ended December 31, 2014, we had federal taxable income of $5.5 million as a result of the disposal of 1875 Lawrence. The Company made special cash distributions of $13 million during the year and had remaining federal NOL carryovers of $13.1 million at December 31, 2014. The Company has continued to establish a valuation allowance against its deferred tax assets as the utilization of any deferred tax asset is not at a level of more likely than not that they will be realized

32


prior to their expiration. The Company recorded an income tax benefit of $0.1 million during the year ended December 31, 2014 related to the overpayment of AMT tax for the year ended December 31, 2013. We recorded estimated AMT tax of $0.2 million for the year ended December 31, 2013 as a result of gains recognized on the sale of investments during the year.  The Company recorded no provision for income tax, including AMT, during the year ended December 31, 2014.
If, in any taxable year, estimates of NOL (and amounts of NOL applied to reduce taxable income) are inaccurate, the Company may have to make adjusting distributions in the following taxable year. Such distributions are subject to complex and uncertain tax rules and may reduce cash available for distributions and/or cause the stockholders to incur tax.
Non-U.S. income or other taxes, and a requirement to withhold any non-U.S. taxes, may apply, and, if so, the amount of net cash from operations payable to you will be reduced.
We have made investments in real estate located outside of the United States and may invest in stock or other securities of entities owning real property located outside the U.S. As a result, we may be subject to foreign (i.e., non-U.S.) income taxes, stamp taxes, real property conveyance taxes, withholding taxes, and other foreign taxes or similar impositions in connection with our ownership of foreign real property or foreign securities. The country in which the real property is located may impose such taxes regardless of whether we are profitable and in addition to any U.S. income tax or other U.S. taxes imposed on profits from our investments in such real property or securities. If a foreign country imposes income taxes on profits from our investment in foreign real property or foreign securities, you will not be eligible to claim a tax credit on your U.S. federal income tax returns to offset the income taxes paid to the foreign country, and the imposition of any foreign taxes in connection with our ownership and operation of foreign real property or our investment in securities of foreign entities will reduce the amounts distributable to you. Similarly, the imposition of withholding taxes by a foreign country will reduce the amounts distributable to you. We expect the organizational costs associated with non-U.S. investments, including costs to structure the investments so as to minimize the impact of foreign taxes, will be higher than those associated with U.S. investments. Moreover, we may be required to file income tax or other information returns in foreign jurisdictions as a result of our investments made outside of the U.S. Any organizational costs and reporting requirements will increase our administrative expenses and reduce the amount of cash available for special distributions to you. You are urged to consult with your own tax advisors with respect to the impact of applicable non-U.S. taxes and tax withholding requirements on an investment in our common stock.
Our foreign investments will be subject to changes in foreign tax or other laws, as well as to changes in U.S. tax laws, and such changes could negatively impact our returns from any particular investment.
We have made investments in real estate located outside of the United States. Such investments are typically structured to minimize non-U.S. taxes, and generally include the use of holding companies. Our ownership, operation and disposition strategy with respect to non-U.S. investments will take into account foreign tax considerations. For example, it is typically advantageous from a tax perspective in non-U.S. jurisdictions to sell interests in a holding company that owns real estate rather than the real estate itself. Buyers of such entities, however, will often discount their purchase price by evaluating any inherent risks or expected tax liability in such entity. Additionally, the pool of buyers for interests in such holding companies is typically more limited than buyers of direct interests in real estate, and we may be forced to dispose of real estate directly, thus potentially incurring higher foreign taxes and negatively effecting the return on the investment.
We will also capitalize our holding companies with debt and equity to reduce foreign income and withholding taxes as appropriate and with consultation with local counsel in each jurisdiction. Such capitalization structures are complex and potentially subject to challenge by foreign and domestic taxing authorities.
We may use certain holding structures for our non-U.S. investments to accommodate the needs of one class of investors which reduce the after-tax returns to other classes of investors. For example, if we interpose an entity treated as a corporation for United States tax purposes in our chain of ownership with respect to any particular investment, U.S. tax-exempt investors will generally benefit as such investment will no longer generate unrelated business taxable income. However, if a corporate entity is interposed in a non-U.S. investment holding structure, this would prevent individual investors from claiming a foreign tax credit for any non-U.S. income taxes incurred by the corporate entity or its subsidiaries.
Foreign investments are subject to changes in foreign tax or other laws. Any such law changes may require us to modify or abandon a particular holding structure. Such changes may also lead to higher tax rates on our foreign investments than we anticipated, regardless of structuring modifications. Additionally, U.S. tax laws with respect to foreign investments are subject to change, and such changes could negatively impact our returns from any particular investment.

33


Legislative or regulatory action could adversely affect the returns to our investors.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. You are urged to consult with your own tax advisor with respect to the impact of recent legislation on your investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. You also should note that our counsel's tax opinion is based upon existing law and Treasury Regulations, applicable as of the date of its opinion, all of which are subject to change, either prospectively or retroactively.
For taxable years beginning January 1, 2013, the tax rate on certain "qualified dividend income" is 20% for certain individuals, trusts and estates. REIT distributions generally do not qualify for "qualified dividend income" tax rate, therefore individuals, trusts and estates may be subject to a maximum tax rate of 39.6% on ordinary REIT dividends. For corporate stockholders, the maximum corporate tax rate for such distributions is 35%. As a REIT, we generally would not be subject to federal or state corporate income taxes on that portion of our ordinary income or capital gain that we distribute currently to our stockholders, and we thus expect to avoid the "double taxation" to which other corporations are typically subject. It is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be taxed for federal income tax purposes as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interests of our stockholders.
Equity participation in mortgage, bridge, mezzanine or other loans may result in taxable income and gains from these properties that could adversely impact our REIT status.
If we participate under a loan in any appreciation of the properties securing the mortgage loan or its cash flow and the Internal Revenue Service characterizes this participation as "equity," we might have to recognize income, gains and other items from the property for federal income tax purposes. This could affect our ability to qualify as a REIT.
Our investments in debt instruments may cause us to recognize "phantom income" for federal income tax purposes even though no cash payments have been received on the debt instruments.
It is expected that we may acquire debt instruments in the secondary market for less than their face amount. The amount of such discount will generally be treated as "market discount" for federal income tax purposes. We may acquire distressed debt investments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt are "significant modifications" under the applicable Treasury regulations, the modified debt may be considered to have been reissued to us in a debt-for-debt exchange with the borrower. This deemed reissuance may prevent the modified debt from qualifying as a good REIT asset if the underlying security has declined in value.
In general, we will be required to accrue original issue discount on a debt instrument as taxable income in accordance with applicable federal income tax rules even though no cash payments may be received on such debt instrument.
In the event a borrower with respect to a particular debt instrument encounters financial difficulty rendering it unable to pay stated interest as due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income. Similarly, we may be required to accrue interest income with respect to CMBS at the stated rate regardless of when their corresponding cash payments are received.
As a result of these factors, there is a significant risk that we may recognize substantial taxable income in excess of cash available for special distributions. In that event, we may need to borrow funds or take other action to satisfy the REIT distribution requirements for the taxable year in which this "phantom income" is recognized.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order to maintain our REIT qualification. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. We intend to make special distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code.

34


From time to time, we may generate taxable income greater than our taxable income for financial reporting purposes, or our taxable income may be greater than our cash flow available for special distributions to stockholders (for example, where a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise). If we do not have other funds available in these situations we could be required to borrow funds, sell investments at disadvantageous prices or find another alternative source of funds to make special cash distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Risks Related to Investments by Benefit Plans Subject to ERISA and Certain Tax-Exempt Entities (including IRAs)
If the fiduciary of an employee pension benefit plan subject to ERISA (such as profit sharing, Section 401(k) or pension plan) or any other retirement plan or account fails to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in our stock, you could be subject to criminal and civil penalties.
There are special considerations that apply to employee benefit plans subject to ERISA (such as profit sharing, section 401(k) or pension plans) and other retirement plans or accounts subject to Section 4975 of the Internal Revenue Code (such as an IRA) that are investing in our shares. If you are investing the assets of such a plan or account in our common stock, you should satisfy yourself that:
your investment is consistent with your fiduciary obligations and other duties under ERISA and the Internal Revenue Code;
your investment is made in accordance with the documents and instruments governing your plan or IRA, including your plan's or account's investment policy;
your investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Internal Revenue Code;
your investment in our shares, for which no public trading market exists, is consistent with the liquidity needs of the plan or IRA;
your investment will not produce an unrelated amount of "unrelated business taxable income" for the plan or IRA;
you will be able to comply with the requirements under ERISA and the Internal Revenue Code to value the assets of the plan or IRA annually; and
your investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.
With respect to the annual valuation requirements described above, we will provide an estimated value for our shares annually. For information regarding our estimated value per share, see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of equity Securities - Market Information" of this Annual Report on Form 10-K. We can make no claim whether such estimated value will or will not satisfy the applicable annual valuation requirements under ERISA and the Internal Revenue Code. The Department of Labor or the Internal Revenue Service may determine that a plan fiduciary or an IRA custodian is required to take further steps to determine the value of our common stock. In the absence of an appropriate determination of value, a plan fiduciary or an IRA custodian may be subject to damages, penalties or other sanctions.
Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Code may result in the imposition of civil and criminal penalties and could subject the fiduciary to claims for damages or for equitable remedies. In addition, if an investment in our shares constitutes a prohibited transaction under ERISA or the Code, the fiduciary or IRA owner who authorized or directed the investment or a related party may be subject to the imposition of excise taxes with respect to the amount invested. In the case of a prohibited transaction involving an IRA owner, the IRA may be disqualified and all of the assets of the IRA may be deemed distributed and subjected to tax. ERISA plan fiduciaries and IRA custodians should consult with counsel before making an investment in our common shares.
Item 1B.    Unresolved Staff Comments.
Not applicable.

