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EX-32.2 - EXHIBIT 32.2 - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex322-q32016.htm
EX-32.1 - EXHIBIT 32.1 - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex321-q32016.htm
EX-31.2 - EXHIBIT 31.2 - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex312-q32016.htm
EX-31.1 - EXHIBIT 31.1 - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex311-q32016.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2016
 
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 incorporation or
organization)
 
(I.R.S. Employer
Identification No.)
 
15601 Dallas Parkway, Suite 600, Addison, Texas 75001
(Address of principal executive offices) (Zip Code)
 
Registrant’s telephone number, including area code:  (866) 655-3650
 
None
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the Registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes 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 whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: 
Large accelerated filer o
 
Accelerated filer o
 
 
 
Non-accelerated filer o 
(Do not check if a smaller reporting company)
 
Smaller reporting company x
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes o No ý
 
As of October 31, 2016, Behringer Harvard Opportunity REIT II, Inc. had 25,218,770 shares of common stock outstanding.

 



BEHRINGER HARVARD OPPORTUNITY REIT II, INC.
FORM 10-Q
Quarter Ended September 30, 2016
 
 
 
Page
 
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015
 
 
 
 
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Condensed Consolidated Statements of Equity for the Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I
FINANCIAL INFORMATION
Item 1.                 Financial Statements.
Behringer Harvard Opportunity REIT II, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except shares)
(unaudited)
 
 
September 30, 2016
 
December 31, 2015
Assets
 
 

 
 

Real estate
 
 

 
 

Land and improvements, net
 
$
42,862

 
$
51,382

Buildings and improvements, net
 
133,829

 
185,213

Real estate under development
 

 
176

Total real estate
 
176,691

 
236,771

Cash and cash equivalents
 
69,687

 
76,815

Restricted cash
 
6,994

 
4,581

Accounts receivable, net
 
1,511

 
2,426

Prepaid expenses and other assets
 
1,212

 
1,078

Investment in unconsolidated joint venture
 
14,658

 
14,482

Furniture, fixtures and equipment, net
 
3,582

 
5,702

Lease intangibles, net
 
327

 
334

Total assets
 
$
274,662

 
$
342,189

Liabilities and Equity
 
 

 
 

Notes payable, net
 
$
142,789

 
$
177,036

Accounts payable
 
370

 
479

Payables to related parties
 
310

 
433

Acquired below-market leases, net
 
69

 
80

Distributions payable to common shareholders
 

 
38,378

Distributions payable to noncontrolling interest
 
21

 
52

Income taxes payable
 
841

 
986

Deferred gain
 
1,247

 

Accrued and other liabilities
 
7,055

 
8,166

Total liabilities
 
152,702

 
225,610

 
 
 
 
 
Commitments and contingencies
 

 

 
 
 
 
 
Equity
 
 

 
 

Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none outstanding
 

 

Convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 outstanding
 

 

Common stock, $.0001 par value per share; 350,000,000 shares authorized, 25,360,610 and 25,585,198 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
 
3

 
3

Additional paid-in capital
 
228,630

 
229,796

Accumulated distributions and net loss
 
(112,464
)
 
(119,609
)
Accumulated other comprehensive loss
 
(266
)
 
(372
)
Total Behringer Harvard Opportunity REIT II, Inc. equity
 
115,903

 
109,818

Noncontrolling interest
 
6,057

 
6,761

Total equity
 
121,960

 
116,579

Total liabilities and equity
 
$
274,662

 
$
342,189

See Notes to Unaudited Condensed Consolidated Financial Statements.

3


Behringer Harvard Opportunity REIT II, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except per share amounts)
(unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues
 
 

 
 
 
 
 
 
Rental revenue
 
$
6,740

 
$
8,349

 
$
21,590

 
$
25,300

Hotel revenue
 
4,653

 
4,190

 
13,946

 
13,332

Total revenues
 
11,393

 
12,539

 
35,536

 
38,632

Expenses
 
 

 
 

 
 
 
 
Property operating expenses
 
2,635

 
3,172

 
7,128

 
8,836

Hotel operating expenses
 
3,509

 
3,166

 
10,219

 
9,440

Interest expense, net
 
1,561

 
1,711

 
4,692

 
5,278

Real estate taxes
 
1,197

 
1,637

 
4,113

 
4,793

Property management fees
 
374

 
415

 
1,164

 
1,279

Asset management fees
 
554

 
657

 
1,773

 
2,099

General and administrative
 
705

 
1,061

 
2,246

 
2,772

Depreciation and amortization
 
2,616

 
3,467

 
8,396

 
11,869

Total expenses
 
13,151


15,286

 
39,731

 
46,366

Interest income, net
 
39

 
28

 
72

 
107

Loss on early extinguishment of debt
 
(500
)
 
(613
)
 
(500
)
 
(732
)
Other income (loss)
 
52

 
74

 
263

 
(95
)
Loss before gain on sale of real estate and income taxes
 
(2,167
)
 
(3,258
)
 
(4,360
)
 
(8,454
)
Gain on sale of real estate
 
11,462

 
17,451

 
11,462

 
22,771

Income tax benefit (expense)
 
29

 
(1,076
)
 
29

 
(2,740
)
Net income
 
9,324

 
13,117

 
7,131

 
11,577

Net (income) loss attributable to the noncontrolling interest
 
59

 
(262
)
 
14

 
(855
)
Net income attributable to the Company
 
$
9,383

 
$
12,855

 
$
7,145

 
$
10,722

Weighted average shares outstanding:
 
 

 
 

 
 
 
 
Basic and diluted
 
25,391

 
25,667

 
25,470

 
25,715

Basic and diluted income per share
 
$
0.37

 
$
0.50

 
0.28

 
$
0.42

Distributions declared per common share
 
$

 
$

 
$

 
$
1.00

Comprehensive income (loss):
 
 

 
 

 
 
 
 
Net income
 
$
9,324

 
$
13,117

 
$
7,131

 
$
11,577

Other comprehensive income (loss):
 
 

 
 

 
 
 
 
Reclassification of unrealized (gain) loss on currency translation to net income
 

 
(346
)
 

 
250

Foreign currency translation gain (loss)
 
37

 
124

 
106

 
(248
)
Total other comprehensive income (loss)
 
37

 
(222
)
 
106

 
2

Comprehensive income
 
9,361

 
12,895

 
7,237


11,579

Comprehensive (income) loss attributable to noncontrolling interest
 
59

 
(262
)
 
14

 
(855
)
Comprehensive income attributable to the Company
 
$
9,420

 
$
12,633

 
$
7,251

 
$
10,724

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

4


Behringer Harvard Opportunity REIT II, Inc.
Condensed Consolidated Statements of Equity
(in thousands)
(unaudited)
 
 
Convertible Stock
 
Common Stock
 
 
 
Accumulated Distributions and Net Income (Loss)
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
Number of Shares
 
Par Value
 
Number of Shares
 
Par Value
 
Additional Paid-in Capital
 
 
 
Noncontrolling Interest
 
Total Equity
Balance at January 1, 2015
1

 
$

 
25,802

 
$
3

 
$
231,240

 
$
(62,477
)
 
$
(246
)
 
$
8,036

 
$
176,556

Net income
 

 
 

 
 
 
 
 
 
 
10,722

 
 
 
855

 
11,577

Redemption of common stock
 

 
 

 
(147
)
 
 
 
(997
)
 
 
 
 
 
 
 
(997
)
Distributions declared on common stock
 
 
 
 
 
 
 
 
 
 
(25,732
)
 
 
 
 
 
(25,732
)
Contributions from noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
499

 
499

Distributions to noncontrolling interest
 

 
 

 
 
 
 
 
 
 
 
 
 
 
(2,383
)
 
(2,383
)
Other comprehensive income (loss):
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Reclassification of unrealized loss on currency translation to net income
 

 
 

 
 
 
 
 
 
 
 
 
250

 


 
250

Foreign currency translation loss
 

 
 

 
 
 
 
 
 
 
 
 
(248
)
 


 
(248
)
Balance at September 30, 2015
1

 
$

 
25,655

 
$
3

 
$
230,243

 
$
(77,487
)
 
$
(244
)
 
$
7,007

 
$
159,522

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
1

 
$

 
25,585

 
$
3

 
$
229,796

 
$
(119,609
)
 
$
(372
)
 
$
6,761

 
$
116,579

Net income
 

 
 

 
 
 
 
 
 
 
7,145

 
 
 
(14
)
 
7,131

Redemption of common stock
 

 
 

 
(224
)
 
 
 
(1,166
)
 
 
 
 
 
 
 
(1,166
)
Contributions from noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
92

 
92

Distributions to noncontrolling interest
 

 
 

 
 
 
 
 
 
 
 
 
 
 
(782
)
 
(782
)
Other comprehensive income:
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Foreign currency translation gain
 

 
 

 
 
 
 
 
 
 
 
 
106

 
 

 
106

Balance at September 30, 2016
1

 
$

 
25,361

 
$
3

 
$
228,630

 
$
(112,464
)
 
$
(266
)
 
$
6,057

 
$
121,960

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

5



Behringer Harvard Opportunity REIT II, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 

 
 

