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, 2017

 

Commission File Number: 000-51961

 

Behringer Harvard Opportunity REIT I, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland		20-1862323
(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:  (888) 808-7348

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the Registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No ¨

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate 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 x  No ¨

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer x (Do not check if a smaller reporting company)	Smaller reporting company ¨
	Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

 

As of November 9, 2017, the Registrant had 56,500,472 shares of common stock outstanding.

 

 

 

BEHRINGER HARVARD OPPORTUNITY REIT I, INC.

FORM 10-Q

Quarter Ended September 30, 2017

 

		Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Statement of Net Assets in Liquidation (unaudited) as of September 30, 2017	3
	Condensed Consolidated Balance Sheet as of December 31, 2016	4
	Condensed Consolidated Statement of Changes in Net Assets in Liquidation (unaudited) for the Period from February 1, 2017 through September 30, 2017	5
	Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the One Month Ended January 31, 2017 and the Three and Nine Months Ended September 30, 2016	6
	Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the One Month Ended January 31, 2017	7
	Condensed Consolidated Statements of Cash Flows (unaudited) for the One Month Ended January 31, 2017 and the Nine Months Ended September 30, 2016	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	37
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
Signature		39

 

 

PART I

FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

 

Behringer Harvard Opportunity REIT I, Inc.

Condensed Consolidated Statement of Net Assets in Liquidation

(Liquidation Basis)

(in thousands)

(Unaudited)

 

		September 30,
		2017
Assets
Real estate assets		$	58,104
Cash and cash equivalents			55,955
Restricted cash			2,962
Accounts receivable			937
Note receivable			1,500
Total Assets			119,458
Liabilities
Liability for estimated costs in excess of estimated receipts during liquidation			3,205
Accounts payable			96
Accrued and other liabilities			6,060
Total Liabilities			9,361
Commitments and contingencies
Net assets in liquidation		$	110,097

 

See Notes to Condensed Consolidated Financial Statements.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Condensed Consolidated Balance Sheet

(Going Concern Basis)

(in thousands, except share and per share amounts)

 

		December 31,
		2016
Assets
Real estate
Land and improvements, net		$	54,759
Buildings and improvements, net			149,959
Real estate under development			840
Total real estate			205,558
Cash and cash equivalents			19,086
Restricted cash			8,406
Accounts receivable, net			4,257
Prepaid expenses and other assets			1,670
Investments in unconsolidated joint ventures			7,711
Furniture, fixtures and equipment, net			3,668
Lease intangibles, net			1,182
Other intangibles, net			3,307
Total assets		$	254,845
Liabilities and Stockholders' Equity
Notes payable, net		$	141,882
Accounts payable			1,385
Payables to related parties			529
Accrued and other liabilities			25,254
Total liabilities			169,050
Commitments and contingencies
Stockholders' Equity
Company's Stockholders' Equity:
Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none issued and outstanding			-
Convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 shares issued and outstanding			-
Common stock, $.0001 par value per share; 350,000,000 shares authorized, and 56,500,472 shares issued and outstanding			6
Additional paid-in capital			507,303
Accumulated deficit			(417,023	)
Accumulated other comprehensive loss			(4,921	)
Total Company's stockholders' equity			85,365
Noncontrolling interest			430
Total stockholders' equity			85,795
Total liabilities and stockholders' equity		$	254,845

 

See Notes to Condensed Consolidated Financial Statements.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Condensed Consolidated Statement of Changes in Net Assets in Liquidation

(Liquidation Basis)

(in thousands)

(Unaudited)

 

		Period from
		February 1, 2017
		through
		September 30, 2017
Net assets in liquidation, beginning of period		$	109,969
Changes in net assets in liquidation			128
Net assets in liquidation, end of period		$	110,097

 

See Notes to Condensed Consolidated Financial Statements.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Going Concern Basis)

(in thousands, except share and per share amounts)

(Unaudited)

 

		One Month				Three Months				Nine Months
		Ended				Ended				Ended
		January 31, 2017				September 30, 2016				September 30, 2016
Revenues
Rental revenue		$	1,277			$	3,632			$	11,621
Hotel revenue			2,284				10,385				27,542
Condominium sale			-				-				2,271
Total revenues			3,561				14,017				41,434
Expenses
Property operating expenses			475				1,469				4,829
Hotel operating expenses			2,163				7,654				21,756
Bad debt expense (recovery)			(5	)			17				43
Cost of condominium sale			-				-				2,271
Interest expense			717				2,116				7,205
Real estate taxes			401				1,058				3,073
Impairment charges			-				9,247				9,247
Property management fees			96				423				1,205
Asset management fees			159				503				1,563
General and administrative			322				1,791				4,424
Depreciation and amortization			869				2,602				7,966
Total expenses			5,197				26,880				63,582
Interest income			-				2				4
Other expense, net			-				(86	)			(101	)
Gain on extinguishment of debt			-				-				1,624
Loss before gain on sale of real estate, income tax expense and equity in earnings of unconsolidated joint venture			(1,636	)			(12,947	)			(20,621	)
Gain on sale of real estate			-				-				3,025
Income tax expense			(6	)			(49	)			(91	)
Equity in earnings of unconsolidated joint venture			25				(27	)			30
Net loss			(1,617	)			(13,023	)			(17,657	)
Net loss attributable to noncontrolling interest			35				129				438
Net loss attributable to common shareholders		$	(1,582	)		$	(12,894	)		$	(17,219	)
Weighted average shares outstanding:
Basic and diluted			56,500				56,500				56,500
Basic and diluted loss per share		$	(0.03	)		$	(0.23	)		$	(0.30	)
Comprehensive loss
Net loss		$	(1,617	)		$	(13,023	)		$	(17,657	)
Other comprehensive income:
Foreign currency translation gain (loss)			342				169				482
Total other comprehensive income (loss)			342				169				482
Comprehensive loss			(1,275	)			(12,854	)			(17,175	)
Comprehensive loss attributable to the noncontrolling interest			35				129				438
Comprehensive loss attributable to common shareholders		$	(1,240	)		$	(12,725	)		$	(16,737	)

 

See Notes to Condensed Consolidated Financial Statements.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Going Concern Basis)

(in thousands, except share amounts)

(Unaudited)

 

																										Accumulated
		Convertible Stock								Common Stock								Additional								Other								Total
		Number				Par				Number				Par				Paid-In				Accumulated				Comprehensive				Noncontrolling				Stockholders'
		of Shares				Value				of Shares				Value				Capital				Deficit				Income (Loss)				Interest				Equity
Balance at January 1, 2017			1,000			$	-			$	56,500,472			$	6			$	507,303			$	(417,023	)		$	(4,921	)		$	430			$	85,795
Net income (loss)			-				-				-				-				-				(1,582	)			-				(35	)			(1,617	)
Other comprehensive income:
Foreign currency translation gain			-				-				-				-				-				-				342				-				342
Balance at January 31, 2017			1,000			$	-				56,500,472			$	6			$	507,303			$	(418,605	)		$	(4,579	)		$	395			$	84,520

 

See Notes to Condensed Consolidated Financial Statements.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Condensed Consolidated Statements of Cash Flows

(Going Concern Basis)

(in thousands)

(Unaudited)

 

		One Month				Nine Months
		Ended				Ended
		January 31, 2017				September 30, 2016
Cash flows from operating activities:
Net loss		$	(1,617	)		$	(17,657	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization			871				8,019
Amortization of deferred financing fees			53				487
Gain on extinguishment of debt			-				(1,624	)
Loss on retirement of asset			-				16
Gain on sale of real estate			-				(3,025	)
Impairment charges			-				9,247
Bad debt (recovery) expense			(5	)			43
Equity in earnings of unconsolidated joint venture			(25	)			(30	)
Change in operating assets and liabilities:
Accounts receivable			(201	)			(37	)
Condominium inventory			-				2,201
Prepaid expenses and other assets			37				773
Accounts payable			(478	)			241
Accrued and other liabilities			(548	)			2,599
Payables to related parties			68				(394	)
Lease intangibles			4				(219	)
Net cash (used in) provided by operating activities			(1,841	)			640
Cash flows from investing activities:
Proceeds from sale of real estate			-				21,852
Additions of real estate and furniture, fixtures, and equipment			(262	)			(9,318	)
Change in restricted cash			207				(686	)
Distributions from unconsolidated joint venture			-				202
Net cash (used in) provided by investing activities			(55	)			12,050
Cash flows from financing activities:
Proceeds from notes payable			-				8,237
Payments on notes payable			(259	)			(19,714	)
Net cash used in financing activities			(259	)			(11,477	)
Net change in cash and cash equivalents			(2,155	)			1,213
Cash and cash equivalents at beginning of the year			19,086				20,746
Cash and cash equivalents at end of the period		$	16,931			$	21,959

 

See Notes to Condensed Consolidated Financial Statements.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.