35


Item 2.    Properties.
General
The following table presents certain additional information about our consolidated investments in real estate as of December 31, 2014:
Property Name
 
Location
 
Date Acquired
 
Approximate
Rentable Square
Footage or
Number of Units
and Beds
 
Description
 
Encumbrances
 
Ownership
Interest
 
Occupancy
at the end
of 2014
 
Occupancy
at the end
of 2013
 
Effective
Monthly
Rent per
Square
Foot/Unit/Bed
for 2014(1)
 
Effective
Monthly
Rent per
Square
Foot/Unit/Bed
for 2013(1)
Holstenplatz
 
Hamburg, Germany
 
June 30, 2010
 
80,000
 
8-story office
 
$9.1 million
 
100%
 
100%
 
100%
 
$
1.18

 
$
1.39

Gardens Medical Pavilion(2)
 
Palm Beach Gardens, Florida
 
October 20, 2010
 
75,374
 
Medical office
 
$13.7 million
 
79.8%
(2) 
60%
 
80%
 
1.21

 
2.47

Courtyard Kauai Coconut Beach Hotel
 
Kauai, Hawaii
 
October 20, 2010
 
311 Rooms
(3)
Hotel
 
$38 million
 
80%
 
82%
(4)
80%
(4)
n/a

 
n/a

River Club and the Townhomes at River Club
 
Athens, Georgia
 
April 25, 2011
 
1,128 beds
(5)
Student housing
 
$24.7 million
 
85%
 
97%
 
76%
 
362.72

 
416.80

Lakes of Margate
 
Margate, Florida
 
October 19, 2011
 
280 units
 
Multifamily
 
$14.7 million
 
92.5%
 
90%
 
93%
 
1,127.98

 
1,112.98

Arbors Harbor Town
 
Memphis, Tennessee
 
December 20, 2011
 
345 units
 
Multifamily
 
$25.6 million
 
94%
 
91%
 
94%
 
1,169.66

 
1,139.49

Wimberly at Deerwood ("Wimberly")
 
Jacksonville, Florida
 
February 19, 2013
 
322 units
 
Multifamily
 
$26.7 million
 
95%
 
91%
 
89%
 
1,032.22

 
972.59

22 Exchange
 
Akron, Ohio
 
April 16, 2013
 
471 beds / 22,104 sq ft retail space
 
Student housing
 
$19.5 million
 
90%
 
(6)
 
(6)
 
(7)

 
(7
)
Parkside Apartments ("Parkside")
 
Sugarland, Texas
 
August 8, 2013
 
240 units
 
Multifamily
 
$10.8 million
 
90%
 
83%
 
91%
 
1,066.50

 
1,003.13

Lakewood Flats
 
Dallas, Texas
 
October 10, 2014
 
435 units
 
Multifamily
 
$33.5 million
 
100%
 
93%
 
n/a
 
1,168.13

 
n/a

Real Estate Held for Sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Babcock Self Storage(8)  
 
San Antonio, Texas
 
August 30, 2011
 
537 units
 
Self storage
 
$2.1 million
 
85%
 
83%
 
79%
 
101.63

 
101.74

Alte Jakobstraße(8)
 
Berlin, Germany
 
April 5, 2012
 
70,000
 
7-story office
 
$7 million
 
100%
 
100%
 
99%
 
0.93

 
1.23

_______________________________________________________________________________

(1)
Effective monthly rent is calculated using leases in place as of December 31 and takes into account any rent concessions.
(2)
We acquired a portfolio of eight medical office buildings, known as the Original Florida MOB Portfolio, on October 8, 2010.  We acquired a medical office building known as Gardens Medical Pavilion on October 20, 2010.  Collectively, the Original Florida MOB Portfolio and Gardens Medical Pavilion were referred to as the Florida MOB Portfolio and consisted of nine medical office buildings. On September 20, 2013, we sold the Original Florida MOB Portfolio. As of December 31, 2014, we own approximately 79.8% of the ninth building, Gardens Medical Pavilion.
(3)
The Courtyard Kauai Coconut Beach Hotel has 311 rooms and approximately 6,200 square feet of meeting space. Occupancy is for the entire year and is based on standard industry metrics, including rooms available for rent.
(4)
Represents average occupancy for the year ended December 31.
(5)
The River Club and the Townhomes at River Club consist of two student housing complexes with a total of 1,128 beds.
(6)
22 Exchange consists of a student housing complex with 471 beds and 22,104 square feet of retail space. At December 31, 2014 and 2013, occupancy for student housing was 83% and 72% and retail was 71% and 71%, respectively.
(7)
Effective monthly rent per bed for student housing was $524.41 and $612.04 and effective monthly rent per square foot for the retail space was $1.40 and $1.56 at December 31, 2014 and 2013, respectively.
(8)
As of December 31, 2014, Babcock and AJS are classified as real estate held for sale on our consolidated balance sheet. Babcock was sold on January 8, 2015 and AJS was sold on February 21, 2015. A portion of the sales proceeds from the sale of each property were used to pay off the related existing indebtedness in full.
The following information generally applies to our consolidated investments in our real estate properties:
we believe our real estate property is adequately covered by insurance and suitable for its intended purpose;
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 life of the buildings.

36


Portfolio Diversification
As an opportunistic and value-add fund, we utilize a business model driven by investment strategy and expected performance characteristics. Accordingly, we have investments in several types of real estate, including office, hotel, multifamily and student housing.
The following table shows the total revenue of our real estate portfolio for the properties we consolidated in our financial statements as of December 31, 2014, including revenues generated from tenant reimbursements ($ in thousands):
Property
Description
 
2014 Revenue
 
Percentage of
2014 Revenue
Holstenplatz
Office building
 
$
1,767

 
4
%
Gardens Medical Pavilion
Medical office building
 
2,439

 
5
%
Courtyard Kauai Coconut Beach Hotel
Hotel
 
16,371

 
34
%
Arbors Harbor Town
Multifamily
 
4,899

 
10
%
Lakes of Margate
Multifamily
 
3,991

 
8
%
Wimberly
Multifamily
 
3,850

 
8
%
Parkside
Multifamily
 
2,892

 
6
%
Lakewood Flats
Multifamily
 
1,385

 
3
%
River Club and the Townhomes at River Club
Student housing
 
4,578

 
9
%
22 Exchange
Student housing
 
3,505

 
7
%
Total, excluding properties sold and held for sale
 
 
$
45,677

 
94
%
Alte Jakobstraße(1)
Office building
 
1,308

 
3
%
Babcock Self Storage(1)  
Self storage
 
569

 
1
%
1875 Lawrence(1)
Office building
 
1,043

 
2
%
Total revenues
 
 
$
48,597

 
100
%
_________________________________________
(1)
We sold AJS and Babcock on February 21, 2015 and January 8, 2015, respectively. The two properties are classified as held for sale at December 31, 2014. We sold our 1875 Lawrence property on May 30, 2014.

37


Geographic Diversification
The following table shows the geographic diversification of our real estate portfolio for those properties that we consolidate in our financial statements as of December 31, 2014. This table excludes revenues generated from tenant reimbursements. See footnote (1) below:
Location
2014 Revenue(1)(2)
in (000s)
 
Percentage of
2014 Revenue
Hawaii
$
16,371

 
38
%
Florida
8,845

 
21
%
Tennessee
4,731

 
11
%
Georgia
4,524

 
10
%
Texas
4,039

 
9
%
Ohio
3,342

 
8
%
International
1,208

 
3
%
 
$
43,060

 
100
%
_________________________________________
(1)
2014 Revenue represents contractual base rental income of our office properties and does not take into account any rent concessions or prospective rent increases. It also includes revenue from our multifamily, hotel properties and student housing, excluding tenant reimbursements, without consideration of tenant contraction or termination rights.
(2)
This table does not include revenues of $0.8 million for 1875 Lawrence, located in Colorado, which we sold on May 30, 2014. In addition, revenues of $0.5 million for Babcock, located in Texas, and $0.8 million for AJS, located in Germany, our two held for sale properties at December 31, 2014, are not included in the table. We sold Babcock and AJS in the first quarter of 2015.
See Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements for information regarding how geographic concentration may be considered in the evaluation of our investments for impairment.
Future Lease Payments Table
The following table presents the future minimum base rental payments due to us under non-cancelable leases over the next ten years at our consolidated office properties as of December 31, 2014 (in thousands):
Year
 
Amount(1)
2015
 
$
2,603

2016
 
2,449

2017
 
1,969

2018
 
1,575

2019
 
1,126

2020
 
928

2021
 
838

2022
 
845

2023
 
837

2024
 
779

Thereafter
 
424

_____________________________________
(1)
Excludes leases at our AJS office building which was classified as held for sale at December 31, 2014 and was sold on February 21, 2015.