Net income
 
$
7,131

 
$
11,577

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
 

Depreciation and amortization
 
8,277

 
11,721

Amortization of deferred financing fees
 
394

 
540

Gain on sale of real estate
 
(11,462
)
 
(22,771
)
Loss on early extinguishment of debt
 
500

 
732

Loss on derivatives
 
2

 
15

Change in operating assets and liabilities:
 
 
 
 

Accounts receivable
 
890

 
232

Prepaid expenses and other assets
 
(137
)
 
22

Accounts payable
 
(109
)
 
(239
)
Income taxes payable
 
(171
)
 
1,951

Accrued and other liabilities
 
(1,001
)
 
1,460

Payables to related parties
 
(123
)
 
(112
)
Addition of lease intangibles
 
(65
)
 
(28
)
Cash provided by operating activities
 
4,126

 
5,100

Cash flows from investing activities:
 
 

 
 

Investment in unconsolidated joint venture
 
(176
)
 
(377
)
Proceeds from sale of real estate
 
68,520

 
79,075

Additions of property and equipment
 
(2,062
)
 
(3,399
)
Change in restricted cash
 
(1,166
)
 
(404
)
Net proceeds from the sale of real estate placed into escrow
 
(1,247
)
 

Cash provided by investing activities
 
63,869

 
74,895

Cash flows from financing activities:
 
 

 
 

Financing costs
 
(135
)
 
(379
)
Payments on notes payable
 
(34,880
)
 
(44,674
)
Redemptions of common stock
 
(1,166
)
 
(997
)
Distributions paid on common stock
 
(38,378
)
 
(25,732
)
Contributions from noncontrolling interest holders
 
92

 
499

Distributions to noncontrolling interest holders
 
(813
)
 
(2,362
)
Cash used in financing activities
 
(75,280
)
 
(73,645
)
Effect of exchange rate changes on cash and cash equivalents
 
157

 
(291
)
Net change in cash and cash equivalents
 
(7,128
)
 
6,059

Cash and cash equivalents at beginning of period
 
76,815

 
72,949

Cash and cash equivalents at end of period
 
$
69,687

 
$
79,008

See Notes to Unaudited Condensed Consolidated Financial Statements.

6


Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 

1.                    Business and Organization
Business
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. 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 have invested until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met. Consistent with our investment objectives of commencing a liquidation within three to six years after the termination of our initial public offering, we have entered our disposition phase and our board of directors is in the process of considering the orderly disposition of our assets. As of September 30, 2016, we had eight real estate investments, seven of which were consolidated. One of our consolidated properties is wholly owned and six properties are consolidated through investments in joint ventures.
Substantially all of our business is conducted through Behringer Harvard Opportunity OP II LP, a limited partnership organized in Delaware (the “Operating Partnership”).  As of September 30, 2016, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, owned a 0.1% partnership interest in the Operating Partnership as its sole general partner.  As of September 30, 2016, our wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of the Operating Partnership and owned the remaining 99.9% interest in the Operating Partnership.
We are externally managed and advised by Behringer Harvard Opportunity Advisors II, LLC (the “Advisor”).  The Advisor is responsible for managing our day-to-day affairs and for services related to the sale of our assets.
Organization
In connection with our initial capitalization, we issued 22,471 shares of our common stock and 1,000 shares of our convertible stock to Behringer Harvard Holdings, LLC (“Behringer”) on January 19, 2007.  Behringer transferred its shares of convertible stock to one of its affiliates on April 2, 2010. As of September 30, 2016, we had 25.4 million shares of common stock outstanding and 1,000 shares of convertible stock outstanding held by an affiliate of Behringer.
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. Our board of directors is in the process of considering the orderly disposition of our assets and we can provide no assurances as to the timing of our ultimate liquidation. As we sell assets, we expect to distribute net proceeds to our stockholders.

7

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 



2.                     Interim Unaudited Financial Information
The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on March 16, 2016.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in this report on Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
The results for the interim periods shown in this report are not necessarily indicative of future financial results.  The accompanying condensed consolidated balance sheet as of September 30, 2016, the condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2016 and 2015 and the condensed consolidated statements of equity and cash flows for the nine months ended September 30, 2016 and 2015 have not been audited by our independent registered public accounting firm.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to fairly present our condensed consolidated financial position as of September 30, 2016 and December 31, 2015 and our condensed consolidated results of operations and cash flows for the periods ended September 30, 2016 and 2015.  Such adjustments are of a normal recurring nature.
In the Notes to Condensed Consolidated Financial Statements, all dollar and share amounts in tabulation are in thousands of dollars and shares, respectively, unless otherwise noted.

3.                      Summary of Significant Accounting Policies
Described below are certain of our significant accounting policies.  The disclosures regarding several of the policies have been condensed or omitted in accordance with interim reporting regulations specified by Form 10-Q.  Please see our Annual Report on Form 10-K for a complete listing of all of our significant accounting policies.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates include such items as impairment of long-lived assets, depreciation and amortization, and allowance for doubtful accounts.  Actual results could differ from those estimates.
Principles of Consolidation and Basis of Presentation
Our condensed consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control. All inter-company transactions, balances, profits, and the accounts of variable interest entities, if any, in which we are the primary beneficiary have been eliminated in consolidation. Interests in entities acquired will be evaluated based on applicable GAAP, which includes the requirement to consolidate entities deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary. If the interest in the entity is determined not to be a VIE, then the entity will be evaluated for consolidation based on legal form, economic substance, and the extent to which we have control, substantive participating rights or both under the respective ownership agreement. For entities in which we have less than a controlling interest or entities which we are not deemed to be the primary beneficiary, we account for the investment using the equity method of accounting.
There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and, if so, whether we are the primary beneficiary. The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity. Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility and using a discount rate to determine the net present value of those future losses. A change in the judgments, assumptions, and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment using the equity method that should in fact be consolidated, the effects of which could be material to our financial statements.


8

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Real Estate
As of September 30, 2016 and December 31, 2015, accumulated depreciation and amortization related to our consolidated investments in real estate assets and intangibles were as follows: 
September 30, 2016
 
Buildings and Improvements
 
Land and Improvements
 
Lease Intangibles
 
Acquired
Below-Market Leases
Cost
 
$
163,620

 
$
45,884

 
$
1,546

 
$
(137
)
Less: depreciation and amortization
 
(29,791
)
 
(3,022
)
 
(1,219
)
 
68

Net
 
$
133,829

 
$
42,862

 
$
327

 
$
(69
)
 
December 31, 2015
 
Buildings and Improvements
 
Land and Improvements
 
Lease Intangibles
 
Acquired
Below-Market Leases
Cost
 
$
211,635

 
$
54,068

 
$
3,083

 
$
(184
)
Less: depreciation and amortization
 
(26,422
)
 
(2,686
)
 
(2,749
)
 
104

Net
 
$
185,213

 
$
51,382

 
$
334

 
$
(80
)
We amortize the value of in-place leases, in-place tenant improvements, and in-place leasing commissions to expense over the initial term of the respective leases.  In no event does the amortization period for intangible assets or liabilities exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the acquired lease intangibles related to that tenant would be charged to expense.
Anticipated net amortization expense (accretion) associated with the acquired lease intangibles for each of the following five years as of September 30, 2016 is as follows: 
Year
 
Lease / Other
Intangibles
October 1, 2016 - December 31, 2016
 
$
9

2017
 
20

2018
 
(14
)
2019
 
(12
)
2020
 
(10
)
Real Estate Held for Sale
We classify properties as held for sale when certain criteria are met in accordance with GAAP.  At that time, we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property.  Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell.  We did not have any real estate assets classified as held for sale as of September 30, 2016 or December 31, 2015.
Investment Impairment
For all of our real estate and real estate-related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to: a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers and changes in the global and local markets or economic conditions.  Our assets may at times be concentrated in limited geographic locations and, to the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at those properties within a short time period, which may result in asset impairments.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual

9

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


disposition to the carrying amount of the asset.  These projected cash flows are prepared internally by the Advisor and reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s principal executive officer and principal financial officer review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions that are consistent with market data or with assumptions that would be used by a third-party market participant and assume the highest and best use of the investment. We consider trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist.  In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value.  While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.
In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, and the projected sales price of each of the properties.  A future change in these estimates and assumptions could result in understating or overstating the carrying value of our investments, which could be material to our financial statements. In addition, we may incur impairment charges on assets classified as held for sale in the future if the carrying amount of the asset upon classification as held for sale exceeds the estimated fair value, less costs to sell.
We also evaluate our investments in unconsolidated joint ventures at each reporting date.  If we believe there is an other than temporary decline in market value, we will record an impairment charge based on these evaluations.  We assess potential impairment by comparing our portion of estimated future undiscounted operating cash flows expected to be generated by the joint venture over the life of the joint venture’s assets to the carrying amount of the joint venture.  In the event that the carrying amount exceeds our portion of estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the joint venture to its estimated fair value.
We believe the carrying value of our operating real estate assets and our investment in an unconsolidated joint venture is currently recoverable.  There were no impairment charges for the three and nine months ended September 30, 2016 and 2015.  However, if market conditions worsen unexpectedly or if changes in our strategy significantly affect any key assumptions used in our fair value calculations, we may need to take charges in future periods for impairments related to our existing investments.  Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.
Investment in Unconsolidated Joint Venture
We provide funding to third-party developers for the acquisition, development, and construction of real estate (“ADC Arrangement”).  Under an ADC Arrangement, we may participate in the residual profits of the project through the sale or refinancing of the property.  We evaluate this arrangement to determine if it has characteristics similar to a loan or if the characteristics are more similar to a joint venture or partnership such as participating in the risks and rewards of the project as an owner or an investment partner.  When we determine that the characteristics are more similar to a jointly-owned investment or partnership, we account for the arrangement as an investment in an unconsolidated joint venture under the equity method of accounting or a direct investment (consolidated basis of accounting) instead of applying loan accounting. The ADC Arrangement is reassessed at each reporting period. See Note 9, Investment in Unconsolidated Joint Venture, for further discussion.
Revenue Recognition
We recognize rental income generated from leases of our operating properties on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any.  Straight-line rent was income of less than $0.1 million recognized in rental revenues for the three and nine months ended September 30, 2016 and 2015. Leases associated with our multifamily, student housing, and hotel assets are generally short-term in nature, and thus have no straight-line rent. Net above-market lease amortization was a charge of less than $0.1 million recognized in rental revenues for the three and nine months ended September 30, 2016. Net below-market lease amortization was income of less than $0.1 million recognized in rental revenues for the three and nine months ended September 30, 2015.
Hotel revenue is derived from the operations of the Courtyard Kauai Coconut Beach Hotel and consists primarily of guest room, food and beverage, and other ancillary revenues such as laundry and parking. Hotel revenue is recognized as the services are rendered.

10

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Accounts Receivable
Accounts receivable primarily consist of receivables related to our consolidated properties of $1.5 million and $2.4 million as of September 30, 2016 and December 31, 2015, respectively, and included straight-line rental revenue receivables of $0.3 million as of September 30, 2016 and December 31, 2015. 
Furniture, Fixtures, and Equipment
Furniture, fixtures, and equipment are recorded at cost and are depreciated according to the Company’s capitalization policy, which uses the straight-line method over their estimated useful lives of five to seven years.  Furniture, fixtures, and equipment associated with properties classified as held for sale are not depreciated. Maintenance and repairs are charged to operations as incurred.  Accumulated depreciation associated with our furniture, fixtures, and equipment was $9.4 million and $8.1 million as of September 30, 2016 and December 31, 2015, respectively.
Deferred Financing Fees
Deferred financing fees are recorded at cost and are amortized to interest expense using a straight-line method that approximates the effective interest method over the life of the related debt. Deferred financing fees, net of accumulated amortization, were $0.9 million and $1.7 million as of September 30, 2016 and December 31, 2015, respectively. Accumulated amortization of deferred financing fees were $1.8 million and $2.5 million as of September 30, 2016 and December 31, 2015, respectively. In April 2015, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2015-03”) to ASC Topic 835, Interest - Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs. The adoption of ASU 2015-03, effective January 1, 2016, requires companies to present debt issuance costs related to a recognized debt liability as a direct reduction from the carrying amount of the related debt liability, retrospectively.
The adoption of the new standard resulted in the following reclassifications of unamortized deferred financing fees as of December 31, 2015:
December 31, 2015
Originally Reported
 
Reclassification
 
Adjusted
Deferred financing fees, net
$
1,656

 
$
(1,656
)
 
$

Notes payable
178,692

 
(1,656
)
 
177,036


Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and have qualified as a REIT since the year ended December 31, 2008.  To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subject to federal income tax at the corporate level.  We are organized and operate in such a manner as to qualify for taxation as a REIT under the Code and intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. Taxable income from non-REIT activities managed through a taxable REIT subsidiary (“TRS”) is subject to applicable federal, state, and local income and margin taxes. We currently have no taxable income associated with a TRS. Our operating partnerships are flow-through entities and are not subject to federal income taxes at the entity level.
As a result of the sale of one of our foreign investments during the first quarter of 2015, Alte Jakobstraße (“AJS”), we recorded estimated foreign income tax of approximately $2.2 million during the period ended March 31, 2015. During the second quarter of 2015, we recorded a credit of $0.5 million to the provision for income tax based on a change in the estimated taxes payable on the sale of AJS. We recorded a provision for income tax of approximately $1 million in the third quarter of 2015 as a result of estimated foreign income tax related to the sale of Holstenplatz, resulting in a total income tax provision of $2.7 million for the nine months ended September 30, 2015. During the third quarter of 2016, we recorded a credit of less than $0.1 million to the provision for income tax based on the difference in the actual taxes due and the originally estimated taxes payable on the sale of Holstenplatz. The foreign income tax recorded during 2015 was calculated on gains recognized at the exchange rate in effect on the date of sale and calculated using current tax rates.
We have reviewed our tax positions under GAAP guidance that clarify the relevant criteria and approach for the recognition and measurement of uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position

11

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination. We believe it is more likely than not that the tax positions taken relative to our federal tax status as a REIT will be sustained in any tax examination.
Foreign Currency Translation
For our international investments where the functional currency is other than the U.S. dollar, assets and liabilities are translated using period-end exchange rates, while the statement of operations amounts are translated using the average exchange rates for the respective period. Gains and losses resulting from the change in exchange rates from period to period are reported separately as a component of other comprehensive income (loss). Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations and comprehensive income (loss).
The Euro is the functional currency for the operations of AJS and Holstenplatz, which were both sold in 2015. We sold AJS on February 21, 2015 and Holstenplatz on September 1, 2015. We maintain a Euro-denominated bank account that is comprised primarily of the remaining proceeds from the sale of these properties and is translated into U.S. dollars at the current exchange rate at each reporting period. For the three and nine months ended September 30, 2016, the foreign currency translation adjustment was a gain of less than $0.1 million and a gain of $0.1 million, respectively. For the three and nine months ended September 30, 2015, the foreign currency translation adjustment was a gain of $0.1 million and a loss of $0.2 million, respectively.
When the Company has substantially liquidated its investment in a foreign entity, the cumulative translation adjustment (“CTA”) balance is required to be released into earnings. In accordance with ASU 2013-05, upon disposal of the property, we would recognize the CTA as an adjustment to the gain on sale. During the first quarter of 2015, we recognized a CTA of approximately $0.6 million as a reduction to the gain on sale of our AJS office building, which we sold on February 21, 2015. We sold our wholly owned investment in the Holstenplatz office building on September 1, 2015. We recognized a CTA credit of approximately $0.4 million as an increase to the gain on sale of Holstenplatz. With the sale of Holstenplatz, we no longer have foreign operations.
Concentration of Credit Risk
At September 30, 2016 and December 31, 2015, we had cash and cash equivalents deposited in certain financial institutions in excess of federally insured levels.  We have diversified our cash and cash equivalents among several banking institutions in an attempt to minimize exposure to any one of these entities.  We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents or restricted cash.
Geographic and Asset Type Concentration
Our investments may at times 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. For the nine months ended September 30, 2016, excluding sold assets, 44% and 15% of our total revenues were derived from our properties located in Hawaii and Florida, respectively. Additionally, excluding our property sold in 2016, 44%, 30%, and 21% of our total revenues for the nine months ended September 30, 2016 were from our hotel, multifamily, and student housing investments, respectively. To the extent that our portfolio is concentrated in limited geographic regions or types of assets, downturns relating generally to such region or type of asset may result in defaults on a number of our investments within a short time period, which may reduce our net income and the value of our common stock and accordingly limit our ability to fund our operations.
Noncontrolling Interest
Noncontrolling interest represents the noncontrolling ownership interest’s proportionate share of the equity in our consolidated real estate investments.  Income and losses are allocated to noncontrolling interest holders based generally on their ownership percentage.  In certain instances, our joint venture agreement provides for liquidating distributions based on achieving certain return metrics (“promoted interest”).  If a property reaches a defined return threshold, then it will result in distributions to noncontrolling interest which is different from the standard pro-rata allocation percentage.
Earnings per Share
Net income per share is calculated based on the weighted average number of common shares outstanding during each period.  The weighted average shares outstanding used to calculate both basic and diluted income per share were the same for

12

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


each of the three and nine months ended September 30, 2016 and 2015 as there were no potentially dilutive securities outstanding.
Subsequent Events
We have evaluated subsequent events for recognition or disclosure in our condensed consolidated financial statements.
 