Business

 

Behringer Harvard Opportunity REIT I, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”) was incorporated in November 2004 as a Maryland corporation and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.

 

We have operated commercial real estate and real estate-related assets located in and outside the United States. Under our opportunistic and value-add investment strategy, we focused generally on acquiring properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, or those located in markets and submarkets with higher volatility, lower barriers to entry, and high growth potential.  We previously acquired a wide variety of properties, including office, retail, hospitality, recreation and leisure, multifamily, industrial, and other properties.  We also purchased existing and newly constructed properties and properties under development or construction.  As of September 30, 2017, we wholly owned one investment property on our condensed consolidated financial statements.   Our one investment property is located in Texas.

 

Substantially all of our business is conducted through Behringer Harvard Opportunity OP I, LP, a Texas limited partnership organized in November 2004 (the “Operating Partnership”), or its subsidiaries.  Our wholly owned subsidiary, BHO, Inc., a Delaware corporation, owns less than a 0.1% interest in the Operating Partnership as its sole general partner.  The remaining interest of the Operating Partnership is held as a limited partnership interest by our wholly owned subsidiary, BHO Business Trust, a Maryland business trust.

 

Our business has been managed by an external advisor since the commencement of our initial public offering, and we have no employees. From September 20, 2005 through February 10, 2017, an affiliate of Stratera Holdings, LLC (formerly known as Behringer Harvard Holdings, LLC) (“Behringer”) acted as our external advisor (the “Behringer Advisor”). On February 10, 2017, we engaged an affiliate of the Lightstone Group (“Lightstone”), LSG-BH I Advisor LLC (the “Advisor”), to provide advisory services to us. Our external advisor is responsible for managing our day-to-day affairs and for services related to the disposition of our assets.

 

Plan of Liquidation

 

On August 26, 2016, in connection with an evaluation of strategic alternatives available to us and the possible execution of a liquidity event, our board of directors unanimously approved a plan for the sale of all of our assets and our dissolution (the “Plan of Liquidation”) and recommended that the Plan of Liquidation be submitted to our stockholders for approval. On January 30, 2017, our stockholders approved the Plan of Liquidation.

 

Pursuant to the Plan of Liquidation, we expect to make liquidating distribution payments to our stockholders after we sell all of our assets, pay all of our known liabilities, and provide for unknown liabilities. We expect to complete these activities within 24 months of stockholder approval of the Plan of Liquidation. We can give no assurances regarding the timing of asset dispositions in connection with the implementation of the Plan of Liquidation, the sales prices we will receive for our assets and the amount or timing of any liquidating distributions. Our ability to execute our Plan of Liquidation is dependent upon our ability to sell our remaining real estate investments and to fund certain ongoing costs of our Company, including our development and operating properties, as well as administrative and wind-down expenses.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

2.

Interim Unaudited Financial Information

 

The accompanying unaudited interim condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements and related notes as contained the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on March 22, 2017.  The unaudited interim condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair presentation of the results for the periods presented. The accompanying unaudited condensed consolidated financial statements of Behringer Harvard Opportunity REIT I, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

 

The condensed consolidated balance sheet as of December 31, 2016 included herein has been derived from the consolidated balance sheet included in the Company's Annual Report on Form 10-K.

 

The unaudited condensed consolidated statements of operations for the interim periods are not necessarily indicative of results for the full year or any other period as we are in the process of implementing the Plan of Liquidation. 

 

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.

 

Presentation of Financial Statements

 

As a result of the approval of the Plan of Liquidation by our stockholders on January 30, 2017, our consolidated financial statements in this Form 10-Q are presented using two different bases of accounting. We adopted the liquidation basis of accounting as of February 1, 2017 and for the periods subsequent to February 1, 2017. We believe the one-day timing difference between the approval of the Plan of Liquidation on January 30, 2017 and the adoption of the liquidation basis of accounting on February 1, 2017 is immaterial. Under the liquidation basis of accounting, all of our assets must be stated at their estimated net realizable values, which is the amount expected to be collected in settling or disposing the assets. As a result, a Consolidated Statement of Net Assets in Liquidation is presented, which represents the estimated amount of cash we ultimately expect to collect on disposal of assets and payment of obligations as we implement the Plan of Liquidation. In addition, a Consolidated Statement of Changes in Net Assets in Liquidation will reflect changes in net assets from the original estimated values as of February 1, 2017 through the most recent period presented, as further described below.

 

All financial results and disclosures through January 31, 2017, prior to adopting liquidation basis accounting, are presented on a going concern basis, which contemplates the realization of assets and liabilities in the normal course of business. As a result, the consolidated balance sheet as of December 31, 2016, and the consolidated statements of operations and comprehensive loss, the consolidated statements of equity, and the consolidated statements of cash flows for the one month ended January 31, 2017 and the three and nine months ended September 30, 2016, respectively, use the going concern basis of accounting presentation consistent with our Annual Report on Form 10-K for the year ended December 31, 2016, as further described below.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

While we project having available cash to distribute to stockholders after all asset sales are completed, we are subject to outside forces beyond our control when completing the sales of our properties, some of which are more difficult to market and all of which are at various stages of disposition.

 

Liquidation Basis (Post Plan of Liquidation Stockholder Approval)

 

Effective February 1, 2017, in accordance with liquidation basis accounting, our assets were adjusted to their estimated net realizable value, or liquidation value, which represents the estimated amount of cash that we expect to collect on disposal of assets and payment of obligations as we implement the Plan of Liquidation. The liquidation values of our operating properties are presented on an undiscounted basis. Estimated costs to dispose of assets have been presented separately from the related assets. Liabilities are carried at their contractual amounts due or estimated settlement amounts.

 

We accrue costs we expect to incur and income we expect to earn through the estimated end of our liquidation to the extent we have a reasonable basis for estimation. These amounts are classified as a liability for estimated costs in excess of estimated receipts during liquidation on the accompanying Condensed Consolidated Statement of Net Assets in Liquidation. Actual costs and income may differ from amounts reflected in the financial statements because of inherent uncertainty in estimating future events. These differences may be material. See Note 4, "Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation" for further discussion. Actual costs incurred but unpaid as of September 30, 2017 are included in accounts payable and accrued and other liabilities on the accompanying Condensed Consolidated Statement of Net Assets in Liquidation.

 

Net assets in liquidation represents the estimated liquidation value available to stockholders upon liquidation. Due to the uncertainty in the timing of anticipated sale dates and estimated cash flows, actual operating results and sale proceeds may differ materially from amounts estimated.

 

Going Concern Basis (Pre Plan of Liquidation Stockholder Approval)

 

Amounts as of December 31, 2016 included in the unaudited condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date but do not include all disclosures required by GAAP.