38


Portfolio Lease Expirations
The following table presents lease expirations for non-cancelable leases for our consolidated office properties as of December 31, 2014 ($ in thousands):
Year of Expiration
Number of
Leases
Expiring
 
Annualized
Base Rent(1)(2)
 
Percent of
Portfolio
Annualized Base
Rent Expiring
 
Leased
Rentable
Sq. Ft.
 
Percent of
Portfolio
Rentable Sq. Ft.
Expiring
2015
1

 
$
36

 
1
%
 
1,573

 
1
%
2016
6

 
538

 
18
%
 
30,554

 
22
%
2017
5

 
535

 
18
%
 
21,164

 
15
%
2018
4

 
411

 
14
%
 
23,947

 
18
%
2019
4

 
298

 
10
%
 
17,687

 
13
%
2020
3

 
204

 
7
%
 
8,949

 
7
%
2021

 

 
%
 

 
%
2022
1

 
19

 
1
%
 
1,496

 
1
%
2023
1

 
69

 
3
%
 
4,273

 
3
%
2024
3

 
710

 
24
%
 
24,965

 
18
%
Thereafter
2

 
124

 
4
%
 
2,358

 
2
%
Total
30

 
$
2,944

 
100
%
 
136,966

 
100
%
_____________________________________
(1)
Represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to the expiration multiplied by 12, without consideration of tenant contraction or termination rights. Tenant reimbursements generally include payment of real estate taxes, operating expenses and common area maintenance and utility charges.
(2)
Excludes leases at our AJS office building which was classified as held for sale at December 31, 2014 and was sold on February 21, 2015.
Item 3.    Legal Proceedings.
We are not party to, and none of our properties are subject to, any material pending legal proceedings.
Item 4.    Mine Safety Disclosure.
None

39


PART II
Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
There is no established public trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder. Unless and until our shares are listed on a national securities exchange, it is not expected that a public market for the shares will develop.
Determination of Estimated Per Share Value
On November 21, 2014, pursuant to the Amended and Restated Policy for Estimation of Common Stock Value (the “Estimated Valuation Policy”), our board of directors met and established an estimated per share value of our common stock as of October 31, 2014 of $9.72.
Process and Methodology
Our board of directors’ objective in determining an estimated value per share was to arrive at an estimated value that it believes is reasonable after consultation with our Advisor and with an independent, third-party valuation and advisory firm engaged by the Company, using what the board of directors deems to be appropriate valuation methodologies and assumptions under current circumstances.
In arriving at an estimated value per share, our board of directors reviewed and considered the valuation analyses prepared by the Advisor and Capright Property Advisors, LLC (“Capright”). The Advisor presented a report to the board of directors with an estimated per share value. Capright provided our board of directors an opinion that the resulting “as-is” market value for the Company’s properties, as calculated by the Advisor, and the other assets and liabilities as valued by the Advisor, along with the corresponding net asset value (“NAV”) valuation methodologies and assumptions used by the Advisor to arrive at a recommended value of $9.72 per share as of October 31, 2014 were appropriate and reasonable. The board of directors conferred with the Advisor and a representative from Capright regarding the methodologies and assumptions used to reach their respective conclusions. The board of directors, which is responsible for determining the estimated per share value, considered all information provided in light of its own familiarity with our assets and unanimously approved an estimated value of $9.72 per share.
Capright’s opinion was subject to various limitations. In forming its opinion, Capright relied on information provided by our Advisor and third parties without independent verification. Our Advisor provided Capright with information regarding lease terms and the physical condition and capital expenditure requirements of each property. Capright did not perform engineering or structural studies or environmental studies of any of the properties, nor did they perform an independent appraisal of the other assets and liabilities included in our estimated value per share.
In forming their conclusion as to the as-is value of the real estate investments held by the Company as of October 31, 2014, Capright’s opinion was subject to various limitations. For those properties appraised by Capright, the scope of their work included:
Review of all property level information provided by the Advisor;
Physical inspection of each asset to determine its physical condition and location attributes;
Review of the Company’s real estate investments’ historical performance and business plans related to operations of the investments; and
Review of the applicable markets by means of publications and other resources to measure existing market conditions, supply and demand factors, and growth patterns.
For other real estate investments, Capright performed the following:
Review of a third party appraisal report for one property prepared in early 2014:
Review of an existing sale agreement and sale negotiations for three properties as of October 31, 2014; and
Review of purchase terms, net of fees, for an asset acquired after September 30, 2014.
Capright also evaluated the following information to arrive at their opinion:
Review of key market assumptions for mezzanine investments and mortgage liabilities, including but not limited to interest rates and collateral;
Review of the data models prepared by the Advisor supporting the valuation for each investment;
Review of Advisor calculations related to value allocations to noncontrolling interests and joint venture interests, preferred equity interests and promoted interests, based on contractual terms and market assessments; and

40


Review of valuation methodology used by the Advisor for other assets and liabilities.
Capright has acted as a valuation advisor to the Company in connection with this assignment. The compensation paid to Capright in connection with this assignment was not contingent upon the successful completion of any transaction or conclusion reached by Capright. Capright has rendered valuation advisory services to another Behringer-sponsored investment program during this year for which it received usual and customary compensation. Capright may be engaged to provide financial advisory services to the Company, its Advisor, or other Behringer-sponsored investment programs or their affiliates in the future.
The estimated valuation of $9.72 per share as of October 31, 2014, reflects an increase from the estimated valuation of $9.59 per share, which was the estimated per share value after adjustment of the August 1, 2013 estimated per share valuation for the $0.50 per share special cash distribution paid on September 18, 2014. The major factors that contributed most to the increase in the adjusted estimated share value were:
the continued compression of capitalization rates among the multi-family assets in the portfolio:
the successful repositioning of the Courtyard Kauai asset; and
the successful sale of 1875 Lawrence for a sales price greater than the estimated value for the property determined in connection with the August 1, 2013 estimated per share valuation.
These increases were partially offset by a decline in interest rate spreads over LIBOR on our floating rate debt compared with last year, which resulted in a non-cash debt mark-to-market adjustment.
The following is a summary of the valuation methodologies used for each type of asset:
Investments in Real Estate. The Company has focused on acquiring commercial real estate properties in different asset classes generally requiring development, redevelopment, or repositioning. Due to the opportunistic and value-added nature of the Company’s real estate investments, both Capright and our Advisor utilized a variety of valuation methodologies, each as appropriate for the asset type under consideration to assign an estimated value to each asset.
Our Advisor estimated the value of our investments in real estate utilizing multiple valuation methods, as appropriate for each asset, including an income approach using discounted cash flow analysis and a sales comparable analysis. The key assumptions used in the discounted cash flow approach were specific to each property type, market location, and quality of each property, and were based on similar investors’ return expectations and market assessments and are reflected in the table included under “Allocation of Estimated Value” below. In calculating values for our assets, our Advisor used balance sheet and cash flow estimates as of September 30, 2014.
In forming its opinion, Capright prepared appraisals on seven of our consolidated investment properties in connection with the valuation. The appraisals estimated values by using discounted cash flow, comparable sales, or a weighting of these approaches in determining each property’s value. The appraisals employed a range of terminal capitalization rates, discount rates, growth rates, and other variables that fell within ranges that Capright and the Advisor believed would be used by similar investors to value the properties we own. The assumptions used in developing these estimates were specific to each property (including holding periods) and were determined based upon a number of factors including the market in which the property is located, the specific location of the property within the market, property and market vacancy, tenant demand for space and investor demand and return requirements.
For the remaining real estate assets reviewed by Capright, the current values were based on a prior third party appraisal performed in early 2014, an existing sale agreement and sale negotiations for assets as of October 31, 2014, and purchase terms for an asset, net of fees, that was acquired after September 30, 2014.
While we and our Advisor believe that the approaches used by appraisers in valuing our real estate assets, including an income approach using discounted cash flow analysis and sales comparable analysis, is standard in the real estate industry, the estimated values for our investments in real estate may or may not represent current market values or fair values determined in accordance with GAAP. Real estate is currently carried at its amortized cost basis in our financial statements, subject to any adjustments applicable under GAAP.
Investment in Mezzanine Loan. The value of our Mezzanine Loan investment was valued at the outstanding principal balance. The loan is accounted for as an investment in unconsolidated joint venture on our balance sheet.
Mortgage Loans. Values for mortgage loans were estimated by the Advisor and reviewed by Capright using a discounted cash flow analysis, which would use inputs based on the remaining loan terms and estimated current market interest rates for mortgage loans with similar characteristics, including remaining loan term and loan-to-value ratios. The current market interest rate was generally determined based on market rates for available comparable debt. The estimated current market interest rates for mortgage loans at the valuation date ranged from 1.8% to 5.7%.