4.                 New Accounting Pronouncements
In May 2014, the FASB issued an update (“ASU 2014-09”) to ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.  The new guidance will require companies to apply a five-step model in accounting for revenue arising from contracts with customers, as well as enhance disclosures regarding revenue recognition. Lease contracts will be excluded from this revenue recognition criteria; however, the sale of real estate will be required to follow the new model.  ASU 2014-09 is effective for public companies for interim and annual reporting periods beginning after December 15, 2017. In addition, early adoption will be permitted beginning after December 15, 2016, including interim reporting periods within those annual periods. Either full retrospective adoption or modified retrospective adoption is permitted. We do not expect that the adoption of this pronouncement will have a material effect on our condensed consolidated financial statements; however, we will continue to evaluate this assessment until the guidance becomes effective.
During the quarter ended June 30, 2016, the FASB issued subsequent updates to ASU 2014-09. In April 2016, the FASB issued an update (“ASU 2016-10”) to ASC Topic 606, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing. In May 2016, the FASB issued an update (“ASU 2016-12”) to ASC Topic 606, Revenue from Contracts with Customers, Narrow-Scope Improvement and Practical Expedients.  The amendments in these updates did not change the core principle of the guidance in Topic 606; rather, they added improvements to reduce the diversity in practice at initial application and the cost and complexity of applying Topic 606 both at transition and an ongoing basis. The areas affected include: assessing the collectability criteria; presentation of sales taxes and other similar taxes collected from customers; noncash consideration; contract modification and completed contracts at transition; and technical correction as it relates to retrospective application and disclosure.  The new guidance is effective January 1, 2018, with early adoption permitted beginning January 1, 2017, and allows full or modified retrospective application.  We do not expect the adoption of ASU 2016-10 and ASU 2016-12 to have a material effect on our consolidated financial statements; however, we will continue to evaluate this assessment until the guidance becomes effective.
In August 2014, the FASB issued an update (“ASU 2014-15”) to ASC Topic 205, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management’s assessment of a company’s ability to continue as a going concern and provide related footnote disclosures when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within one year from the financial statement issuance date. ASU 2014-15 applies to all companies and is effective for the annual period ending after December 15, 2016, and all annual and interim periods thereafter. We do not believe the adoption of this guidance will have a material impact on our disclosures.
In February 2016, the FASB issued an update (“ASU 2016-02”) to ASC Topic 842, Leases. ASU 2016-02 supersedes the existing lease accounting model, and modifies both lessee and lessor accounting. The new guidance will require lessees to recognize a liability to make lease payments and a right-of-use asset, initially measured at the present value of lease payments, for both operating and financing leases. For leases with a term of 12 months or less, lessees will be permitted to make an accounting policy election by class of underlying asset to not recognize lease liabilities and lease assets. Under this new pronouncement, lessor accounting will be largely unchanged from existing GAAP. The new standard will be effective January 1, 2019, with early adoption permitted. We do not expect that the adoption of this pronouncement will have a material effect on our condensed consolidated financial statements; however, we will continue to evaluate this assessment until the guidance becomes effective.
In August 2016, the FASB issued an update (“ASU 2016-15”) to ASC Topic 230, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments. The objective of this amendment is to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statements of cash flows. Of the eight types of cash flows discussed in the new standard, the classification of debt prepayment, distributions received from equity method investees, and debt extinguishment costs as financing outflows may impact the Company. ASU 2016-15 is effective for public companies for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in

13

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 


an interim period. The amendment in the update should be applied using the retrospective transition method for each period presented. We will continue to evaluate the impact until the guidance becomes effective.

5.                    Assets and Liabilities Measured at Fair Value
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access.  Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity’s own assumptions, as there is little, if any, related market activity.  In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Recurring Fair Value Measurements
Currently, we use interest rate swaps and caps to manage our interest rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative.  This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, implied volatilities, and foreign currency exchange rates.
We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties.  However, as of September 30, 2016, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.  As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The following fair value hierarchy table presents information about our assets measured at fair value on a recurring basis as of December 31, 2015: 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 

 
 

 
 

 
 

Derivative financial instruments
 
$

 
$
2

 
$

 
$
2

Courtyard Kauai Coconut Beach Hotel was our only remaining asset with an interest rate cap as of September 30, 2016 and it had a nominal value.
Derivative financial instruments classified as assets are included in prepaid expenses and other assets on the balance sheet.
Nonrecurring Fair Value Measurements
During the year ended December 31, 2015, we recorded a $1.4 million non-cash impairment charge as a result of a measurable decrease in the fair value of 22 Exchange, one of our student housing investments. In estimating the fair value of 22 Exchange, we used management’s internal discounted cash flow analysis prepared with consideration of the current local market. The discounted cash flow estimate is considered Level 3 under the fair value hierarchy described above.

14

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 


The following fair value hierarchy table presents information about our assets measured at fair value on a nonrecurring basis during the year ended December 31, 2015:
For the year ended December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
Loss
Assets
 
 
 
 
 
 
 
 
 
 
Buildings and improvements, net(1)
 
$

 
$

 
$
25,000

 
$
25,000

 
$
(1,417
)
______________________________________
(1)
Due to the local market decline in Akron, Ohio during the fourth quarter of 2015, we recorded a non-cash impairment charge of $1.4 million on our investment in 22 Exchange, one of our student housing investments.
Quantitative Information about Level 3 Fair Value Measurements
 Description
 
Fair Value
for the year ended
December 31, 2015 (in 000s)
 
Valuation
Techniques
 
Unobservable Input
 
Range
(Weighted Average)
Buildings and improvements, net(1)
 
$
25,000

 
Discounted cash flow
 
Discount rate
Terminal capitalization rate
 
7.5% - 8.0%
6.5% - 7.5%
______________________________________
(1)
Due to the local market decline in Akron, Ohio during the fourth quarter of 2015, we recorded a non-cash impairment charge of $1.4 million on our investment in 22 Exchange, a student housing property.
There were no impairment charges recorded during the three and nine months ended September 30, 2016 and 2015.

6.                   Financial Instruments not Reported at Fair Value
We determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies.  However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value.  The use of different market assumptions or only estimation methodologies may have a material effect on the estimated fair value amounts.
As of September 30, 2016 and December 31, 2015, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses, other liabilities, payables/receivables from related parties, and distributions payable to noncontrolling interests were at amounts that reasonably approximated their fair value based on their highly-liquid nature and short-term maturities. The fair value of the notes payable is categorized as a Level 2 in the fair value hierarchy.  The fair value was estimated using a discounted cash flow analysis valuation on the borrowing rates currently available for loans with similar terms and maturities.  The fair value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate.  Disclosure about fair value of financial instruments is based on pertinent information available to management as of September 30, 2016 and December 31, 2015. 
Carrying amounts of our notes payable and the related estimated fair value as of September 30, 2016 and December 31, 2015 are as follows:
 
 
September 30, 2016
 
December 31, 2015
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Notes payable
 
$
143,686

 
$
146,175

 
$
178,692

 
$
179,306

Less: unamortized debt issuance costs
 
(897
)
 
 
 
(1,656
)
 
 
Notes payable, net
 
$
142,789

 
 
 
$
177,036

 
 

15

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 



7.      Real Estate and Real Estate-Related Investments
As of September 30, 2016, we consolidated seven real estate assets in our condensed consolidated balance sheet. The following table presents certain information about our consolidated investments as of September 30, 2016:
Property Name
 
Description
 
Location
 
Date Acquired
 
Ownership
Interest
Gardens Medical Pavilion
 
Medical office building
 
Palm Beach Gardens, Florida
 
October 20, 2010
 
81.8%
Courtyard Kauai Coconut Beach Hotel
 
Hotel
 
Kauai, Hawaii
 
October 20, 2010
 
80%
River Club and the Townhomes at River Club
 
Student housing
 
Athens, Georgia
 
April 25, 2011
 
85%
Lakes of Margate
 
Multifamily
 
Margate, Florida
 
October 19, 2011
 
92.5%
Arbors Harbor Town
 
Multifamily
 
Memphis, Tennessee
 
December 20, 2011
 
94%
22 Exchange
 
Student housing
 
Akron, Ohio
 
April 16, 2013
 
90%
Parkside Apartments (“Parkside”)
 
Multifamily
 
Sugar Land, Texas
 
August 8, 2013
 
90%
Real Estate Asset Disposition
Lakewood Flats
On August 16, 2016, we sold Lakewood Flats for a contract sales price of approximately $68.8 million, resulting in a gain on sale of real estate of $11.5 million and a deferred gain of approximately $1.2 million. The deferred gain represents the amount of monies held in escrow to be reimbursed upon completion of the property’s outstanding insurance claim. We recorded a loss on early extinguishment of debt of $0.5 million, which was composed of the write-off of deferred financing fees of $0.4 million and an early termination fee of $0.1 million. A portion of the proceeds from the sale were used to pay off in full the existing indebtedness of approximately $33.5 million secured by the property. Lakewood Flats was classified as held for sale on our consolidated balance sheet at June 30, 2016.
Sales of Real Estate Reported in Continuing Operations
The following table presents our sales of real estate for the nine months ended September 30, 2016 and 2015 (in millions):
Date of Sale
 
Property
 
Ownership Interest
 
Sales Contract Price
 
Net Cash Proceeds(1)
 
Gain on Sale of Real Estate
August 16, 2016
 
Lakewood Flats
 
100%
 
$
68.8

 
$
68.5

 
$
11.5

January 8, 2015
 
Babcock Self Storage
 
85%
 
$
5.4

 
$
5.2

 
$
2.0

February 21, 2015
 
Alte Jakobstraße
 
99.7%
 
$
14.1

 
$
13.0

 
$
3.3

September 1, 2015
 
Holstenplatz
 
100.0%
 
$
18.4

 
$
18.0

 
$
8.6

September 9, 2015
 
Wimberly at Deerwood
 
95.0%
 
$
43.5

 
$
42.9

 
$
8.9

______________________________________
(1)
A portion of the net cash proceeds was used to pay off the property-associated debt of $33.5 million, $2.1 million, $6.5 million, and $26.4 million for Lakewood Flats, Babcock Self Storage (“Babcock”), AJS, and Wimberly at Deerwood (“Wimberly”), respectively. The Holstenplatz debt was paid off on April 30, 2015.
The Company does not view the 2016 disposal of Lakewood Flats or the 2015 disposals of Babcock, AJS, Holstenplatz, and Wimberly as a strategic shift. Therefore, the results of operations for Lakewood Flats is presented in continuing operations in the consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015. The results of operations for Babcock and AJS are presented in continuing operations in the condensed consolidated statements of operations for the nine months ended September 30, 2015. The results of operations for Holstenplatz and Wimberly are presented in continuing operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2015. Net income attributable to the Company for the nine months ended September 30, 2016 includes the gain on sale of Lakewood Flats of $11.5 million. Net income attributable to the Company for the nine months ended September 30, 2015 related to Babcock, AJS, Holstenplatz, and Wimberly was $17.8 million and includes the gains on sale for a total of $22.8 million.