 

Noncontrolling Interests - Liquidation Basis

 

Under the liquidation basis, the presentation for joint ventures historically consolidated under the going concern basis accounting are determined based on the Company's planned exit strategy for the joint venture investment. We intend to sell all of our properties, rather than selling our interest in our properties, and therefore the properties will be presented on a gross basis with a liability to the non-controlling interest holders, if any. Amounts due to non-controlling interests in connection with the disposition of consolidated joint ventures, if any, are accrued as a liability for non-controlling interests.

 

Consolidation and Variable Interest Entities - Going Concern Basis

 

Operating results for the periods ended January 31, 2017 and September 30, 2016 were prepared on the going concern basis of accounting, which contemplates the realization of assets and liabilities in the normal course of business. Our condensed consolidated financial statements included our accounts and the accounts of other subsidiaries over which we had control.  All inter-company transactions, balances, and profits were eliminated in consolidation.  Interests in entities acquired were evaluated based on applicable GAAP, which included the requirement to consolidate entities deemed to be variable interest entities (“VIE”) in which we were the primary beneficiary.  If the interest in the entity was determined not to be a VIE, then the entity was evaluated for consolidation based on legal form, economic substance, and the extent to which we had control and/or substantive participating rights under the respective ownership agreement. For entities in which we had less than a controlling interest or entities which we were not deemed to be the primary beneficiary, we accounted for the investment using the equity method of accounting.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

There were judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and, if so, whether we were the primary beneficiary.  The entity was 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 involved 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 have resulted 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.

 

Real Estate

 

Liquidation Basis

 

As of September 30, 2017, our remaining real estate investment property was adjusted to its estimated net realizable value, or liquidation value, which represents the estimated amount of cash that we expect to collect on disposal, less disposal costs, as we implement the Plan of Liquidation.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Going Concern Basis

 

Prior to adopting the liquidation basis of accounting, the value of hotels and all other buildings was depreciated over the estimated useful lives of 39 years and 25 years, respectively, using the straight-line method. Accumulated depreciation and amortization related to our consolidated investments in real estate assets and intangibles were as follows (dollars in thousands):

 

December 31, 2016		Buildings and Improvements				Land and Improvements				Lease Intangibles				Other Intangibles
Cost		$	198,499			$	57,148			$	3,643			$	9,626
Less: depreciation and amortization			(48,540	)			(2,389	)			(2,461	)			(6,319	)
Net		$	149,959			$	54,759			$	1,182			$	3,307

 

Condominium Inventory - Going Concern Basis

 

On February 22, 2016, we sold our one remaining condominium unit in inventory at Chase — The Private Residences for a sales price of $2.5 million, receiving net proceeds of $2.2 million after closing costs.

 

Accounts Receivable - Going Concern Basis

 

Prior to adopting the liquidation basis of accounting, accounts receivable primarily consisted of straight-line rental revenue receivables of $2 million as of December 31, 2016, and receivables from our hotel operators and tenants related to our other consolidated properties of $2.4 million.  The allowance for doubtful accounts was $0.2 million as of December 31, 2016.

 

Investment Impairment - Going Concern Basis

 

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 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 a portion of our 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 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 and 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.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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, planned development, 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 book value of our investments, which could be material to our financial statements. In addition, we may incur impairment charges on real estate 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 investment in an unconsolidated joint venture 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.

 

During the year ended December 31, 2016, we recorded $9.2 million of non-cash impairment charges as a result of measurable decreases in the fair value of two of our investments during the third quarter of 2016. We recorded a non-cash impairment charge of $2.2 million for our Northpoint Central building based upon indication of a decline in market value of the asset. In estimating the fair value of Northpoint Central, we primarily considered an appraisal prepared in connection with the Plan of Liquidation. The appraised value was determined using a discounted cash flow analysis. We also recorded a non-cash impairment charge of $7 million for our unconsolidated investment in Central Europe. We reviewed estimates of the underlying real estate assets of the venture based upon a discounted cash flow analysis and did not find the asset book value reported by the venture impaired. We then evaluated our interest in the Central Europe investment for an other than temporary decline in market value and determined that we would not recover our investment during our hold period. Due to the shortened hold period contemplated in the Plan of Liquidation, the lack of control by the Company to compel the venture to sell the remaining assets and liquidate the venture during our hold period, and the absence of a market to buy our interest, we recorded an impairment of our investment interest by discounting our interest in the investment by 40% to reflect the impact of holding a non-controlling interest.

 

Deferred Financing Fees - Going Concern Basis

 

Prior to adopting the liquidation basis of accounting, deferred financing fees were recorded at cost and 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 $0.4 million as of December 31, 2016. Accumulated amortization of deferred financing fees were $1.9 million as of December 31, 2016.

 

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, allowance for doubtful accounts, and allowance for loan losses.  Actual results could differ from those estimates.

 

Under the liquidation basis of accounting, we use estimates to adjust our assets to liquidation value. These estimates include the amount of cash that we expect to collect on disposal of assets, payment of obligations, and accrued income and expenses as we implement the Plan of Liquidation.

 

Restricted Cash

 

As of September 30, 2017, restricted cash of $3.0 million principally consisted of amounts held in escrow related to certain completed asset dispositions.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Accrued and Other Liabilities

 

As of September 30, 2017, accrued and other liabilities of $6.0 million included amounts set aside related to certain operating expenses, property taxes, and tenant escrows.

 

Recently Issued Accounting Pronouncements

 

As a result of our adoption of the liquidation basis of accounting, we do not anticipate that any recently issued accounting pronouncements will have a material effect on our consolidated financial statements.

 

4.

Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation

 

The liquidation basis of accounting requires us to estimate net cash flows from operations and to accrue all costs associated with implementing and completing the Plan of Liquidation. We currently estimate that we will have costs in excess of estimated receipts during the liquidation. These amounts can vary significantly due to, among other things, the timing and estimates for lease-up, the timing of property sales, direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with the winding up of operations. These costs are estimated and are anticipated to be paid out over the liquidation period.

 

Upon transition to the liquidation basis of accounting on February 1, 2017, we accrued the following revenues and expenses expected to be incurred during liquidation (dollars in thousands):

 

Rental revenue		$	8,201
Hotel revenue			11,716
Property operating expenses			(2,535	)
Hotel operating expenses			(8,776	)
Interest expense			(2,593	)
Real estate taxes			(2,088	)
Property management fees			(694	)
Asset management fees			(929	)
General and administrative expenses			(3,431	)
Capital expenditures			(2,872	)
Liquidation transaction costs			(2,785	)
Liquidation transaction costs due to related parties			(200	)
Liability for estimated costs in excess of estimated receipts during liquidation		$	(6,986	)

 

The change in liability for estimated costs in excess of estimated receipts during liquidation as of September 30, 2017 is as follows (dollars in thousands):

 

										Remeasurement
						Net Cash				of Assets and
		February 1, 2017				Payments				Liabilities				September 30, 2017
Assets:
Estimated net inflows from investments in real estate		$	359			$	(52	)		$	331			$	638
Liabilities:
Liquidation transaction costs			(2,985	)			-				-				(2,985	)
Corporate expenditures			(4,360	)			4,084				(582	)			(858	)
			(7,345	)			4,084				(582	)			(3,843	)
Total liability for estimated costs in excess of estimated receipts during liquidation		$	(6,986	)		$	4,032			$	(251	)		$	(3,205	)

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

5.