41


Other Assets and Liabilities. For a majority of our other assets and liabilities, consisting of cash and cash equivalents, short-term investments, accounts payable and other liabilities, the carrying values as of September 30, 2014, adjusted for significant activity through October 31, 2014, were considered equal to fair value by the Advisor due to their cost-based characteristics or short maturities. In connection with our estimated valuation of operating properties, notes receivable and mortgage loans payable, certain GAAP balances related to accumulated depreciation and amortization, straight-lining of rents, deferred revenues and expenses, and debt and notes receivable premiums and discounts were eliminated as the accounts were already considered in the estimated values.
Noncontrolling Interests. In those situations where our consolidated assets and liabilities are held in joint venture structures in which other equity holders have an interest, the Advisor has valued those noncontrolling interests based on the terms of the joint venture agreement applied in the liquidation of the joint venture. The resulting noncontrolling interests are a deduction to the estimated value.
Common Stock Outstanding. In deriving an estimated per share value, the total estimated value was divided by 25.8 million, the total number of common shares outstanding as of October 31, 2014, on a fully diluted basis, which includes financial instruments that can be converted into a known or determinable number of common shares. As of the valuation date, none of the financial instruments that could be converted into common shares were convertible into a known or determinable number of common shares. The determination of the number of common shares outstanding used in the estimated value per share is the same as used in GAAP computations for per share amounts.
Our estimated value per share was calculated by aggregating the value of our assets, subtracting the value of our liabilities, and dividing the net total by the fully-diluted common stock outstanding. Our estimated value per share is effective as of October 31, 2014.
The estimated per share value does not reflect a liquidity discount for the fact that the shares are not traded on a national securities exchange, a discount for the non-assumability or prepayment obligations associated with certain of the Company’s debt, or a discount for our corporate level overhead and other costs that may be incurred, including any costs related to the sale of the Company’s assets other than the assets discussed above. Different parties using different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The markets for real estate can fluctuate and values are expected to change in the future.
This value does not reflect “enterprise value,” which could include premiums or discounts for:
the size of our portfolio: although some buyers may pay more for a portfolio compared to prices for individual properties;
the characteristics of our working capital, leverage, credit facility and other financial structures where some buyers may ascribe different values based on synergies, cost savings or other attributes;
disposition and other expenses that would be necessary to realize the value;
the provisions under our advisory agreement and our potential ability to secure the services of a management team on a long-term basis; or
the potential difference in our share value if we were to list our shares on a national securities exchange.

42


Allocation of Estimated Value
The table below sets forth the calculation of the Company’s estimated value per share as of October 31, 2014, as well as the calculation of the Company’s prior estimated value per share as of August 1, 2013. The estimated valuation of $9.72 per share as of October 31, 2014, reflects an increase from the estimated valuation of $9.59 per share, which was the adjusted estimated per share value after adjustment of the August 1, 2014 estimated per share valuation for the $0.50 per share special cash distribution paid to shareholders on September 18, 2014.
 
 
October 31, 2014 Estimated Value
per Share
 
August 1, 2013 Estimated Value
per Share
Real estate:
 
 
 
 
Operating(1)
 
$
16.19

 
$
16.01

Mezzanine loan investment(2)
 
0.53

 
0.53

Cash and cash equivalents
 
2.92

 
2.64

Restricted cash
 
0.17

 
0.27

Notes payable(3)
 
(8.78
)
 
(8.20
)
Other assets and liabilities
 
(0.20
)
 
(0.27
)
Noncontrolling interests
 
(1.11
)
 
(0.89
)
Estimated net asset value per share
 
$
9.72

 
$
10.09

Estimated enterprise value premium
 

 

Total estimated value per share(4)
 
$
9.72

 
$
10.09

Less: Special cash distribution(5)
 

 
(0.50
)
Total estimated value per share, as adjusted
 
$
9.72

 
$
9.59

______________________________________________________________________

(1)    The following are the key assumptions (shown on a weighted average basis) which are used in the discounted cash flow models to estimate the value of the real estate assets we currently own.
 
Hotel
 
Multifamily
 
Student Housing
Exit capitalization rate
7.0%
 
6.4%
 
6.5%
Discount rate
9.0%
 
7.5%
 
7.7%
Annual market rent growth rate
4.5%
 
3.0%
 
3.1%
Average holding period
10 years
 
10 years
 
10 years
The following are ranges of the key assumptions which are used in the discounted cash flow models to estimate the value of the real estate assets we currently own. The discounted cash flow analyses for our hotel asset is only one category, and therefore, no range of values is available.
 
Multifamily
 
Student Housing
Exit capitalization rate
6.0% - 6.8%
 
6.5%
Discount rate
7.0% - 8.0%
 
7.5% - 8.0%

(2)    Accounted for as an investment in unconsolidated joint venture in our consolidated balance sheet as of September 30, 2014 and December 31, 2014.
(3)    October 31, 2014 notes payable net of $(492,000) mark-to-market adjustment.
(4)    As of October 31, 2014, we had 25,801,669 shares outstanding.  The potential dilutive effect of our common stock equivalents does not impact our estimated per share value as there were no potentially dilutive securities outstanding at October 31, 2014.

43


(5)
On September 18, 2014, we paid a $0.50 per share special cash distribution to stockholders of record as of September 15, 2014 which resulted in a corresponding reduction in our estimated value per share from August 1, 2013.
The real estate assets we owned as of October 31, 2014 reflect an overall increase of 16.1% from the original purchase price (excluding acquisition costs and operating deficits) plus post-acquisition capital investments.
While we believe that our assumptions utilized are reasonable, a change in these assumptions would affect the calculation of value of our real estate assets. The table below presents the estimated increase or decrease to our estimated value per share for a 25 basis point increase and decrease in the discount rates and capitalization rates. The table is only hypothetical to illustrate possible results if only one change in assumptions was made, with all other factors held constant. Further, each of these assumptions could change by more than 25 basis points or not change at all. We have also invested in non-U.S. dollar denominated real property and real estate-related securities exposing us to fluctuating currency rates. A change in the foreign exchange currency rates may have an adverse impact on our value.
 
Change in Estimated Value per Share
 
Increase of
25 basis points
 
Decrease of
25 basis points
Capitalization rate
$
(0.48
)
 
$
0.53

Discount rate
$
(0.20
)
 
$
0.21

Historical Estimated Values per Share
The historical reported estimated values per share of the Company’s common stock approved by the board of directors are set forth below:
Estimated Value per Share
 
Effective Date of Valuation
 
Filing with the Securities and
Exchange Commission
$10.09(1)
 
August 1, 2013
 
Current Report on Form 8-K
filed August 15, 2013
(1)
Pursuant to our Amended and Restated Policy for Estimation of Common Stock Value, our estimated value per share was reduced to $9.59 in September 2014 as a result of the payment of a special cash distribution of $0.50 per share.
Limitations of Estimated Value Per Share
 As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may prove later to be inaccurate or incomplete.  Further, different parties using different assumptions and estimates could derive a different estimated value per share, which could be significantly different from our board’s estimated value per share.  The estimated per share value determined by our board of directors neither represents the fair value according to GAAP of our assets less liabilities, nor does it represent the amount our shares would trade at on a national securities exchange or the amount a shareholder would obtain if he tried to sell his shares or if we liquidated our assets.  Accordingly, with respect to the estimated value per share, the Company can give no assurance that:
a stockholder would be able to resell his or her shares at this estimated value;
a stockholder would ultimately realize distributions per share equal to the Company’s estimated value per share upon liquidation of the Company’s assets and settlement of its liabilities or a sale of the Company;
the Company’s shares would trade at the estimated value per share on a national securities exchange; or
the methodologies used to estimate the Company’s value per share would be acceptable to FINRA or under ERISA for compliance with their respective reporting requirements.
For further information regarding the limitations of the estimated value per share, see the Estimated Valuation Policy filed as Exhibit 99.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on March 28, 2012. Although our Estimated Valuation Policy requires us to update our estimated per share value at least every 18 months, we intend to update our estimated per share value on an annual basis.

44


The estimated value of our shares was calculated as of a particular point in time.  The value of the Company’s shares will fluctuate over time in response to developments related to individual assets in the portfolio and the management of those assets and in response to the real estate and finance markets.  As such, the estimated value per share does not take into account developments in our portfolio since October 31, 2014, including the sale of Babcock and AJS in the first quarter of 2015. There is no assurance of the extent to which the current estimated valuation should be relied upon for any purpose after its effective date regardless that it may be published on any statement issued by the Company or otherwise.
The Company is diligently working to secure new leases with quality tenants to: increase net operating income and the ultimate value of our assets; complete, market, and sell development assets; execute on other value creation strategies; and minimize expenses when possible.
Holders
As of February 28, 2015, we had 25,732,304 shares of common stock outstanding held by a total of approximately 11,000 stockholders.
Distributions
We made an election to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2008. As a REIT, we must distribute at least 90% of our REIT taxable income to our stockholders annually. Our distributions to our stockholders have historically been declared on a quarterly basis and paid on a monthly basis. We have paid all or a portion of our distributions from cash on hand, borrowings, proceeds from the sale of assets and the proceeds of our offerings.
On August 8, 2014, our board of directors authorized a special cash distribution of $0.50 per share of common stock payable to our stockholders of record as of September 15, 2014. We did not pay any distributions during the year ended December 31, 2013.
On March 18, 2015, our board of directors authorized a special cash distribution of $1.00 per share of common stock payable to our stockholders of record as of March 30, 2015.
We have paid and may in the future pay some or all of our distributions from sources other than operating cash flow. We have, for example, generated cash to pay distributions from sales activities and financing activities, components of which included proceeds from the Offerings and borrowings (including borrowings secured by our assets) in anticipation of future operating cash flow. We have also utilized cash from refinancing and dispositions, the components of which may represent a return of capital and/or the gains on sale. In addition, from time to time, our Advisor may agree to waive or defer all or a portion of the acquisition, asset management or other fees or incentives due to it, pay general administrative expenses or otherwise supplement investor returns which may increase the amount of cash that we have available to pay special cash distributions to our stockholders.
Total distributions paid to stockholders during the year ended December 31, 2014 consisted solely of the special cash distribution of $13 million paid to stockholders in cash on September 18, 2014 and was fully funded with a portion of proceeds from asset sales.
We expect any future distributions to be fully funded with proceeds from asset sales; however future distributions, declared and paid at the discretion of the board of directors, may exceed cash flow from operating activities or funds from operations. For further discussion regarding our ability to sustain any level of our distributions, see Part I, Item 1A, "Risk Factors."