16

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 



8.                   Investment in Unconsolidated Joint Venture
We provided mezzanine financing totaling $15.3 million to an unaffiliated third-party entity (the “Borrower”) that owns an apartment complex under development in Denver, Colorado (“Prospect Park”).  The Borrower also has a senior construction loan with a third-party construction lender (the “Senior Lender”) in an aggregate principal amount up to $40 million.  The senior construction loan is guaranteed by the owners of the developer.  We also have a personal guaranty from the owners of the developer guaranteeing completion of the project and payment of cost overruns. Our mezzanine loan is secured by all of the membership interests of the Borrower and is subordinate to the senior construction loan. Our advances of $15.3 million have annual stated interest rates ranging from 10% to 18%. We evaluated this ADC Arrangement and determined that the characteristics are similar to a jointly-owned investment or partnership. Accordingly, the investment was accounted for as an unconsolidated joint venture under the equity method of accounting instead of loan accounting since we will participate in the residual interests through the sale or refinancing of the property. 
Both the senior loan and our mezzanine loan were in technical default at July 31, 2016 due to a delay in completion of the project. The Senior Lender and the Company have decided not to call the loan and will amend the loan agreements when construction is complete. Completion of the project is expected to occur before the end of 2016. As of September 30, 2016, the outstanding principal balance under the mezzanine loan was $15.3 million. The Borrower has been funding any cost overruns.
We considered the impact of these events on the accounting treatment and determined the ADC Arrangement will continue to be accounted for as an unconsolidated joint venture under the equity method of accounting. We will continue to monitor this situation and any impact these events might have on our ability to ultimately realize the investment. The ADC Arrangement is reassessed at each reporting period.
In connection with this investment, interest capitalized for the three and nine months ended September 30, 2016 was less than $0.1 million and less than $0.2 million, respectively.  Interest capitalized for the three and nine months ended September 30, 2015 was $0.1 million and $0.4 million, respectively. For the three months ended September 30, 2016 and 2015, we recorded no equity in earnings (losses) of unconsolidated joint venture related to our investment in Prospect Park.
The following table sets forth our ownership interest in Prospect Park: 
 
 
Ownership Interest
 
Carrying Amount
Property Name
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
Prospect Park
 
N/A
 
N/A
 
$
14,658

 
$
14,482

 

17

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 


9. Variable Interest Entities
As discussed in Note 3, effective January 1, 2016, we have adopted the guidance in ASU 2015-02. As a result, the Operating Partnership (see Note 1) and each of our less than wholly-owned real estate partnerships (22 Exchange, LLC, Gardens Medical Pavilion, LLC, SL Parkside Apartments, LLC, and the ADC Arrangement associated with Prospect Park) have been deemed to have the characteristics of a VIE. However, we were not required to consolidate any previously unconsolidated entities or deconsolidate any previously consolidated entities as a result of the change in classification. Accordingly, there has been no change to the amounts reported in our condensed consolidated balance sheets and statements of cash flows or amounts recognized in our condensed consolidated statements of operations.
Consolidated VIEs
The Company consolidates the Operating Partnership, 22 Exchange, LLC, Gardens Medical Pavilion, LLC through BH-AW-Florida MOB Venture, LLC, and SL Parkside Apartments, LLC, which are variable interest entities, or VIEs, for which we are the primary beneficiary. Generally, a VIE is a legal entity in which the equity investors do not have the characteristics of a controlling financial interest or the equity investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A limited partnership, or legal entities such as an LLC, are considered a VIE when the majority of the limited partners unrelated to the general partner possess neither the right to remove the general partner without cause, nor certain rights to participate in the decisions that most significantly affect the financial results of the partnership. In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; and the similarity with and significance to our business activities and the business activities of the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of real estate held by these VIEs and general market conditions.
Unconsolidated VIEs
Included in the Company’s joint venture investments at September 30, 2016 is the ADC Arrangement associated with Prospect Park, which is accounted for as an unconsolidated joint venture and is a VIE. Refer to Note 8 for further details on the ADC Arrangement. This arrangement was established to provide mezzanine financing to an unaffiliated third party that owns Prospect Park, an apartment complex under development in Denver, Colorado. Based on our reevaluation under ASU 2015-02, we determined that we are not the primary beneficiary of this VIE based on the rights of the general partner. The arrangement does not allow for substantive kick-out rights over the general partner and we do not have the power to direct the activities of Prospect Park that most significantly affect the entity’s economic performance. Accordingly, we have determined it is appropriate, consistent with past accounting, that the Prospect Park ADC Arrangement will continue to be accounted for under the equity method.
As of September 30, 2016 and December 31, 2015, total assets of the property under development were approximately $74 million and $63.9 million, respectively. Total assets as of September 30, 2016 and December 31, 2015 were made up of construction in progress of $63.6 million and $53.5 million, respectively, land of $9.8 million, and other assets of $0.6 million and $0.5 million, respectively. The outstanding balance on the senior construction loan as of September 30, 2016 and December 31, 2015 was $35.7 million and $26.9 million, respectively. At September 30, 2016 and December 31, 2015, the outstanding principal balance of our mezzanine loan was $15.3 million.
The Company’s maximum exposure to losses associated with its unconsolidated joint venture is limited to its carrying value in this investment. As of September 30, 2016 and December 31, 2015, the Company’s carrying value and maximum exposure to loss in this investment was $14.7 million and $14.5 million, respectively.

18

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 


 
10.                     Notes Payable
The following table sets forth information on our notes payable as of September 30, 2016 and December 31, 2015:
 
 
Notes Payable as of
 
 
 
 
Description
 
September 30, 2016
 
December 31,
2015
 
Interest Rate
 
Maturity Date
Courtyard Kauai Coconut Beach Hotel
 
$
38,000

 
$
38,000

 
30-day LIBOR + .95%
(1) 
5/9/2017
Gardens Medical Pavilion
 
13,001

 
13,298

 
4.9%
 
1/1/2018
River Club and the Townhomes at River Club
 
24,016

 
24,299

 
5.26%
 
5/1/2018
Lakes of Margate
 
14,309

 
14,496

 
5.49% and 5.92%
 
1/1/2020
Arbors Harbor Town
 
24,775

 
25,130

 
3.985%
 
1/1/2019
22 Exchange
 
19,392

 
19,500

 
3.93%
 
5/5/2023
Parkside(2)
 
10,193

 
10,469

 
5%
 
6/1/2018
Lakewood Flats(3)
 

 
33,500

 
30-day LIBOR + 1.5%
(1) 
11/5/2019
   Total debt
 
143,686

 
178,692

 
 
 
 
Deferred financing fees(4)
 
(897
)
 
(1,656
)
 
 
 
 
Notes payable, net of deferred financing fees
 
142,789

 
177,036

 
 
 
 
Total notes payable obligations
 
$
142,789

 
$
177,036

 
 
 
 
_________________________________
(1)
30-day London Interbank Offered Rate (“LIBOR”) was 0.53% at September 30, 2016.
(2)
Includes approximately $0.3 million of unamortized premium related to debt we assumed at acquisition.
(3)
On August 16, 2016, we sold Lakewood Flats to an unaffiliated third party. A portion of the proceeds from the sale were used to payoff the existing indebtedness associated with the property.
(4) Effective January 1, 2016, we adopted ASU 2015-03, which requires companies to present the debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of the related debt liability. See Note 3, Summary of Significant Accounting Policies, for further details.
At September 30, 2016, our notes payable balance was $142.8 million, net of deferred financing fees of $0.9 million. 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, 22 Exchange, and Parkside notes payable. Interest capitalized in connection with our equity method investment in Prospect Park for the three and nine months ended September 30, 2016 was less than $0.1 million and less than $0.2 million, respectively. Interest capitalized for the three and nine months ended September 30, 2015 was $0.1 million and $0.4 million, respectively.
On August 16, 2016, we sold Lakewood Flats to an unaffiliated third party and used a portion of the proceeds from the sale to fully satisfy the existing indebtedness of approximately $33.5 million.