Net Assets in Liquidation

 

The following is a reconciliation of equity under the going concern basis of accounting to net assets in liquidation under the liquidation basis of accounting as of February 1, 2017 (dollars in thousands):

 

Equity as of January 31, 2017		$	84,125
Increase due to estimated net realizable value of real estate			35,260
Increase due to adjustment of assets and liabilities to net realizable value			1,968
Increase in non-controlling interest liability			(4,398	)
Liability for estimated costs in excess of estimated receipts during liquidation			(6,986	)
Adjustment to reflect the change to the liquidation basis of accounting			25,844
Estimated value of net assets in liquidation as of February 1, 2017		$	109,969

 

Our net assets in liquidation were $110.1 million and $110.0 million as of September 30, 2017 and February 1, 2017 (the date we adopted the liquidation basis of accounting), respectively. Our net assets in liquidation as of September 30, 2017 would result in liquidating distributions of approximately $1.95 per share. The estimate of liquidating distributions includes projections of costs and expenses to be incurred during the period required to complete the Plan of Liquidation. There is inherent uncertainty with these projections, and they could change materially based on the timing of the sales, the performance of the underlying assets, and any changes in the underlying assumptions of the projected cash flows.

 

6.

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.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Nonrecurring Fair Value Measurements

 

During the year ended 2016, we recorded $9.2 million of non-cash impairment charges as a result of measurable decreases in the fair value of two of our investments during the third quarter. We recorded a non-cash impairment charge of $2.2 million for our Northpoint Central building based upon indication of a decline in market value of the asset. In estimating the fair value of Northpoint Central, we primarily considered an appraisal prepared for the Plan of Liquidation. The appraised value was determined using a discounted cash flow analysis. We also recorded a non-cash impairment charge of $7 million for our unconsolidated investment in the Central Europe Joint Venture. We reviewed estimates of the underlying real estate assets of the venture based upon a discounted cash flow analysis and did not find the asset book value reported by the venture impaired. We then evaluated our interest in the Central Europe Joint Venture for an other than temporary decline in market value and determined that we would not recover our investment value during our hold period. Due to the shortened hold period contemplated in the Plan of Liquidation, the lack of control by the Company to compel the venture to sell the remaining assets and liquidate the venture during our hold period, and the absence of a market to buy our interest, we recorded an impairment of our investment interest by discounting our interest in the investment by 40% to reflect the impact of holding a non-controlling interest. The estimates are considered Level 3 under the fair value hierarchy described above.

 

The following fair value hierarchy tables present information about our assets measured at fair value on a nonrecurring basis during the year ended December 31, 2016 (dollars in thousands):

 

As of December 31, 2016		Level 1				Level 2				Level 3				Total Fair Value				Loss
Assets
Buildings and improvements, net(1)		$	—			$	—			$	10,584			$	10,584			$	(2,212	)
Investment in unconsolidated joint venture(2)			—				—				7,228				7,228				(7,035	)

 

 

(1) During the third quarter of 2016, we recorded a non-cash impairment of $2.2 million with our Northpoint Central office building.

(2) During the third quarter of 2016, we recorded a non-cash impairment of $7 million associated with our unconsolidated investment in the Central Europe Joint Venture.

 

Quantitative Information about Level 3 Fair Value Measurements

 

Description		Fair Value at December 31, 2016 (in 000s)				Valuation Techniques		Unobservable Input		Range (Weighted Average)
Buildings and improvements, net(1)		$	10,584			Discounted cash flow		Discount rate Terminal capitalization rate Market rent growth Expense growth rate		10.50% 9.50% 0% - 3.00% 0% - 3.00%
Investment in unconsolidated joint venture(2)			7,228			Market comparable		Discount for non-controlling interest(3)		40%

 

 

(1)

During the third quarter of 2016, we recorded a non-cash impairment of $2.2 million on the Northpoint Central office building.

(2)

During the third quarter of 2016, we recorded a non-cash impairment of $7 million associated with our unconsolidated investment in the Central Europe Joint Venture.

(3)

In determining the discount for our non-controlling interest, we considered the terms of the investment agreement, which limit our control to compel the liquidation of the investment, as well as the lack of a market for our interest in the investment.

 

There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the one month ended January 31, 2017 and the year ended December 31, 2016.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

7.

Fair Value Measurement of Financial Instruments

 

We determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop the related estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

As of January 31, 2017 and December 31, 2016, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued and other liabilities, and payables/receivables from related parties were at amounts that reasonably approximated their fair value based on their highly liquid nature and/or short-term maturities. The fair values are based upon interest rates for mortgages with similar terms and remaining maturities that management believes we could obtain. The fair value of the notes payable is categorized as a Level 2 basis. The fair value is 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.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Carrying amounts of our notes payable and the related estimated fair value as of December 31, 2016 are as follows (dollars in thousands):

 

		December 31, 2016
		Carrying Amount				Fair Value
Notes payable		$	142,310			$	140,746
Less: unamortized debt issuance costs			(428	)
Notes payable, net		$	141,882

 

The fair value estimates presented herein are based on information available to our management as of December 31, 2016. Although our management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these condensed consolidated financial statements since those respective dates.

 

8.

Real Estate Investments

 

As of September 30, 2017, we wholly owned one investment property on our condensed consolidated financial statements. 

 

The following table presents certain information about our remaining property as of September 30, 2017:

 

Property Name

Location

Approximate Rentable Square Footage

Description

Ownership Interest

Year Acquired

Frisco Square(1)

Frisco, Texas

(2)

mixed-use development (retail, office, restaurant and land)

100

%

2007

 

 

(1)

See below under the caption, Frisco Square Land Sales, and Note 14 for additional information.

(2)

Our Frisco Square mixed-use development consists of 101,000 square feet of office space, 71,000 square feet of retail, a 41,500 square foot movie theater, 114 multifamily units, and approximately 17 acres of land.

 

Real Estate Development

 

The Ablon at Frisco Square

 

On August 26, 2014, we contributed 3.4 acres of land held by our Frisco Square mixed-use project located in Frisco, Texas to The Ablon at Frisco Square, LLC (“Ablon Frisco Square Venture”), a special purpose entity in which we owned a 90% limited partnership interest. The Ablon at Frisco Square Venture was formed to construct a 275-unit multifamily project located in Frisco, Texas. Concurrently with the land contribution, the Ablon at Frisco Square Venture closed on a $26.3 million construction loan. See Note 10, Notes Payable, for additional information. Construction on the development began on September 2, 2014. Total construction costs for the development were approximately $41.9 million. The project was completed and available for occupancy in the first quarter of 2016. The Ablon at Frisco Square Venture sold the project on May 23, 2017.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Real Estate Asset Dispositions

 

Las Colinas Commons

 

On February 2, 2016, we sold Las Colinas Commons, an office building complex located in Irving, Texas, for a contractual sales price of approximately $14.3 million, resulting in $14 million of cash proceeds after reduction for certain transaction costs. In connection with the sale, we recorded a gain on sale of real estate property of $1.3 million. Las Colinas Commons and Northpoint Central both served as collateral under a loan. Under the terms of the loan, the lender required a release price payment of $14.9 million to release the Las Colinas Commons property from the loan. A portion of the proceeds from the sale were used to pay off in full the existing indebtedness of approximately $11.3 million associated with the office building complex. The $3.6 million excess principal payment amount was used to reduce Northpoint Central’s allocated loan balance.

 

Northborough Tower

 

The non-recourse loan for Northborough Tower, an office building located in Houston, Texas, matured on January 11, 2016, and we did not repay the debt.  We subsequently transferred the property to the lender via a deed in lieu of foreclosure on May 9, 2016.  As a result of the transfer, we recorded a gain on extinguishment of debt of $1.6 million representing the difference between the debt extinguished of $16 million over the net book value of the assets and liabilities transferred to the lender of $14.4 million. During 2015, we recorded a non-cash impairment of $2.1 million for Northborough Tower.  At the date of transfer, we assessed the carrying value of the assets and liabilities transferred to the lender and concluded that an additional impairment was not needed.