45


Recent Sales of Unregistered Securities
During the three months ended December 31, 2014, we did not sell any equity securities that were not registered under the Securities Act of 1933.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information regarding our equity compensation plans as of December 31, 2014:
Plan Category
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
 
Weighted-average
exercise price of
outstanding options,
warrants and rights
 
Number of securities
remaining available for
future issuance
under equity
compensation plans
 
Equity compensation plans approved by security holders

 

 
10,000,000

*
Equity compensation plans not approved by security holders

 

 

 
Total

 

 
10,000,000

*
_________________
* All shares authorized for issuance pursuant to awards not yet granted under the Incentive Plan.
Share Redemption Program
Our board of directors has adopted a share redemption program that permits stockholders to sell their shares back to us, subject to the significant conditions and limitations of the program. Our board of directors can amend the provisions of our share redemption program at any time without the approval of our stockholders.
The terms on which we redeem shares may differ between redemptions upon a stockholder's death, "qualifying disability" (as defined in the share redemption program) or confinement to a long-term care facility (collectively, "Exceptional Redemptions") and all other redemptions ("Ordinary Redemptions"). From April 1, 2012 through May 15, 2014, our board of directors suspended accepting Ordinary Redemptions. On May 15, 2014, our board of directors adopted the Third Amended and Restated Share Redemption Program and reopened the share redemption program for Ordinary Redemptions, to be effective on that date. In addition, for periods beginning on or after May 15, 2014, the cash available for redemptions was increased from $1 million to no more than $10 million in any twelve-month period. The redemption limitations apply to all redemptions, whether Ordinary or Exceptional Redemptions.
The per share redemption price for Ordinary Redemptions and Exceptional Redemptions is equal to the lesser of 80% and 90%, respectively, of (i) the current estimated per share value and (ii) the average price per share the investor paid for all of his shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock) less the Special Distributions (as defined in the share redemption program).
Effective November 21, 2014, our estimated value per share was $9.72. As of March 30, 2015, the estimated value per share of our common stock will be reduced by $1.00 per share in accordance with the Valuation Policy to take into account the special cash distribution authorized by our board of directors on March 18, 2015. For a full description of the methodologies used to estimate the value of our common stock as of October 31, 2014, see "Determination of Estimated Per Share Value" disclosed above.
Notwithstanding the redemption prices set forth above, our board of directors may determine, whether pursuant to formulas or processes approved or set by our board of directors, the redemption price of the shares, which may differ between Ordinary Redemptions and Exceptional Redemptions; provided, however, that we must provide at least 30 days’ notice to stockholders before applying this new price determined by our board of directors.
Any shares approved for redemption will be redeemed on a periodic basis as determined from time to time by our board of directors, and no less frequently than annually.  We will not redeem, during any twelve-month period, more than 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption.  In addition, the cash available for redemptions is limited to no more than $10 million in any twelve-month period.  The redemption limitations apply to all redemptions, whether Ordinary or Exceptional Redemptions.

46


Any Ordinary Redemption requests submitted while Ordinary Redemptions were suspended were returned to investors and must be resubmitted. We gave all stockholders notice that we were resuming Ordinary Redemptions, so that all stockholders would have an equal opportunity to submit shares for redemption. Any redemption requests are honored pro rata among all requests received based on funds available and are not honored on a first come, first served basis. During the three months ended December 31, 2014, our board of directors redeemed all 33 Ordinary Redemption requests received that complied with the applicable requirements and guidelines of the share redemption program for an aggregate of 67,429 shares redeemed for $0.5 million (approximately $7.17 per share).  All redemptions were funded with cash on hand.
During the three months ended December 31, 2014, our board of directors redeemed all nine Exceptional Redemption requests received that complied with the applicable requirements and guidelines of the share redemption program for an aggregate of 39,119 shares redeemed for $0.3 million (approximately $8.09 per share).  All redemptions were funded with cash on hand.
During the quarter ended December 31, 2014, we redeemed shares as follows:
2014
Total Number of
Shares Redeemed
 
Average Price
Paid Per Share
 
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
 
Maximum
Number of Shares
That May Be
Purchased Under
the Plans or
Programs
October
106,548

 
$
7.50

 
106,548

 
(1)
November

 

 

 
 
December

 

 

 
 
 
106,548

 
$
7.50

 
106,548

 
(1)
__________________________
(1)
A description of the maximum number of shares that may be purchased under our redemption program is included in the narrative preceding this table.
Item 6.    Selected Financial Data.
As of December 31, 2014, we had 13 real estate investments, 12 of which were consolidated, including Babcock and AJS, which are classified as real estate held for sale in our consolidated balance sheet. Two of our consolidated properties are wholly owned and ten properties are consolidated through investments in joint ventures. During 2014, we completed one acquisition and sold the 1875 Lawrence office building. The following data should be read in conjunction with our consolidated financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7.
The following table reflects a rollforward of the number of real estate investments we had beginning January 1, 2010 through December 31, 2014:
 
 Portfolio Beginning of Year
 
Acquisitions
 
Dispositions
 
Portfolio at Year-End
 
Unconsolidated at Year-End (1)
2010(2)
4

 
7

 
1

 
10

 
1

2011(3)
10

 
4

 
3

 
11

 

2012(4)
11

 
1

 
2

 
10

 

2013(5)
10

 
4

 
1

 
13

 
1

2014
13

 
1

 
1

 
13

 
1

______________________________________________________________________
(1)
The number of unconsolidated investments at year-end is included in the number of investments in the Portfolio at Year-End.
(2)
In May 2010, we acquired a fee simple interest in Palms of Monterrey, a multi-family complex located in Fort Myers, Florida. Prior to May 2010, we were the holder of a 90% interest in a promissory note secured by a first lien mortgage in the property which was completed during 2009.
(3)
The number of dispositions in 2011 includes receipt of prepayment of a loan receivable, an equity investment, and an 80% interest in a corporate headquarters and industrial warehouse facility.
(4)
The number of dispositions in 2012 does not reflect the sale of one of four buildings in our Interchange Business Center investment. We sold the remaining three buildings at Interchange Business Center on April 12, 2013 and reflected the sale in 2012 as part of the disposition of the remaining buildings in 2013.
(5)
The number of dispositions in 2013 does not reflect the sale of the Original Florida MOB Portfolio. This investment and Gardens Medical Pavilion, collectively, the Florida MOB Portfolio have been counted as one investment. As of December 31, 2013, we own a 79.8% interest in Gardens Medical Pavilion.

47


The selected data below has been derived from our audited consolidated financial statements ($ in thousands, except per share amounts):
 
December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Total assets
$
409,691

 
$
414,375

 
$
379,066

 
$
447,996

 
$
367,479

Notes payable
$
216,294

 
$
212,037

 
$
183,308

 
$
239,757

 
$
175,378

Other liabilities(1)
16,841

 
9,549

 
9,225

 
11,235

 
9,890

Behringer Harvard Opportunity REIT II, Inc. equity
168,520

 
183,884

 
175,163

 
182,397

 
171,678

Noncontrolling interest
8,036

 
8,905

 
11,370

 
14,607

 
10,533

Total liabilities and equity
$
409,691

 
$
414,375

 
$
379,066

 
$
447,996

 
$
367,479

_____________________________________
(1)
Other liabilities as of December 31, 2014 of $16.8 million includes obligations associated with real estate held for sale of $9.2 million related to Babcock and AJS.
 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Revenues
$
48,597

 
$
43,389

 
$
32,718

 
$
21,822

 
$
14,464

Loss from continuing operations
(334
)
(1) 
(17,553
)
 
(12,785
)
 
(9,409
)
 
(10,043
)
Income from discontinued operations, including gains on disposal

 
31,159

 
22,012

 
776

 
1,861

Net income (loss)
(334
)
 
13,606

 
9,227

 
(8,633
)
 
(8,182
)
Add: Net (income) loss attributable to noncontrolling interest
331

 
(4,877
)
 
(7,562
)
 
882

 
755

Net income (loss) attributable to the Company
(3
)
 
8,729

 
1,665

 
(7,751
)
 
(7,427
)
Basic and diluted income (loss) per share
$

 
$
0.34

 
$
0.06

 
$
(0.32
)
 