19

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 


We are subject to customary affirmative, negative, and financial covenants and representations, warranties, and borrowing conditions, all as set forth in our loan agreements, including, among other things, maintaining minimum debt service coverage ratios, loan to value ratios and liquidity. As of September 30, 2016, we believe we were in compliance with the covenants under our loan agreements. The following table summarizes our contractual obligations for principal payments as of September 30, 2016:  
Year
 
Amount Due
October 1, 2016 - December 31, 2016
 
$
524

2017
 
40,151

2018
 
46,807

2019
 
24,308

2020
 
13,771

Thereafter
 
17,845

Total contractual obligations for principal payments
 
143,406

Unamortized premium
 
280

Total notes payable
 
143,686

Less: Deferred financing fees, net
 
(897
)
    Notes payable, net
 
$
142,789

 

11.               Leasing Activity
Future minimum base rental payments of our remaining office property due to us under non-cancelable leases in effect as of September 30, 2016 are as follows: 
Year
 
Amount Due
October 1, 2016 - December 31, 2016
 
$
308

2017
 
1,250

2018
 
980

2019
 
919

2020
 
927

Thereafter
 
3,000

Total
 
$
7,384

 
The schedule above does not include rental payments due to us from our multifamily, hotel, and student housing properties, as leases associated with these properties typically are for periods of one year or less. We have one remaining office property at September 30, 2016, Gardens Medical Pavilion, located in Palm Beach Gardens, Florida.

20

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)



12.               Derivative Instruments and Hedging Activities
We may be exposed to the risk associated with variability of interest rates that might impact our cash flows and the results of operations.  The hedging strategy of entering into interest rate caps and swaps, therefore, is to eliminate or reduce, to the extent possible, the volatility of cash flows.  As of September 30, 2016, we had one remaining interest rate cap which was not designated as a hedging instrument. At September 30, 2016 and December 31, 2015, the fair value of our derivative instrument had a nominal value and was reported in prepaid expenses and other assets.
The following table summarizes the notional value of our derivative financial instrument.  The notional value provides an indication of the extent of our involvement in this instrument, but does not represent exposure to credit, interest rate, or market risks: 
Type / Description
 
Notional
Value
 
Interest Rate /
Strike Rate
 
Index
 
Maturity Date
Not designated as hedging instrument
 
 

 
 
 
 
 
 
Interest rate cap - Courtyard Kauai Coconut Beach Hotel
 
$
38,000

 
3.00%
 
30-day LIBOR
 
May 15, 2017
The table below presents the fair value of our derivative financial instrument, as well as its classification on the consolidated balance sheets as of September 30, 2016 and December 31, 2015: 
Derivative not designated as hedging instrument:
 
 
 
Asset Derivative(1)
 
Balance Sheet Location
 
September 30, 2016
 
December 31, 2015
 
 
 
 
 
 
 
Interest rate derivative contract
 
Prepaid expenses and other assets
 
$

 
$
2

______________________________________
(1)
The interest rate cap for Courtyard Kauai Coconut Beach Hotel had a nominal value at September 30, 2016 and 2015.
The table below presents the effect of our derivative financial instruments on the condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015: 
Derivatives Not Designated as Hedging Instruments(1)
Amount of Loss 
Three months ended September 30,
 
Nine months ended September 30,
2016
 
2015
 
2016
 
2015
$

 
$

 
$
2

 
$
15

______________________________________
(1)
Courtyard Kauai Coconut Beach Hotel interest rate cap had a nominal value and was our only remaining asset with an interest rate cap during the three and nine months ended September 30, 2016 and 2015.

13.              Distributions
Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous periods and expectations of performance for future periods. These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions, proceeds from asset sales, and other factors that our board deems relevant. The board’s decision will be substantially influenced by its obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all. We expect that any future distributions authorized by our board of directors will be periodic, special distributions as opposed to regular monthly or quarterly distributions.
On November 20, 2015, our board of directors authorized a special cash distribution of $1.50 per share of common stock, payable to stockholders of record as of December 31, 2015. The Company paid this special cash distribution of $38.4 million on January 5, 2016. 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. This special cash distribution of $25.7 million was paid on March 31, 2015. These special cash distributions represented a portion of proceeds from asset sales.

21

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 



14.              Related Party Transactions
Advisor
The Advisor and certain of its affiliates may receive fees and compensation in connection with the management and sale of our assets based on the advisory management agreement, as amended and restated.
Fifth Amended and Restated Advisory Management Agreement
On July 25, 2016, we entered into the Fifth Amended and Restated Advisory Management Agreement (the “Fifth Advisory Agreement”) with our Advisor to, among other things, revise the administrative services fee, amend the non-solicitation provision, and extend the term of the agreement to June 6, 2017. The Fifth Advisory Agreement is effective as of June 6, 2016.
The Advisor or its affiliates receive acquisition and advisory fees of 1.5% of the amount paid in respect of the purchase, development, construction, or improvement of each asset we acquire, including any debt attributable to those assets. In addition, the Advisor and its affiliates receive acquisition and advisory fees of 1.5% of the funds advanced in respect of a loan investment. We incurred no acquisition and advisory fees payable to the Advisor for the nine months ended September 30, 2016. We incurred acquisition and advisory fees payable to the Advisor of less than $0.1 million for the nine months ended September 30, 2015 as a result of improvements made to our assets. During the nine months ended September 30, 2016 and 2015, we had no acquisitions.
The Advisor or its affiliates also receive an acquisition expense reimbursement in the amount of (i) 0.25% of the funds paid for purchasing an asset, including any debt attributable to the asset, plus 0.25% of the funds budgeted for development, construction, or improvement in the case of assets that we acquire and intend to develop, construct, or improve or (ii) 0.25% of the funds advanced in respect of a loan investment. We also pay third parties, or reimburse the Advisor or its affiliates, for any investment-related expenses due to third parties in the case of a completed investment, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, third-party brokerage or finder's fees, title insurance, premium expenses, and other closing costs.
The Advisor and its affiliates are also responsible for paying all of the investment-related expenses that we or the Advisor or its affiliates incur that are due to third parties or related to the additional services provided by the Advisor as described above with respect to investments we do not make, other than certain non-refundable payments made in connection with any acquisition. For the nine months ended September 30, 2016, we incurred no acquisition expense reimbursements. For the nine months ended September 30, 2015, we incurred less than $0.1 million in acquisition expense reimbursements.
We pay the Advisor or its affiliates a debt financing fee of 0.5% of the amount available under any loan or line of credit made available to us and pay directly all third-party costs associated with obtaining the debt financing. We incurred no debt financing fees for the nine months ended September 30, 2016 and 2015.
We pay the Advisor or its affiliates a development fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project if such affiliate provides the development services and if a majority of our independent directors determines that such development fee is fair and reasonable to us.  We incurred no such fees for the nine months ended September 30, 2016 and 2015.
We pay the Advisor or its affiliates a monthly asset management fee of one-twelfth of 0.7% of the value of each asset. The value of our assets will be the value as determined in connection with the establishment and publication of an estimated value per share unless the asset was acquired after our publication of an estimated value per share (in which case the value of the asset will be the contract purchase price of the asset). For the nine months ended September 30, 2016 and 2015, we expensed $1.6 million and $2 million, respectively, of asset management fees payable to the Advisor.  The totals for the nine months ended September 30, 2016 and 2015 include asset management fees related to our disposed properties.
The Advisor is responsible for paying all of the expenses it incurs associated with persons employed by the Advisor to the extent that they provide services related to us for which the Advisor receives an acquisition, asset management, or debt financing fee, including wages and benefits of the personnel. Instead of reimbursing the Advisor for specific expenses paid or incurred in connection with providing services to us, we pay the Advisor an administrative services fee based on a budget of expenses prepared by the Advisor. The administrative services fee is intended to reimburse for all costs associated with providing services to us. Under the Fifth Advisory Agreement, the administrative services fee is the lesser of (i) $1.3 million per calendar year, and (ii) the costs of providing administrative services to us under the Fifth Advisory Agreement, payable in

22

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 


four equal quarterly installments within 45 days of the end of each calendar quarter. For the calendar year ending December 31, 2015, the administrative services fee was $1.5 million. In addition, under the advisory management agreement, we are to reimburse the Advisor for certain due diligence services provided in connection with asset dispositions or debt financings separately from the administrative services fee. For the nine months ended September 30, 2016 and 2015, we incurred and expensed such costs for administrative services and due diligence services of approximately $0.9 million and $1.2 million, respectively. Included in that amount is less than $0.1 million related to certain due diligence services provided in connection with asset dispositions during the nine months ended September 30, 2016 and 2015.
Notwithstanding the fees and cost reimbursements payable to our Advisor pursuant to the Fifth Advisory Agreement, under our charter we may not reimburse the Advisor for any amount by which our operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of: (i) 2% of our average invested assets, or (ii) 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts, or other similar non-cash reserves and excluding any gain from the sale of our assets for that period unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended September 30, 2016, our total operating expenses (including the asset management fee) were not excessive.
Property Manager
We pay our property manager and affiliate of the Advisor, Behringer Harvard Opportunity II Management Services, LLC or its affiliates (collectively, our “Property Manager”), fees for the management, leasing, and construction supervision of our properties which is 4.0% of gross revenues of the properties managed by our Property Manager. We pay our Property Manager an oversight fee equal to 0.5% of the gross revenues of the property managed for any property for which we contract directly with a third-party property manager.  In no event will our Property Manager receive both a property management fee and an oversight fee with respect to any particular property.  In the event we own a property through a joint venture that does not pay our Property Manager directly for its services, we will pay our Property Manager a management fee or oversight fee, as applicable, based only on our economic interest in the property.  We incurred and expensed property management fees or oversight fees to our Property Manager of approximately $0.4 million and $0.5 million for the nine months ended September 30, 2016 and 2015, respectively.
We pay our Property Manager a construction management fee in an amount not to exceed 5% of all hard construction costs incurred in connection with, but not limited to capital repairs and improvements, major building reconstruction and tenant improvements, if such affiliate supervises construction performed by or on behalf of us or our affiliates. We incurred no construction management fees for the nine months ended September 30, 2016 and 2015.
We are dependent on the Advisor and our Property Manager for certain services that are essential to us, including asset disposition decisions, property management and leasing services, and other general administrative responsibilities.  In the event that these companies were unable to provide us with their respective services, we would be required to obtain such services from other sources.