 

Frisco Square Land Sales

 

On May 24, 2016, we sold a 5.2 acre parcel of land at Frisco Square located in Frisco, Texas for a contractual sales price of $8 million. On August 12, 2016, we executed a purchase and sale agreement to sell 3.39 acres of land at Frisco Square for approximately $4.3 million. The third-party buyer is working on development plans, and we currently expect the sale to close during the fourth quarter of 2017. On February 14, 2017, we sold a 3.29 acre parcel of land at Frisco Square for a contractual sales price of $4.7 million. On March 28, 2017, we sold a 3.83 acre parcel of land at Frisco Square for a contractual sales price of $5 million. On October 4, 2017, we sold a 0.21 acre parcel of land at Frisco Square for a contractual sales price of $0.3 million.

 

Royal Island

 

On May 8, 2017, the Royal Island asset, located in the Commonwealth of The Bahamas, was sold to the lender. Under the contract, the purchaser agreed to pay the deferred real estate taxes and seabed leases that totaled approximately $0.7 million and discharge all of the indebtedness under the loan. The loan balance and accrued interest aggregated $25.0 million at the date of disposition. We previously consolidated our 87.29% interest in the Royal Island and a third party owned a non-controlling 12.71% interest.

 

The Ablon at Frisco Square

 

On May 23, 2017, the Ablon Frisco Square Venture, in which we had a 90% ownership interest, sold the Ablon at Frisco Square, a 275-unit multifamily project located in Frisco, Texas, to an unaffiliated third party at a contractual sales price of $53.5 million. In connection with the closing, a portion of the proceeds from the sale were used to pay off in full the existing indebtedness of approximately $26.3 million secured by the property.

 

Chase Park Plaza Hotel

 

On June 2, 2017, we sold the Chase Park Plaza Hotel located in St. Louis, Missouri, to an unaffiliated third party at a contractual sales price of approximately $87.8 million.  In connection with the closing, a portion of the proceeds from the sale were used to pay off in full the existing indebtedness of approximately $60.2 million secured by the property. 

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The Lodge and Spa at Cordillera

 

On May 5, 2016, we executed a purchase and sale agreement for The Lodge and Spa at Cordillera, a land, hotel and development property located in Edwards, Colorado. for an initial contractual purchase price of $10.0 million, subject to five incremental increases of $0.1 million up to $10.5 million if the purchaser elected to extend the closing date. On February 28, 2017 we ceased to operate the hotel. On June 29, 2017, the contractual purchase price was further amended from $10.5 million to $10.6 million. The sale of the property closed on August 1, 2017. In connection with the closing, we provided short-term financing in the amount of $1.5 million to the unrelated third party buyer at a fixed interest rate of 12% with monthly interest-only payments due through its maturity date of November 20, 2017.

 

Northpoint Central

 

Our non-recourse debt secured by Northpoint Central, an office building located in Houston, Texas, matured on May 6, 2017 and we did not repay the debt which constituted a maturity default. Prior to the debt maturity we had actively marketed the property for sale but did not receive any offers above the loan balance. On July 4, 2017, ownership of Northpoint Central was transferred to the lender via foreclosure.

 

Disposed Real Estate Reported in Continuing Operations

 

The Company did not view the 2016 disposals of Las Colinas Commons and Northborough Tower as a strategic shift. Therefore, the results of operations of the properties were included in continuing operations within the accompanying condensed consolidated statements of operations through their respective dates of disposition.

 

Net income attributable to the Company for the nine months ended September 30, 2016 related to Las Colinas Commons and Northborough Tower aggregated $2.7 million. This amount reflects (i) the $1.3 million gain on sale of Las Colinas Commons recognized during the first quarter of 2016 and (ii) the gain on extinguishment of debt of $1.6 million recognized upon the transfer of ownership of the Northborough Tower to the lender during the second quarter of 2016.

 

Investment in Unconsolidated Joint Venture

 

We had a 47.01% noncontrolling, unconsolidated ownership investment in a joint venture (the “Central Europe Joint Venture”) consisting of properties (the “Central Europe Portfolio”) located in the Czech Republic and Poland. Because we exercised significant influence over, but did not control the Central Europe Joint Venture, we accounted for our ownership interest using the equity method of accounting. Capital contributions, distributions, and profits and losses of the Central Europe Joint Venture were allocated in accordance with the terms of the applicable partnership agreement.

 

On June 7, 2017, we sold our ownership interest in the Central Europe Joint Venture to our joint venture partner at a contractual sales price of approximately €6.1 million, which was equivalent to $6.8 million at the closing date.

 

The following table presents certain information about our unconsolidated investment as of December 31, 2016 (dollars in thousands):

 

		Ownership				Carrying Value of Investment
Property Name		Interest				December 31, 2016
Central Europe Joint Venture			47.01	%		$	7,711

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Our investment in the unconsolidated joint venture as of December 31, 2016 consisted of our proportionate share of the combined assets and liabilities of our investment property, shown at 100%, as follows (dollars in thousands):

 

		December 31, 2016
Real estate assets, net		$	53,294
Cash and cash equivalents			4,858
Other assets			1,338
Total assets		$	59,490
Notes payable		$	31,321
Other liabilities			1,814
Total liabilities			33,135
Equity			26,355
Total liabilities and equity		$	59,490

 

Our equity in earnings from our investment is our proportionate share of the combined earnings of our unconsolidated joint venture, shown at 100%, for the three and nine months ended September 30, 2016, respectively, as follows (dollars in thousands):

 

		Three Months				Nine Months
		Ended				Ended
		September 30, 2016				September 30, 2016
Revenue		$	1,607			$	4,954
Operating expenses:
Operating expenses			419				1,455
Property taxes			55				155
Total operating expenses			474				1,610
Operating income			1,133				3,344
Non-operating expenses:
Depreciation and amortization			594				1,783
Interest and other, net			596				1,497
Total non-operating expenses			1,190				3,280
Net income		$	(57	)		$	64
Equity in earnings of unconsolidated joint venture(1)		$	(27	)		$	30

 

 

(1)

Company’s share of net income.

 

9.

Variable Interest Entities

 

Effective January 1, 2016, we adopted the guidance in ASU 2015-02. As a result, the Operating Partnership (see Note 1, Business) and each of our less than wholly-owned real estate partnerships (Behringer Harvard Cordillera, LLC, Behringer Harvard Residences at Cordillera, LLC, and Behringer Harvard Royal Island Debt, LP) were 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 were no changes 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.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Consolidated VIEs

 

We consolidated the Operating Partnership, Behringer Harvard Cordillera, LLC, Behringer Harvard Residences at Cordillera, LLC, and Behringer Harvard Royal Island Debt, LP, which are variable interest entities, or VIEs, for which the Company was 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 is 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 were the primary beneficiary of a VIE, we considered 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 included estimates about the current and future fair values and performance of real estate held by these VIEs and general market conditions.

 

10.

Notes Payable

 

We had no outstanding notes payable as of September 30, 2017. The following table sets forth our notes payable on our consolidated properties as of December 31, 2016 (dollars in thousands):

 

Description		Amount				Maturity Date
Royal Island		$	14,489			Discharged in full on 5/8/2017
Northpoint Central			10,602			Transferred property to lender on 7/4/2017
Chase Park Plaza Hotel			60,888			Repaid in full on 6/2/2017
BHFS II, LLC			6,733			Repaid in full on 9/6/2017
BHFS III, LLC			6,044			Repaid in full on 9/6/2017
BHFS IV, LLC			12,555			Repaid in full on 9/6/2017
BHFS Theatre, LLC			4,699			Repaid in full on 9/6/2017
The Ablon at Frisco Square			26,300			Repaid in full on 5/23/2017
Total debt			142,310
Deferred financing fees			(428	)
Total notes payable obligation		$	141,882

 

We had no outstanding notes payable as of September 30, 2017. Our notes payable balance as of December 31, 2016 was $141.9 million, net of deferred financing fees of $0.4 million. Each of our notes payable was collateralized by one or more of our properties. 