$
(0.39
)
Distributions declared per share
$
0.50

 
$

 
$
0.625

 
$
0.50

 
$
0.50

________________________________________
(1)
Loss from continuing operations for the year ended December 31, 2014 includes an $11.5 million gain on the sale of our 1875 Lawrence property. See Note 6, Real Estate and Real Estate-Related Investments.
Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
Executive Overview
We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis.  In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who were distressed or faced time-sensitive deadlines.  In addition, our opportunistic and value-add investment strategy has included investments in real estate-related assets that present opportunities for higher current income. We have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, and multifamily. We have purchased existing, income-producing properties and newly constructed properties. We have also invested in a mortgage loan and a mezzanine loan. We have made our investments in or in respect of real estate assets located in the United States and other countries based on our view of existing market conditions. While we acquired one property in 2014, we are not actively seeking to purchase additional assets at this time.
Market Outlook
During 2014, the U.S. economy grew at its fastest pace in four years. For 2014, GDP grew at a rate of 2.4%, up from 2.2% in 2013. The year was marked by improved consumer confidence, the best year of job growth since 1999 and an increase in business profits. The reduction in fuel prices during the year accelerated consumer spending as shoppers used the savings to spend elsewhere, but the fourth quarter saw a slight slowdown as the government cut back spending and business slowed

48


investment activity. Many economists expect the economic growth to continue in 2015 as a result of near-record low interest rates, lower energy costs and continued job creation. A sooner than expected increase in interest rates and lack of job growth are factors that could slow the projected economic growth in 2015.
As of December 31, 2014, we were invested in five multifamily properties.  For the year ended December 31, 2014, excluding assets held for sale and assets sold during the year, 37% of our total revenues were derived from our multifamily properties. While the U.S. economy continued its recovery during 2014, the multifamily sector outperformed expectations. Home ownership reached a 19-year low which led to a national multifamily vacancy rate of 4.7% at December 31, 2014. Strong job growth and positive general economic conditions supported increases in rental rates for the year. The sector continued to see balanced supply and demand in 2014. The number of new units delivered in 2014 totaled 238,000, marking a 14-year high, while demand reached 270,000 units. While we believe these factors will continue to be favorable factors for 2015, there are signs that performance may be moving closer to historical averages. Many analysts are still projecting continued multifamily rental growth, albeit at a slower pace particularly in markets with favorable job and income growth, where the demand fundamentals can absorb the supply. It is projected that supply totaling 210,000 in 2015 will likely surpass demand for 186,000 units, which will increase vacancy and pare overall rent rate growth.
We currently have a multifamily property located in Sugarland, Texas, a suburb of Houston, and an investment in a multifamily development located in Denver, Colorado. Both Houston and Denver are energy hubs. The energy sector recently experienced a significant decline in oil prices, which could have an adverse impact on the results at both of these multifamily investments. The multifamily market in Houston has experienced significant growth in occupancy rates and rental rates in recent years with supply meeting demand while new units continue to be delivered to the market. Future rent growth is expected to decline as a result of new supply and a lagging job market due to the decline in oil prices. Denver is headquarters to a number of energy companies. Job layoffs as a result of the downturn in oil prices could reduce the number of tenants available to lease a unit at the development project which is not expected to be completed until the end of 2015.
Financing has also been a favorable factor for the multifamily sector. As of the end of February 2015, five and ten year treasury rates, key benchmarks for multifamily financings, remain low at 1.5% and 2.0%, respectively. In addition to favorable general interest rates, positive macroeconomic conditions will continue to bring in additional lending sources.
As of December 31, 2014, we owned an interest in one hotel property. For the year ended December 31, 2014, excluding assets held for sale and assets sold during the year, 36% of our total revenues were derived from our hotel property. The lodging industry continued to report performance increases during 2014 and is expected to see continued modest growth in 2015. During 2014, industry demand increased by 2.6% which was slightly offset by a 1.2% increase in supply. Smith Travel Research indicates that during 2014 the U.S. hotel industry’s occupancy increased 3.6% to 64.4% while the national overall ADR increased 4.6% and RevPar grew 8.3%. Our hotel property, Courtyard Kauai Coconut Beach Hotel located in Kauai, Hawaii, experienced a 2% increase in occupancy rate during 2014 while ADR increased 7% and RevPar increased 9%. Hawaii’s economy is dependent on conditions in other economies including the U.S. and Japan. Hawaii is expected to see continued positive economic growth in 2015. Visitor arrivals to the islands are expected to grow 1.9% in 2015 while visitor expenditures are expected to grow 3.6% for the same period.
As of December 31, 2014, a portion of our portfolio is invested in three public university student housing complexes, including two complexes located in Georgia and one complex located in Ohio. In student housing, unlike traditional multifamily housing, most leases typically commence and terminate on the same dates.  In the case of our typical student housing leases, this date coincides with the commencement of the fall academic term with the leases typically terminating at the completion of the last summer school session of the academic year.  As such, we must re-lease each property in its entirety each year during a highly compressed time period, resulting in significant turnover in our tenant population from year to year.  As a result, we are highly dependent upon the effectiveness of our marketing and leasing efforts during the short annual leasing season that typically begins in January and ends in August of each year.  Our properties’ occupancy rates are therefore typically relatively stable during the August to July academic year, but are susceptible to fluctuation at the commencement of each new academic year, which may be greater than the fluctuation in occupancy rates experienced by traditional multifamily properties.  Most state universities currently face many challenges, including reduced support from constrained state budgets, demands on institutional funds for academic and support services, increased tuition costs and flat to lower student enrollment. These challenges may lead to a decrease in occupancy and lower than anticipated revenues.
Although the current outlook on financing trends appears relatively stable, there are risks.  It is expected that the U.S. Federal Reserve will increase interest rates during 2015, the timing and amount of the rate increase as well as tax policy and government spending levels can affect the overall level of domestic economic growth.  Any of these domestic issues or the resurfacing of global issues could slow growth, which could affect the amount of capital available or the costs charged for financings.  As of December 31, 2014, our weighted average fixed interest rate was 3.3%, compared to 3.7% at December 31, 2013.

49


Liquidity and Capital Resources
We had cash and cash equivalents of $72.9 million at December 31, 2014. Our principal demands for funds going forward will be for the (a) payment of operating expenses, (b) payment of interest and principal on our outstanding indebtedness and (c) special distributions. Generally, we expect to meet cash needs for the payment of operating expenses and interest on our outstanding indebtedness from our cash flow from operations and to fund special distributions from our proceeds from asset sales. To the extent that our cash flow from operations is not sufficient to cover our operating expenses, interest on our outstanding indebtedness, redemptions or distributions, we expect to use borrowings and asset sales to fund such needs.
We are not actively seeking to purchase additional properties, but may invest capital in our current assets in order to position them for sale in the normal course of business. We intend to hold the various real properties in which we invest until such time as our Advisor determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met. We sold our 1875 Lawrence office building on May 30, 2014, Babcock on January 8, 2015 and AJS on February 21, 2015. On March 18, 2015, our board of directors authorized a special cash distribution of $25.7 million, or $1.00 per share of common stock, payable to stockholders of record as of March 30, 2015. The special cash distribution, which represents a portion of proceeds from asset sales, is to be paid on or about March 31, 2015.
We continually evaluate our liquidity and ability to fund future operations and debt obligations.  As of December 31, 2014, we had $54.1 million of notes payable maturing in the next twelve months. Of that amount, a $38 million loan associated with the Courtyard Kauai Coconut Beach Hotel contains a renewal option to extend the term to May 2017 and $7 million is associated with AJS, which was sold and the loan paid off in February 2015. We expect to pay-off or refinance the remaining $9.1 million, which is secured by the Holstenplatz property, by the maturity date of April 30, 2015. In addition to our debt obligations, we consider other factors in evaluating our liquidity. For example, to the extent our portfolio is concentrated in certain geographic regions, types of assets, industries or business sectors, downturns relating generally to such regions, assets, industry or business sectors may result in tenants defaulting on their lease obligations at a number of our properties within a short time period.  Such defaults could negatively affect our liquidity and adversely affect our ability to fund our ongoing operations. For the year ended December 31, 2014, excluding assets held for sale and 1875 Lawrence sold in 2014, 36% and 23% of our total revenues were derived from our properties located in Hawaii and Florida, respectively. Additionally, excluding assets held for sale and 1875 Lawrence, 37% and 36% of our total revenues for the year ended December 31, 2014 were from our multifamily and hotel properties, respectively. We also consider lease expirations. Leases at our consolidated office properties (excluding AJS) representing 1% and 18% of our annualized base rent and 1% and 22% of our rentable square footage will expire by the end of 2015 and 2016, respectively.  AJS was classified as held for sale at December 31, 2014. As a normal course of business, we are pursuing renewals, extensions and new leases.  If we are unable to renew or extend the expiring leases under similar terms or are unable to negotiate new leases, it would negatively impact our liquidity and adversely affect our ability to fund our ongoing operations.
We may, but are not required to, establish capital reserves from cash flow generated by operating properties and other investments, or net sales proceeds from the sale of our properties and other investments.  Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions and major capital expenditures.  Alternatively, a lender may establish its own criteria for escrow of capital reserves.
We have borrowed money to acquire properties and make other investments.  Under our charter, the maximum amount of our indebtedness is limited to 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors.  In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests.  Our policy limitation, however, does not apply to individual real estate assets.
Commercial real estate debt markets may experience volatility and uncertainty as a result of certain related factors, including the tightening of underwriting standards by lenders and credit rating agencies, macro-economic issues related to fiscal, tax and regulatory policies, and global financial issues.  Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our developments and investments.  This may result in our investment operations generating lower overall economic returns and a reduced level of cash flow, which could potentially impact our ability to make distributions to our stockholders.  In addition, disruptions in the debt markets may reduce the amount of capital that is available to finance real estate, which in turn could: (i) lead to a decline in real estate values generally; (ii) slow real estate transaction activity; (iii) reduce the loan to value ratio upon which lenders are willing to extend debt; and (iv) result in difficulty in refinancing debt as it becomes due, all of which may reasonably be expected to have a material adverse impact on the value of real estate investments and the revenues, income or cash flow from the operations of real properties and mortgage loans.