15.              Supplemental Cash Flow Information
Supplemental cash flow information is summarized below:  
 
 
Nine months ended September 30,
Description
 
2016
 
2015
Interest paid, net of amounts capitalized
 
4,484

 
$
4,959

Income taxes paid, net
 
175

 
856

Non-cash investing activities and financing activities:
 
 
 
 

Proceeds held in escrow through sale of real estate interests
 

 
912

Capital expenditures for real estate in accrued liabilities
 
139

 
414

Accrued distributions to noncontrolling interest
 
21

 
40

 

23

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 



16.         Subsequent Events
Share Redemption Program
On November 9, 2016, our board of directors approved redemptions for the fourth quarter of 2016 totaling 141,841 shares with an aggregate redemption payment of approximately $0.7 million. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” for a full description of the price at which we redeem shares under our share redemption program.
******

24


Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto. 

Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include discussion and analysis of the financial condition of 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 herein and under “Item 1A, Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2016 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;
impairment charges;
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 Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect.  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.

25



Cautionary Note
The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this Quarterly Report on Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties, or covenants to or with any other parties.  Moreover, these representations, warranties, or covenants should not be relied upon as accurately describing or reflecting the current state of our affairs. 

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. Since inception, 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. Currently, our investments include multifamily and student housing communities, an office building, a hotel, and a mezzanine loan. All of our current investments are located in the United States. We are not actively seeking to purchase additional assets at this time and have entered our disposition phase. Consistent with our investment objectives of commencing a liquidation within three to six years after the termination of our initial public offering, we have entered our disposition phase and our board of directors is in the process of considering the orderly disposition of our assets.

Liquidity and Capital Resources
We had unrestricted cash and cash equivalents of $69.7 million at September 30, 2016. Our principal demands for funds going forward will be for the payment of (a) operating expenses, (b) 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 (if any) 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, or redemptions, 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 our various real properties until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met. Our board of directors is in the process of considering the orderly disposition of our assets. We sold Lakewood Flats in the third quarter of 2016 and sold four properties in 2015.
On January 5, 2016, we paid a special cash distribution of $38.4 million, or $1.50 per share of common stock. On March 31, 2015, we paid a special cash distribution of $25.7 million, or $1.00 per share of common stock. Both distributions were funded from proceeds of asset sales.
We continually evaluate our liquidity and ability to fund future operations and debt obligations.  The next debt maturity for the Company is May 2017, related to the Courtyard Kauai Coconut Beach Hotel. If we have not disposed of the property by the maturity date, we will either repay the outstanding balance with available cash or refinance all or a portion of the balance outstanding. 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 and types of assets, downturns relating generally to such regions and assets 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 nine months ended September 30, 2016, excluding sold assets, 44% and 15% of our total revenues were derived from our properties located in Hawaii and Florida, respectively. Additionally, excluding our property sold in 2016, 44% of our total revenues were from our hotel property and 30% were from our multifamily properties.
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.

26


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 special 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.
Debt Financings
From time to time, we have 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 refinance our existing real estate assets, depending on multiple factors.
At September 30, 2016, our notes payable balance was $142.8 million, net of deferred financing fees of $0.9 million and had a weighted average interest rate of 3.8%. As of December 31, 2015, the Company had notes payable of $177 million, net of deferred financing fees of $1.7 million, with a weighted average interest rate of 3.5%. 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, 22 Exchange, and Parkside notes payable.
On August 16, 2016, we sold Lakewood Flats 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 $33.5 million.
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 September 30, 2016, we believe we were in compliance with the debt covenants under our loan agreements.
One of our principal short-term and long-term liquidity requirements includes the repayment of maturing debt.  The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of September 30, 2016. Interest payments on variable rate debt are based on rates in effect as of September 30, 2016. The table does not represent any extension options (in thousands):
 
 
Payments Due by Period(1)(2)
 
 
October 1, 2016 -December 31, 2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
Principal payments - fixed rate debt
 
$
524

 
$
2,151

 
$
46,807

 
$
24,308

 
$
13,771

 
$
17,845

 
$
105,406

Principal payments - variable rate debt
 

 
38,000

 

 

 

 

 
38,000

Interest payments - fixed rate debt
 
1,244

 
4,924

 
3,306

 
1,581

 
786

 
1,670

 
13,511

Interest payments - variable rate debt
 
143

 
204

 

 

 

 

 
347

Total(3)
 
$
1,911

 
$
45,279

 
$
50,113

 
$
25,889

 
$
14,557

 
$
19,515

 
$
157,264

________________________________
(1) 
Does not include approximately $0.3 million of unamortized premium related to debt we assumed on our acquisition of Parkside.
(2)
Effective January 1, 2016, we adopted ASU 2015-03, which requires companies to present debt issuance costs related to a recognized debt liability as a direct reduction from the carrying amount of the related debt liability. See Note 3, Summary of Significant Accounting Policies, for further details.
(3)
Does not include assumptions for any available extension options.

27



Results of Operations
As of September 30, 2016, we had eight real estate investments, seven of which were consolidated (one wholly owned and six properties consolidated through investments in joint ventures). We sold Lakewood Flats on August 16, 2016.
As of September 30, 2015, we had nine real estate investments, eight of which were consolidated, (one wholly owned and seven properties consolidated through investments in joint ventures). We sold four properties during 2015: Babcock and AJS in the first quarter and Holstenplatz and Wimberly in the third quarter.
Three months ended September 30, 2016 as compared to the three months ended September 30, 2015.
The following table provides summary information about our results of operations for the three months ended September 30, 2016 and 2015 ($ in thousands):
 
Three Months Ended
September 30,
 
Increase (Decrease)
 
Percentage Change
 
$ Change
due to
Dispositions(1)
 
$ Change
due to
Same Store(2)
 
2016
 
2015
Rental revenue
$
6,740

 
$
8,349

 
$
(1,609
)
 
(19.3
)%
 
$
(1,907
)
 
$
298

Hotel revenue
4,653

 
4,190

 
463

 
11.1
 %
 

 
463

Property operating expenses
2,635

 
3,172

 
(537
)
 
(16.9
)%
 
(541
)
 
4

Hotel operating expenses
3,509

 
3,166

 
343

 
10.8
 %
 

 
343

Interest expense, net
1,561

 
1,711

 
(150
)
 
(8.8
)%
 
(264
)
 
114

Real estate taxes
1,197

 
1,637

 
(440
)
 
(26.9
)%
 
(450
)
 
10

Property management fees
374

 
415

 
(41
)
 
(9.9
)%
 
(65
)
 
24

Asset management fees(3)
554

 
657

 
(103
)
 
(15.7
)%
 
(126
)
 
23

General and Administrative
705

 
1,061

 
(356
)
 
(33.6
)%
 
n/a

 
n/a

Depreciation and amortization
2,616

 
3,467

 
(851
)
 
(24.5
)%
 
(918
)
 
67

Loss on early extinguishment of debt
(500
)
 
(613
)
 
113

 
(18.4
)%
 
113

 

Gain on sale of real estate
11,462

 
17,451

 
(5,989
)
 
(34.3
)%
 
(5.989
)
 

Income tax benefit (expense)
29

 
(1,076
)
 
1,105

 
(102.7
)%
 
1,105

 

______________________
(1)
Represents the dollar amount decrease for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 related to the 2016 disposition of Lakewood Flats and the 2015 dispositions of Holstenplatz and Wimberly.
(2)
Represents the dollar amount increase (decrease) for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 with respect to real estate and real estate-related investments owned by us during the entire periods presented, excluding any we have classified as held for sale (“Same Store”). Same Store for the periods ended September 30, 2016 and 2015 include Gardens Medical Pavilion, River Club and the Townhomes at River Club, Lakes of Margate, Arbors Harbor Town, Courtyard Kauai Coconut Beach Hotel, 22 Exchange, and Parkside.
(3)
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 amounts above include asset management fees associated with any property owned during a particular period, including those related to our disposed properties.