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Our Las Colinas Commons office buildings and Northpoint Central office building both served as collateral under a non-recourse loan. Under the terms of the loan, the lender required a release price payment of $14.9 million to release the Las Colinas Commons property from the loan. We sold the Las Colinas Commons office buildings on February 2, 2016 and paid in full the existing allocated indebtedness of the Las Colinas Commons loan of $11.3 million and paid $3.6 million which reduced Northpoint Central’s allocated loan balance. The Northpoint Central loan subsequently matured on May 6, 2017 and we did not repay the debt which constituted a maturity default. Prior to the debt maturity we had actively marketed the property for sale, but did not receive any offers above the loan balance. We transferred the asset to the lender on July 4, 2017. The outstanding principal balance at the time of the transfer to the lender was $10.0 million.

 

In addition the loans for our Frisco Square mixed-use project (the BHFS Loans”) were scheduled to initially mature in February 2018 and had two one-year extension options. However, we repaid the BHFS Loans in full on September 6, 2017.

 

Royal Island Loan

 

In April 2016, the lender agreed to increase the amount available to draw on the Royal Island loan to $14.5 million. Additionally, a short-term extension of the loan was received which extended the maturity date from November 10, 2016 to November 30, 2016. However, the lender did not further extend the maturity date, the loan matured and the debt was not repaid. On May 8, 2017, the asset was sold to the lender and the loan and related accrued interest totaling $25.0 million was discharged in full.

 

Ablon at Frisco Square Financing

 

On August 26, 2014, the Ablon Frisco Square Venture obtained a $26.3 million loan to fund the development and construction of the Ablon at Frisco Square. The loan incurred interest at 30-day LIBOR plus 2.5% and had a three-year term with two 12-month extensions available. Payments of interest-only were required during the initial three-year term. The project was completed and available for occupancy in the first quarter of 2016. Our joint venture partner, or one of its affiliates, had provided a completion guaranty and any other carve-out guaranties for the construction loan. On May 23, 2017, the Ablon Frisco Square Venture sold the Ablon at Frisco Square and at closing a portion of the proceeds from the sale was used to pay off in full the existing indebtedness of approximately $26.3 million secured by the property.

 

Northborough Tower Debt

 

The non-recourse loan for our Northborough Tower office building matured on January 11, 2016, and we did not pay the outstanding principal balance, which constituted a maturity default. Prior to the debt maturity we had actively marketed the property for sale, but did not receive any offers above the loan balance. In December 2015, the lender exercised its right to control the operating funds of the property, as the single tenant of building moved out during the third quarter of 2015. The tenant’s lease does not expire until April 2018, and the tenant continued to make its monthly rental payment. On February 5, 2016, we received a notice from the lender of their intent to increase the interest on the Northborough loan to the default interest rate of 8.67%, effective January 12, 2016, due to the maturity default. In February 2016, the lender applied $0.9 million of cash reserves held for tenant and capital improvements to the principal balance of the loan. The lender also applied $0.8 million of excess cash reserves to the principal balance of the loan. On March 15, 2016, we received a notice that Northborough Tower had been posted for foreclosure on April 5, 2016. The property was transferred to the lender via a deed-in-lieu of foreclosure on May 9, 2016. The outstanding principal balance at the time of the transfer to the lender was $15.9 million.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Chase Park Plaza Hotel Loan

 

On August 4, 2016, we modified the Chase Park Plaza Hotel loan to extend the completion date for the required room and common area renovations from August 10, 2016 to August 10, 2017. The Company previously provided a completion guarantee of $6.5 million for the required renovations and that guarantee was reaffirmed with the modification. If the renovation was not completed by August 10, 2017 the lender could have required the Company to escrow 125% of the unspent funds related to the renovation.

 

The loan continued to bear interest at 4.95% and was scheduled to mature on August 11, 2017 with two one-year extensions available. Under the modification, the property was required to have a debt service coverage ratio, as defined, of 1.35 to exercise the extension options. Under the modified loan, we were required to escrow $1.5 million with the lender for the estimated 2017 property tax increase due to the expirations of the 10-year property tax abatement program in December 2016.

 

The modification also required the establishment of a $3.1 million escrow related to certain facade repairs and enhancements. The lender was required to disburse funds from the escrow monthly to pay the construction contract draws as the construction project was invoiced and completed. The Park Plaza Residential Association was responsible to reimburse 39.3% of the construction cost as invoiced. The project was expected to be completed in December 2017.

 

On June 2, 2017, we sold the Chase Park Plaza Hotel and in connection with the closing, a portion of the proceeds from the sale were used to pay off in full the existing indebtedness of approximately $60.2 million secured by the property. 

 

11.

Commitments and Contingencies

 

Chase Park Plaza Hotel

 

Under the Chase Park Plaza Hotel loan agreement, the Company previously provided a completion guarantee of $6.5 million for room renovations and other improvements to be finished by August 10, 2017. In connection with the sale of the Chase Park Plaza Hotel on June 2, 2017, the associated indebtedness was repaid in full.

 

Royal Island

 

On May 8, 2017 the Royal Island asset was sold to its lender for discharge of all indebtedness under the loan. The proceeds from the sale were not sufficient to pay the outstanding obligations of the partnership entities that owned Royal Island. These obligations, which are non-recourse to the Company, totaled $3.8 million as of September 30, 2017 and are included in accrued and other liabilities on the condensed consolidated statement of net assets in liquidation. The Company is exploring alternatives to settle these obligations, which may include, placing the underlying partnerships in receivership or some other form of judicial liquidation process.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

12.

Related Party Transactions

 

Our external advisor and certain of its affiliates may receive fees and compensation in connection with the management and sale of our assets based on an advisory management agreement, as amended and restated.

 

From September 20, 2005 through February 10, 2017, we were party to successive advisory management agreements, each with a term of one year or less, with the Behringer Advisor. The most recently executed advisory management agreement was the Fourth Amended and Restated Advisory Management Agreement (the “Fourth Advisory Agreement”) entered into on May 31, 2016 and effective as of May 15, 2016. On February 10, 2017, we entered into a Termination of Advisory Management Agreement with the Behringer Advisor and (solely with respect to certain sections) Behringer (the “Advisory Termination Agreement”) pursuant to which the Fourth Advisory Agreement was terminated as of the close of business on February 10, 2017.

 

Concurrently with our entry into the Advisory Termination Agreement, we engaged the Advisor to provide us with advisory services pursuant to an advisory management agreement (the “Lightstone Advisory Agreement”). The fees earned by and expenses reimbursed to the Advisor pursuant to the Lightstone Advisory Agreement are identical to the fees earned by and expenses reimbursed to the Behringer Advisor pursuant to the Fourth Advisory Agreement. The following discussion describes the fees and expenses payable to our external advisor and its respective affiliates under both the Fourth Advisory Agreement and the Lightstone Advisory Agreement.

 

We pay our external advisor an asset management fee of 0.575% of the aggregate asset value of acquired real estate and real estate-related assets other than Royal Island, which was sold on May 8, 2017. The fee is payable monthly in arrears in an amount equal to one-twelfth of 0.575% of the aggregate asset value as of the last day of the month.  For the one month ended January 31, 2017, the three months ended September 30, 2016 and the nine months ended September 30, 2016, we incurred approximately $0.2 million, $0.5 million and $1.5 million of asset management fees, respectively.

 

We pay our external advisor acquisition and advisory fees of 2.5% of the contractual purchase price of each asset for the acquisition, development, or construction of real property or 2.5% of the funds advanced in respect of a loan investment.  For the one month ended January 31, 2017, the three months ended September 30, 2016 and the nine months ended September 30, 2016, we incurred no acquisition and advisory fees.