50


Debt Financings
We have, from time to time, obtained mortgage, bridge or mezzanine loans for acquisitions and investments, as well as property development. In the future, we may obtain financing for property development or at such time as determined to be necessary for our existing real estate assets, depending on multiple factors.
At December 31, 2014, our notes payable balance was $216.3 million, excluding $9.1 million of contractual obligations on real estate held for sale, and had a weighted average interest rate of 3.3% compared to a balance of $212 million and weighted average interest rate of 3.7% at December 31, 2013. We have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the Courtyard Kauai Coconut Beach Hotel, Wimberly, 22 Exchange, and Parkside notes payable.  For the year ended December 31, 2014, in connection with the acquisition of Lakewood Flats, we entered into a loan with an unaffiliated third party for approximately $33.5 million.
On May 30, 2014, we sold our 1875 Lawrence office building to an unaffiliated third party and used a portion of the proceeds from the sale to pay off in full the existing indebtedness of approximately $15.6 million associated with the property, which was scheduled to mature on January 1, 2016.
Our loan agreements stipulate that we comply with certain reporting and financial covenants.  These covenants include, among other things, maintaining minimum debt service coverage ratios, loan to value ratios and liquidity.  As of December 31, 2014, we believe we were in compliance with the debt covenants under our loan agreements.
One of our principal long-term liquidity requirements includes the repayment of maturing debt. The following table provides information with respect to the maturities and scheduled principal repayments of our indebtedness as of December 31, 2014 (in thousands):
 
Payments Due by Period(1)(2)
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
Principal payments—variable rate debt
$
38,446

 
$
536

 
$
536

 
$
536

 
$
34,036

 
$
24,095

 
$
98,185

Principal payments—fixed rate debt
10,749

 
1,912

 
2,135

 
46,864

 
24,310

 
31,565

 
117,535

Interest payments—variable rate debt (based on rates in effect as of December 31, 2014)
1,625

 
1,212

 
1,195

 
1,183

 
1,123

 
1,870

 
8,208

Interest payments—fixed rate debt
5,267

 
5,052

 
4,940

 
3,307

 
1,578

 
2,449

 
22,593

Total(3)
$
56,087

 
$
8,712

 
$
8,806

 
$
51,890

 
$
61,047

 
$
59,979

 
$
246,521

_____________________________
(1)    
Does not include approximately $0.6 million of unamortized premium related to debt we assumed on our acquisition of Parkside.
(2)
Our debt secured by AJS and Babcock are not included in the table as the investments are classified as held for sale at December 31, 2014 and they were sold on January 8, 2015 and February 21, 2015, respectively.
(3)
Does not include assumptions for any available extension options.

51



Results of Operations
Year ended December 31, 2014 as compared to the year ended December 31, 2013
As of December 31, 2014, we had 13 real estate investments, including AJS and Babcock which are classified as held for sale in our consolidated balance sheet, 12 of which were consolidated (two wholly owned and ten properties consolidated through investments in joint ventures). We completed one acquisition and sold one property during 2014.
As of December 31, 2013, we had 13 real estate investments, 12 of which were consolidated (two wholly owned and ten properties consolidated through investments in joint ventures). During 2013, we completed four investments including an investment in an unconsolidated joint venture. In 2013, we sold the remaining three industrial buildings at Interchange Business Center and the original eight medical office buildings known as the Original Florida MOB Portfolio which are included in discontinued operations.
The following table provides summary information about our results of operations for the years ended December 31, 2014 and 2013 ($ in thousands):
 
Year ended December 31,
 
Increase
 
Percentage Change
 
$ Change
due to Acquisitions(1)
 
$ Change
due to Dispositions(2)
 
$ Change
due to
Same Store(3)
 
$ Change
due to
Held for Sale
(4)

2014
 
2013
Rental revenue
$
32,226

 
$
28,517


$
3,709


13.0
 %

$
4,918

 
$
(1,808
)

$
601

 
$
(2
)
Hotel revenue
16,371

 
14,872


1,499


10.1
 %


 


1,499

 

Property operating expenses
11,288

 
9,792


1,496


15.3
 %

1,813

 
(712
)

408

 
(13
)
Hotel operating expenses
11,954

 
11,363


591


5.2
 %


 


591

 

Interest expense, net
7,833

 
7,844


(11
)

(0.1
)%

693

 
(613
)

(82
)
 
(9
)
Real estate taxes
5,388

 
4,716


672


14.2
 %

995

 
(456
)

86

 
47

Property management fees
1,642

 
1,521


121


8.0
 %

183

 
(74
)

15

 
(3
)
Asset management fees(5)
2,368

 
3,478


(1,110
)

(31.9
)%

108

 
(630
)

(540
)
 
(48
)
General and Administrative
4,076

 
4,243


(167
)

(3.9
)%

n/a

 
n/a


n/a

 
n/a

Acquisition expense
1,307

 
3,998


(2,691
)

(67.3
)%

(2,691
)
 



 

Depreciation and amortization
14,362

 
13,978


384


2.7
 %

1,166

 
(960
)

172

 
6

Gain on sale of real estate
11,454

 

 
11,454

 
100.0
 %
 

 
11,454

 

 

Income tax benefit (expense)
(101
)
 
183

 
(284
)
 
n/a

 
n/a

 
n/a

 
n/a

 
n/a

_____________
(1)
Represents the dollar amount increase (decrease) for the year ended December 31, 2014 compared to the year ended December 31, 2013 related to real estate and real estate-related investments acquired on or after January 1, 2013.
(2)
Represents the dollar amount increase (decrease) for the year ended December 31, 2014 compared to the year ended December 31, 2013 related to the disposition of 1875 Lawrence on May 30, 2014.
(3)
Represents the dollar amount increase (decrease) for the year ended December 31, 2014 compared to the year ended December 31, 2013 with respect to real estate and real estate-related investments owned by us during the entire periods presented (“Same Store”). Same Store for the periods ended December 31, 2014 and 2013 include Holstenplatz, Gardens Medical Pavilion, River Club and the Townhomes at River Club, Lakes of Margate, Arbors Harbor Town and Courtyard Kauai Coconut Beach Hotel.
(4)
Represents the dollar amount increase (decrease) for the year ended December 31, 2014 compared to the year ended December 31, 2013 related to Babcock and AJS which are classified as real estate held for sale as of December 31, 2014.
(5)
Asset management fees payable to the Advisor are an obligation of the Company, and as such, asset management fees associated with all investments owned during the period are classified in continuing operations. Therefore, the amount above includes asset management fees associated with any property owned during a particular period, including those related to our disposed properties.


52


The following table reflects rental revenue and property operating expenses for the years ended December 31, 2014 and 2013 for (i) our Same Store operating portfolio; (ii) our acquisition of Lakewood Flats in 2014; (iii) our acquisitions in 2013, Wimberly at Deerwood, 22 Exchange and Parkside Apartments; (iv) our disposition of 1875 Lawrence on May 30, 2014, which is included in continuing operations; and (v) Babcock and AJS, our properties in real estate held for sale at December 31, 2014 (in thousands):
 
 
Year Ended December 31,
 
 
Description
 
2014
 
2013
 
Change
Rental revenue
 
 
 
 
 
 
Same Store
 
$
17,674

 
$
17,073

 
$
601

Acquisitions
 
11,632

 
6,714

 
4,918

Dispositions
 
1,043

 
2,851

 
(1,808
)
Real Estate Held for Sale
 
1,877

 
1,879

 
(2
)
Total rental revenue
 
$
32,226

 
$
28,517

 
$
3,709

 
 
 
 
 
 
 
Property operating expenses
 
 
 
 
 
 
Same Store
 
$
6,185

 
$
5,777

 
$
408

Acquisitions
 
3,962

 
2,149

 
1,813

Dispositions
 
648

 
1,360

 
(712
)
Real Estate Held for Sale
 
493

 
506

 
(13
)
Total property operating expenses
 
$
11,288

 
$
9,792

 
$
1,496

The tables below reflect occupancy and effective monthly rental rates for our Same Store operating properties and occupancy and ADR for Courtyard Kauai Coconut Beach Hotel:

Occupancy (%)

Effective Monthly Rent per Square Foot/Unit/Bed ($)(2)


 
Year Ended December 31,
 
Year Ended December 31,
 
 
Property(1)
2014

2013

2014

2013


Holstenplatz(3)
100
%

100
%

$
1.18


$
1.39


per sq ft
Gardens Medical Pavilion
60
%

80
%

1.21


2.47


per sq ft
River Club and the Townhomes at River Club
97
%

76
%

362.72


416.80


per bed
Lakes of Margate
90
%

93
%

1,127.98


1,112.98


per unit
Arbors Harbor Town
91
%

94
%

1,169.66


1,139.49


per unit
______________________________
(1)
Occupancy and effective monthly rental rates for our held for sale properties were as follows: Babcock - 83% and 79% and $101.63 per unit and $101.74 per unit; and AJS - 100% and 99% and $0.93 per square foot and $1.23 per square foot at December 31, 2014 and 2013, respectively.
(2)
Effective rent is calculated as in-place contracted monthly rental revenue, including any premiums due for short-term or month-to-month leases, less any concessions or discounts.
(3)
The exchange rates in effect on December 31, 2014 and 2013 were $1.24 and $1.38, respectively.
 