28


The following table reflects rental revenue and property operating expenses for the three months ended September 30, 2016 and 2015 for: (i) our Same Store operating portfolio; and (ii) our disposition of Lakewood Flats on August 16, 2016 and our 2015 dispositions of Holstenplatz and Wimberly (in thousands):
 
 
Three Months Ended September 30,
 
 
Description
 
2016
 
2015
 
Change
Rental revenue
 
 
 
 
 
 
Same Store
 
$
5,905

 
$
5,607

 
$
298

Dispositions
 
835

 
2,742

 
(1,907
)
Total rental revenue

$
6,740

 
$
8,349

 
$
(1,609
)
 
 
 
 
 
 
 
Property operating expenses
 
 
 
 
 
 
Same Store
 
$
2,308

 
$
2,304

 
$
4

Dispositions
 
327

 
868

 
(541
)
Total property operating expenses
 
$
2,635

 
$
3,172

 
$
(537
)

The tables below reflect occupancy and effective monthly rental rates for our Same Store operating properties and occupancy and average daily rate (“ADR”) for Courtyard Kauai Coconut Beach Hotel:
 
 
Occupancy (%)
 
Effective Monthly Rent per Square Foot/Unit/Bed ($)(1)
 
 
 
 
As of September 30,
 
As of September 30,
 
 
Property
 
2016
 
2015
 
2016
 
2015
 
 
Gardens Medical Pavilion
 
66%

62%

$
2.08


$
2.10

 
per sq ft
River Club and the Townhomes at River Club
 
99%

100%

408.06


393.40

 
per bed
Lakes of Margate
 
95%

93%

1,256.74


1,189.68

 
per unit
Arbors Harbor Town
 
94%

96%

1,208.90


1,135.16

 
per unit
22 Exchange
 
90%
 
96%
 
499.45

 
541.07

 
per bed
Parkside
 
93%
 
85%
 
1,125.63

 
1,127.96

 
per unit
______________________________
(1)
Effective monthly 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.
 
 
Occupancy (%)(1)
 
ADR ($)
 
 
Three Months Ended
September 30,
 
Three Months Ended
September 30,
Property
 
2016
 
2015
 
2016
 
2015
Courtyard Kauai Coconut Beach Hotel
 
86
%
 
78
%
 
$
136.17

 
$
139.02

_______________________________________
(1)
Represents average occupancy for the three months ended September 30. The Courtyard Kauai Coconut Beach Hotel has 311 rooms and approximately 6,200 square feet of meeting space. Occupancy is for the entire three-month period and is based on standard industry metrics, including rooms available for rent.


29


Continuing Operations
Our results of operations for the respective periods presented reflect decreases in most categories. During the three months ended September 30, 2016, we had decreases in rental revenue and property operating expenses of $1.9 million and $0.5 million, respectively, from the impact of our dispositions in 2016 and 2015. Management expects decreases in most categories in the future as we dispose of additional real estate and real estate-related assets. 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.
Revenues.  Revenues for the three months ended September 30, 2016, including Courtyard Kauai Coconut Beach Hotel, were $11.4 million, a decrease of approximately $1.1 million from the three months ended September 30, 2015.  Same Store rental revenue (including our hotel revenue) for the three months ended September 30, 2016 and 2015 was $10.6 million and $9.8 million, respectively. Rental revenue from Lakewood Flats, which was sold in the third quarter of 2016, was $0.8 million and $1.6 million for the three months ended September 30, 2016 and 2015, respectively. Rental revenue from Holstenplatz and Wimberly, which were disposed of in 2015, was $1.1 million for the three months ended September 30, 2015.
The change in revenue is primarily due to:
a decrease in rental revenue of $1.9 million during the third quarter of 2016 as a result of our 2016 and 2015 dispositions. This decrease was partially offset by an increase of approximately $0.3 million related to our Same Store operations; and
an increase in hotel revenue of $0.5 million, or 11.1%, at the Courtyard Kauai Coconut Beach Hotel due to a 9.3% increase in occupancy rate and a 7.1% increase in revenue per available room (“RevPar”) period-over-period.
Property Operating Expenses.    Property operating expenses for the three months ended September 30, 2016 and 2015 were approximately $2.6 million and $3.2 million, respectively. The decrease of approximately $0.6 million was primarily due to our dispositions in 2016 and 2015.
Hotel Operating Expenses.  Hotel operating expenses for the three months ended September 30, 2016 and 2015 were $3.5 million and $3.2 million, respectively. The increase in hotel operating expenses was primarily due to an increase of $0.2 million in food and beverage costs incurred during the three months ended September 30, 2016 at the Courtyard Kauai Coconut Beach Hotel.
Interest Expense, net.   Interest expense for the three months ended September 30, 2016 and 2015 was $1.6 million and $1.7 million, respectively.  The approximate $0.1 million decrease was primarily due to a decrease of $0.2 million related to our dispositions in 2016 and 2015. For the three months ended September 30, 2016 and 2015, we capitalized interest of approximately $0.1 million in connection with our equity method investment in Prospect Park, which is currently under development.
Real Estate Taxes.  Real estate taxes were $1.2 million and $1.6 million for the three months ended September 30, 2016 and 2015, respectively. Our dispositions in 2016 and 2015 accounted for a decrease of approximately $0.4 million and was partially offset by increases of less than $0.1 million in our Same Store operations.
Property Management Fees.   Property management fees, which are based on revenues, were $0.4 million for the three months ended September 30, 2016 and 2015, and were composed of property management fees paid to unaffiliated third parties and our Property Manager.
Asset Management Fees.   Asset management fees for the three months ended September 30, 2016 and 2015 were $0.6 million and $0.7 million, respectively, and were composed of asset management fees paid to our Advisor and third parties with respect to our investments. Asset management fees for the three months ended September 30, 2016 and 2015 include fees related to our disposed properties of less than $0.1 million, each.
General and Administrative Expenses.   General and administrative expenses for the three months ended September 30, 2016 and 2015 were $0.7 million and $1.1 million, respectively, and were composed of audit fees, legal fees, board of directors’ fees, and other administrative expenses.  Decreases in legal fees, audit fees, and administrative service fees payable to the Advisor during the three months ended September 30, 2016 accounted for approximately $0.3 million of the overall $0.4 million decrease.
Depreciation and Amortization.   Depreciation and amortization for the three months ended September 30, 2016 and 2015 was approximately $2.6 million and $3.5 million, respectively.  The decrease of $0.9 million during the third quarter of 2016 was primarily due to our 2016 and 2015 dispositions.

30


Loss on Early Extinguishment of Debt.   We recorded a loss on early extinguishment of debt of $0.5 million in the third quarter of 2016 as a result of the pay off in full of Lakewood Flat’s existing indebtedness when we sold the property in September 2016. The $0.5 million loss was composed of the write-off of deferred financing fees of $0.4 million and an early termination fee of $0.1 million. We recorded a loss on early extinguishment of debt of $0.6 million in the third quarter of 2015 as a result of the pay off in full of Wimberly’s existing indebtedness when we sold the property in September 2015. The $0.6 million loss was composed of the write-off of deferred financing fees of $0.3 million and an early termination fee of $0.3 million.
Gain on Sale of Real Estate.   During the third quarter of 2016, we recorded gains on sale of approximately $11.5 million and a deferred gain of approximately $1.2 million for Lakewood Flats, which sold on August 16, 2016. During the three months ended September 30, 2015, we recorded gains on sale of approximately $17.5 million, which consists of $8.6 million for Holstenplatz, which was sold on September 1, 2015, and $8.9 million for Wimberly, which was sold on September 9, 2015. As discussed in Note 7, Real Estate and Real Estate-Related Investments, the Company did not view the disposals of Lakewood Flats, Holstenplatz, or Wimberly as a strategic shift and the results of operations are presented in continuing operations.
Income Tax Expense. During the third quarter of 2015, we recorded a provision for income tax of approximately $1 million as a result of foreign income tax related to the sale of Holstenplatz. The foreign income tax was calculated on gains recognized at the exchange rate in effect on the sale date of September 1, 2015 and calculated using current tax rates. We had less than $0.1 million income tax benefit in the third quarter of 2016, related to the difference in actual income taxes due and the originally estimated income taxes payable on the sale of Holstenplatz.

Nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015.
The following table provides summary information about our results of operations for the nine months ended September 30, 2016 and 2015 ($ in thousands):
 
Nine Months Ended
September 30,
 
Increase (Decrease)
 
Percentage Change
 
$ Change
due to Dispositions(1)
 
$ Change
due to
Same Store(2)
 
2016
 
2015
Rental revenue
$
21,590

 
$
25,300

 
$
(3,710
)
 
(14.7
)%
 
$
(4,715
)
 
$
1,005

Hotel revenue
$
13,946

 
13,332

 
614

 
4.6
 %
 

 
614

Property operating expenses
7,128

 
8,836

 
(1,708
)
 
(19.3
)%
 
(1,570
)
 
(138
)
Hotel operating expenses
10,219

 
9,440

 
779

 
8.3
 %
 

 
779

Interest expense, net
4,692

 
5,278

 
(586
)
 
(11.1
)%
 
(745
)
 
159

Real estate taxes
4,113

 
4,793

 
(680
)
 
(14.2
)%
 
(734
)
 
54

Property management fees
1,164

 
1,279

 
(115
)
 
(9.0
)%
 
(169
)
 
54

Asset management fees(3)
1,773

 
2,099

 
(326
)
 
(15.5