 

The debt financing fee paid to our external advisor for a Loan (as defined in the agreement) will be 1% of the loan commitment amount.  Amounts due to the external advisor for a Revised Loan (as defined in the agreement) will be 40 basis points of the loan commitment amount for the first year of any extension (provided the extension is for at least 120 days), an additional 30 basis points for the second year of an extension, and another 30 basis points for the third year of an extension in each case, prorated for any extension period less than a full year.  The maximum debt financing fee for any extension of three or more years is 1% of the loan commitment amount. We did not incur any debt financing fees for the one month ended January 31, 2017, the three months ended September 30, 2016 or the nine months ended September 30, 2016.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Subject to certain restrictions as described in the advisory agreement, we reimburse our external advisor for all expenses paid or incurred by them in connection with the services they provide to us, including direct expenses and the costs of salaries and benefits of persons employed by those entities and performing services for us, subject to the limitation that we will not reimburse for any amount by which our external advisor’s operating expenses (including the asset management fee) at the end of the four fiscal quarters immediately preceding the date reimbursement is sought exceeds the greater of (i) 2% of our average invested assets or (ii) 25% of our net income for that four quarter period other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and any gain from the sale of our assets for that period.  Notwithstanding the preceding sentence, we may reimburse the external advisor for expenses in excess of this limitation if a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. In addition, pursuant to the advisory agreement, our obligation to reimburse our external advisor for certain costs incurred in connection with administrative services is currently limited to an aggregate of $1.66 million annually. We do not reimburse our external advisor for the salaries and benefits that our external advisor or its affiliates pay to our named executive officers.  For the one month ended January 31, 2017, the three months ended September 30, 2016 and the nine months ended September 30, 2016, we incurred costs for administrative services of $0.1 million, $0.3 million and $0.9 million, respectively.

 

From September 20, 2005 through February 10, 2017, we were party to a property management and leasing agreement, which was amended and restated at various times (as amended and restated, the “Behringer Property Management Agreement”) between us, our operating partnership, Behringer Harvard Opportunity Management Services, LLC, and Behringer Harvard Real Estate Services, LLC (collectively, the “Behringer Manager”). On February 10, 2017, we entered into a Termination of Property Management and Leasing Agreement with the Behringer Manager and (solely with respect to certain sections) Behringer (the “Property Management Termination Agreement”) pursuant to which the Behringer Property Management Agreement was terminated as of the close of business on February 10, 2017.

 

Concurrently with our entry into the Property Management Termination Agreement, we engaged LSG-BH I Property Manager LLC (the “Lightstone Manager”), an affiliate of the Advisor, pursuant to a property management and leasing agreement (the “Lightstone Property Management Agreement”). The fees earned by and expenses reimbursed to the Lightstone Manager pursuant to the Lightstone Property Management Agreement are identical to the fees earned by and expenses reimbursed to the Behringer Manager pursuant to the Behringer Property Management Agreement. The following discussion describes the fees and expenses payable to our affiliated property manager and its respective affiliates under both the Behringer Property Management Agreement (in effect from September 20, 2005 through February 10, 2017) and the Lightstone Property Management Agreement (in effect as of February 10, 2017).

 

We pay our property manager fees for management, leasing, and maintenance supervision of our properties. Such fees are equal to 4.5% of gross revenues plus leasing commissions based upon the customary leasing commission applicable to the same geographic location of the respective property.  We will pay our property manager an oversight fee equal to 0.5% of gross revenues of the property managed if we contract directly with a non-affiliated third-party property manager in respect of the property.  In no event will we pay both a property management fee and an oversight fee to our property manager with respect to any particular property.  If 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 property management fees and oversight fees of approximately $0.1 million, $0.1 million and $0.5 million during the one month ended January 31, 2017, the three months ended September 30, 2016 and the nine months ended September 30, 2016, respectively.

 

As of December 31, 2016, we had a payable to our external advisor and its affiliates of $0.5 million, which consists of accrued fees, including asset management fees, administrative service expenses, property management fees, and other miscellaneous costs payable to our external advisor and property manager.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The Company accrues for the remaining costs it expects to incur through the end of its liquidation under the liquidation basis of accounting, including costs expected to be paid to its external advisor for services provided during its liquidation. These costs are included in liability for estimated costs in excess of estimated receipts during liquidation of $3.2 million on the consolidated condensed statement of net assets in liquidation as of September 30, 2017. As of September 30, 2017, the Company accrued asset management fees of $0.1 million, property management fees and oversight fees of $0.1 million, and administrative service costs of $0.5 million, which are expected to be paid to the Company’s external advisor during its liquidation. The Company incurred an aggregate of $2.0 million for these costs during the period from February 1, 2017 through September 30, 2017. Actual fees incurred may differ significantly from these estimates due to inherent uncertainty in estimating future events.

 

We are dependent on our external advisor and property manager for certain services that are essential to us, including asset disposition decisions, property management and leasing services, and other general administrative responsibilities. If these companies are unable to provide us with the respective services, we would be required to obtain such services from other sources.

 

13.

Supplemental Cash Flow Information

 

Supplemental cash flow information is summarized below:

 

		One Month				Nine Months
		Ended				Ended
Description		January 31, 2017				September 30, 2016
Supplemental disclosure:
Interest paid, net of amounts capitalized		$	472			$	5,208
Income taxes paid, net of refunds			717				125
Non-cash investing and financing activities:
Property and equipment additions and purchases of real estate in accrued liabilities			-				541
Transfers from real estate under development to building and improvements			-				37,110
Additions to land and land improvements reclassified from real estate under development			-				3,685
Additions to furniture, fixtures, and equipment reclassified from real estate under development			-				1,101
Amortization of deferred financing fees in properties under development			-				10
Deed in lieu of foreclosure:
Real estate and lease intangibles			-				12,723
Note payable			-				15,853
Other assets and liabilities, net			-				1,506

 

14.

Subsequent Events

 

Frisco Square

 

On October 11, 2017, we, through various wholly owned subsidiaries, entered into an agreement (the “Agreement”) to sell our Frisco Square mixed-use project to Frisco Square Acquisition, LLC (the “Buyer”), an unaffiliated third party, for a contractual sales price of $55.0 million. The Buyer made a nonrefundable earnest money deposit of $0.75 million in connection with the execution of the Agreement. Closing is subject to due diligence by the Buyer and other customary closing conditions and is contemplated to occur during the fourth quarter of 2017.

 

 

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 of the Company 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 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 I, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “REIT,” “we,” “us,” or “our”), including our ability to successfully implement the Plan of Liquidation, to address our debt maturities and to fund our liquidity requirements, the value of our assets, our anticipated capital expenditures, the amount and timing of anticipated liquidating distributions to our stockholders, 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 in this Quarterly report on Form 10-Q and under Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 22, 2017 and the factors described below:

 

•

our ability to successfully implement the terms of a plan of liquidation and dissolution (the “Plan of Liquidation”), and sell our assets, pay our liabilities, and distribute the net proceeds from liquidation to our stockholders as we expect;

•

the timing of asset dispositions and the sales price we receive for assets and the amount and timing of liquidating distributions to be received by our stockholders;

•

whether we will face unanticipated difficulties, delays, or expenditures relating to our implementation of the Plan of Liquidation, which may reduce or delay our payment of liquidating distributions;

•

risks associated with legal proceedings, including stockholder litigation, that may be instituted against us related to the Plan of Liquidation;

•

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 properties are located may adversely affect the implementation of the Plan of Liquidation;

•

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

•

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

•

our ability to retain our executive officers and other key individuals who provide advisory and property management services to us as we implement the Plan of Liquidation;

•

unfavorable changes in laws or regulations impacting our business, our assets or our ability to successfully implement the Plan of Liquidation;

•

interests in any liquidating trust we may establish pursuant to the Plan of Liquidation will be generally non-transferable; 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.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 21E of the Exchange Act.