Occupancy (%)(1)
 
ADR ($)
 
Year Ended December 31,
 
Year Ended December 31,
Property
2014
 
2013
 
2014
 
2013
Courtyard Kauai Coconut Beach Hotel
82
%
 
80
%
 
$
133.50

 
$
124.35

_______________________________________
(1)
Represents average occupancy for the year ended December 31. The Courtyard Kauai Coconut Beach Hotel has 311 rooms and approximately 6,200 square feet of meeting space. Occupancy is for the entire year and is based on standard industry metrics, including rooms available for rent.

53


Continuing Operations
Our results of operations for the respective periods presented primarily reflect increases in most categories due to the acquisition of one consolidated property in October 2014 and three consolidated properties and one equity investment during the year ended December 31, 2013, offset by the disposal in May 2014 of one consolidated property. Management expects increases in most categories in the near future as we realize the full-year impact of our 2014 acquisition and as our investments reach stabilization.
Revenues.    Revenues for the year ended December 31, 2014 were $48.6 million, an increase of $5.2 million from the year ended December 31, 2013. Same Store rental revenue for the years ended December 31, 2014 and 2013 were $17.7 million and $17.1 million, respectively, while rental revenue from acquisitions were $11.6 million and $6.7 million, respectively, and rental revenue from 1875 Lawrence, which was disposed of in 2014 and is classified in continuing operations, was $1 million and $2.9 million, respectively. The change in revenue is primarily due to:
an increase in rental revenue of $4.9 million as a result of our acquisition of Lakewood Flats on October 10, 2014 and our 2013 acquisitions of Wimberly, 22 Exchange, and Parkside in the first, second and third quarters, respectively, and an increase of $0.6 million for investments we owned during the entire periods presented, partially offset by a decrease of $1.8 million related to the disposition of 1875 Lawrence in 2014. The increase in revenues for Same Stores was primarily due to increases of $0.3 million, $0.2 million, and $0.2 million at Lakes of Margate, Arbors Harbor Town, and River Club and the Townhomes at River Club, respectively; and
an increase in hotel revenue of $1.5 million at the Courtyard Kauai Coconut Beach Hotel due to a 2% increase in occupancy rate and a 7% increase in ADR, resulting in a 9% increase in RevPar year over year. These improvements are primarily the result of improved operating performance.
Property Operating Expenses.    Property operating expenses for the years ended December 31, 2014 and 2013 were $11.3 million and $9.8 million, respectively. The increase of $1.5 million was primarily due to an increase of $1.8 million related to acquisitions while Same Store increased by $0.4 million. These increases were partially offset by a decrease of $0.7 million due to the disposal of 1875 Lawrence in May 2014.
Hotel Operating Expenses.  Hotel operating expenses for the years ended December 31, 2014 and 2013 were $12 million and $11.4 million, respectively.  The increase in hotel operating expenses was due to additional costs as a result of the increased occupancy at Courtyard Kauai Coconut Beach Hotel.
Interest Expense, net.   Interest expense remained constant at $7.8 million in each of the years ended December 31, 2014 and 2013. An increase of $0.7 million related to acquisitions was offset by decreases related to the disposition in 2014 included in continuing operations and Same Store. For the years ended December 31, 2014 and 2013 we capitalized interest of $0.5 million and $0.3 million, respectively, in connection with our equity method investment in Prospect Park.
Real Estate Taxes.  Real estate taxes were $5.4 million and $4.7 million for the years ended December 31, 2014 and 2013, respectively. Acquisitions and Same Store accounted for increases of $1 million and $0.1 million, respectively, while the disposition of 1875 Lawrence in 2014 resulted in a decrease of $0.5 million.
Property Management Fees.   Property management fees, which are based on revenues, for the years ended December 31, 2014 and 2013 were $1.6 million and $1.5 million, respectively, and were comprised of property management fees paid to unaffiliated third parties and our Property Manager or its affiliates. Annual property management fees for 2014 increased over 2013, primarily due to our acquisition of Lakewood Flats on October 10, 2014 and our acquisition of three properties in 2013. 
Asset Management Fees.   Asset management fees for the years ended December 31, 2014 and 2013 were $2.4 million and $3.5 million, respectively, and were comprised of asset management fees paid to our Advisor and third parties with respect to our investments. Our monthly asset management fees payable to the Advisor were one-twelfth of 1.0% and based on the higher of cost or value for each asset in 2013. Pursuant to the Fourth Advisory Agreement, effective January 1, 2014, our monthly asset management fee payable to the Advisor was reduced to one-twelfth of 0.7% and based on the value for each asset as determined in connection with our establishment and publication of an estimated value per share. Assets acquired after the publication of an estimated value per share will be valued at the contract purchase price of the asset plus amounts expended in connection with the development, construction or improvement of an asset until the next estimated per share value is determined. The $1.1 million decrease in asset management fees for the year ended December 31, 2014 was primarily due to a decrease of $0.6 million due to the disposition of 1875 Lawrence in 2014 and Interchange Business Center and the Original Florida MOB Portfolio in 2013 and a decrease of $0.5 million in Same Store due to fees waived by the Advisor in the second quarter of 2014 for fees previously accrued during 2013 of approximately $0.3 million and the change in rate effective January 1, 2014. Without this one-time adjustment of $0.3 million and a decrease in asset management fees of $1 million related to the

54


reduction in the rate to 0.7% of the value for each asset, asset management fees for the year ended December 31, 2014 would have been approximately $3.7 million. Asset management fees payable to the Advisor are an obligation of the Company, and as such, asset management fees associated with all investments owned during the period are classified in continuing operations. Asset management fees for the years ended December 31, 2014 and 2013 include such fees related to our disposed properties. We expensed $0.1 million and $0.8 million in asset management fees related to disposed properties during the years ended December 31, 2014 and 2013, respectively.
General and Administrative Expenses.   General and administrative expenses for the years ended December 31, 2014 and 2013 were $4.1 million and $4.2 million, respectively, and were comprised of auditing fees, legal fees, board of directors fees, and other administrative expenses. The $0.1 million decrease in general and administrative expenses for the year ended December 31, 2014 was primarily due to a decrease in legal expenses associated with our joint ventures.
Acquisition Expense.  Acquisition expense for the year ended December 31, 2014 of $1.3 million was primarily due to expenses incurred as a result of our acquisition of Lakewood Flats. Acquisition expense of $4 million, net of amounts capitalized, for the year ended December 31, 2013 was primarily due to expenses incurred as a result of our acquisitions of Wimberly, 22 Exchange, and Parkside in 2013.  Acquisition costs capitalized related to our equity method investment in Prospect Park for the year ended December 31, 2013 was $0.4 million. 
Depreciation and Amortization.   Depreciation and amortization for the years ended December 31, 2014 and 2013 were $14.4 million and $14 million, respectively. We had year-over-year increases of $1.2 million for the acquisitions of Lakewood Flats in 2014 and Wimberly, 22 Exchange and Parkside in 2013 and $0.2 million for Same Store. These increases were partially offset by an approximate $1 million decrease year-over-year due to the disposition of 1875 Lawrence in 2014.
Gain on Sale of Real Estate. Gain on sale of real estate for the year ended December 31, 2014 was approximately $11.5 million and represents the gain recognized from the sale of the 1875 Lawrence office building on May 30, 2014. As discussed in Note 6, Real Estate and Real Estate Related Investments, the disposition of 1875 Lawrence was not considered a discontinued operation and the results of operations are presented in continuing operations. Sales of real estate during 2013 were considered discontinued operations.
Income Tax Benefit (Expense). We recorded an income tax benefit of $0.1 million during the year ended December 31, 2014 related to the overpayment of AMT tax for the year ended December 31, 2013. We recorded AMT expense of $0.2 million for the year ended December 31, 2013 as a result of asset sales during the year.


55


Year ended December 31, 2013 as compared to the year ended December 31, 2012
As of December 31, 2013, we had 13 real estate investments, 12 of which were consolidated in our consolidated financial statements. During 2013, we completed four investments including an investment in an unconsolidated joint venture. In 2013, we sold the remaining three industrial buildings at Interchange Business Center and the original eight medical office buildings known as the Original Florida MOB Portfolio which are included in discontinued operations.
As of December 31, 2012, we had ten real estate investments, all of which were consolidated in our consolidated financial statements. We completed one acquisition during the year. We sold two properties in addition to one of the four industrial buildings at Interchange Business Center during 2012 which are included in discontinued operations.
The following table provides summary information about our results of operations for the years ended December 31, 2013 and 2012 ($ in thousands):
 
Year ended December 31,
 
 
 
 
 
 
 
 
 
 
 
2013
 
2012
 
Increase
 
Percentage Change
 
$ Change due to Acquisitions(1)
 
$ Change due to Disposition(2)
 
$ Change due to Same Store(3)
Rental revenue
$
28,517

 
$
21,766

 
$
6,751

 
31.0
%