 

 

Cautionary Note

 

The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this 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 are a Maryland corporation that was formed in November 2004 to invest in and operate commercial real estate or real estate-related assets located in or outside the United States on an opportunistic and value-add basis.  We conduct substantially all of our business through our operating partnership and its subsidiaries. We are organized and qualify as a REIT for federal income tax purposes.

 

Our business has been managed by an external advisor since the commencement of our initial public offering in 2005, and we have no employees. From September 20, 2005 through February 10, 2017, an affiliate of Behringer acted as our external advisor (the “Behringer Advisor”). On February 10, 2017, we engaged an affiliate of the Lightstone Group (“Lightstone”), LSG-BH I Advisor LLC (the “Advisor”), to provide advisory services to us. The external advisor is responsible for managing our day-to-day affairs and for services related to implementing the Plan of Liquidation.

 

As of September 30, 2017, we wholly owned one investment property in our condensed consolidated financial statements, which is located in Texas.

 

Plan of Liquidation

 

On August 26, 2016, in connection with a review of potential strategic alternatives available to us, our board of directors unanimously approved a plan for the sale of all of our assets and our dissolution pursuant to the terms of the Plan of Liquidation. On January 30, 2017 the Plan of Liquidation was approved by our stockholders. We are in various stages of marketing all of our assets for sale and expect to market and dispose of our remaining assets within two years from January 30, 2017. We expect to make liquidating distribution payments to our stockholders after we sell all of our assets, pay all of our known liabilities, and provide for unknown liabilities. We expect to complete these activities within 24 months of the stockholder approval of the Plan of Liquidation. We can give no assurances regarding the timing of asset distributions in connection with the implementation of the Plan of Liquidation, the sales prices we will receive for our assets, or the amount or timing of any liquidating distributions.

 

 

Liquidity and Capital Resources

 

Liquidity Demands

 

As a result of the approval of the Plan of Liquidation by the stockholders on January 30, 2017, our financial position and results of operations for the nine months ended September 30, 2017 are presented using two different presentations. We adopted the liquidation basis of accounting as of February 1, 2017 and for the periods subsequent to February 1, 2017. We believe the one-day timing difference between the approval of the Plan of Liquidation on January 30, 2017 and the adoption of the liquidation basis of accounting on February 1, 2017 is immaterial. All financial results and disclosures through January 31, 2017, prior to adopting liquidation basis of accounting, are presented on a going concern basis, which contemplates the realization of assets and liabilities in the normal course of business.

 

As discussed above, our board of directors unanimously approved a plan for the sale of all of our assets and our dissolution pursuant to the terms of the Plan of Liquidation. The Plan of Liquidation was approved by our stockholders on January 30, 2017. Pursuant to the Plan of Liquidation, we intend to sell all of our assets, pay all of our known liabilities, provide for unknown liabilities, and distribute the net proceeds from liquidation to our stockholders. We can give no assurances regarding the timing of asset dispositions, the sales prices we will receive for our assets, and the amount or timing of any liquidating distributions. It is possible that we will invest additional capital in some of our assets in order to position these assets for sale. We have experienced significant losses and may generate negative cash flows as expenses exceed revenues.  If we are unable to sell a property when we determine to do so as contemplated in our business plan, it could have a significant adverse effect on our cash flows necessary to satisfy our other liabilities in the normal course of business.

 

While we project having available cash to distribute to stockholders after all asset sales are completed, we are subject to outside forces beyond our control when completing the sales of our properties, some of which are more difficult to market and all of which are at various stages of disposition.

 

Our total net assets in liquidation were $110.1 million as of September 30, 2017. Our ability to execute the Plan of Liquidation is dependent upon our ability to sell our remaining real estate investment, and to fund certain ongoing costs of our Company, including those related to our one remaining investment property. Our principal demands for funds for the next twelve months and beyond will be for the payment of costs associated with the lease-up of available space at our one remaining investment property (including any leasing commissions, tenant improvements, and capital improvements) prior to its disposal, and Company operating expenses.  We expect to fund a portion of these demands by using cash flow from operations and available cash on hand.

 

We continually evaluate our liquidity and ability to fund future operations. Our cash balance as of September 30, 2017 was $56.0 million. The note related to Northpoint Central matured on May 6, 2017 and we did not repay the debt which constituted a maturity default. On July 4, 2017, ownership of Northpoint Central was transferred to the lender via foreclosure. On September 6, 2017, we repaid our BHFS Loans on our Frisco Square mixed-use project in full. As a result, we had no outstanding indebtedness as of September 30, 2017. We are in various stages of marketing our remaining investment property for sale and currently expect to sell all of our remaining investment property during the fourth quarter of 2017. See below, under the caption Current Asset Sales Activity, for further details.

 

We also consider lease expirations and other factors in evaluating our liquidity.  If we are unable to renew or extend the expiring leases under substantially similar terms or are unable to negotiate new leases, it would negatively impact our estimated cash flows during our liquidation period and adversely affect the value of our remaining investment property, which would reduce the proceeds we expect to receive upon disposition. As a result, our estimated liquidating distributions to our shareholders would also be adversely impacted.

 

 

Asset Dispositions

 

As discussed above, our board of directors and our stockholders have approved a plan for the disposition of all of our assets and our dissolution pursuant to the terms of the Plan of Liquidation. Within 24 months following our stockholders’ approval of the Plan of Liquidation we expect to dispose all of our assets, pay all of our known liabilities, provide for unknown liabilities, and distribute the net proceeds from liquidation to our stockholders. We can give no assurances regarding the timing of asset dispositions in connection with the implementation of the Plan of Liquidation, the aggregate sales price we will receive for our remaining investment property, or the amount or timing of any liquidating distributions.

 

Current Asset Sales Activity

 

On August 12, 2016, we executed a purchase and sale agreement to sell 3.39 acres of land at Frisco Square to a third party for approximately $4.3 million. The buyer is working on development plans, and we currently expect the sale to close during the fourth quarter of 2017.

 

On October 11, 2017, we, through various wholly owned subsidiaries, entered into an agreement (the “Agreement”) to sell our Frisco Square mixed-use project to Frisco Square Acquisition, LLC (the “Buyer”), an unaffiliated third party, for a contractual sales price of $55.0 million. The Buyer made a nonrefundable earnest money deposit of $0.75 million in connection with the execution of the Agreement. Closing is subject to due diligence by the Buyer and other customary closing conditions and is contemplated to occur during the fourth quarter of 2017.

 

There are no assurances that we will complete these transactions.

 

Completed Sales

 

On February 2, 2016, we sold our Las Colinas Commons office buildings located in Irving, Texas for a contractual sales price of $14.3 million. On February 22, 2016, we sold our remaining condominium unit in inventory at Chase - The Private Residences located in St. Louis, Missouri for a sales price of $2.5 million, receiving net proceeds of $2.2 million after closing costs.

 

On May 24, 2016, we sold a 5.2 acre parcel of land at Frisco Square located in Frisco, Texas for a contractual sales price of $8 million. On February 14, 2017 we sold 3.29 acres of land at Frisco Square for a contractual sales price of $4.7 million. On March 28, 2017, we sold 3.83 acres of land at Frisco Square for a contractual sales price of $5 million. On October 4, 2017, we sold 0.21 acres of land at Frisco Square for a contractual sales price of $0.3 million.

 

On May 8, 2017, the Royal Island asset, located in the, Commonwealth of The Bahamas, was sold to the lender. Under the contract, the purchaser agreed to pay the deferred real estate taxes and seabed leases that totaled approximately $0.7 million and discharge all of the indebtedness under the loan. The loan balance and accrued interest aggregated $25.0 million at the date of disposition. We previously consolidated our 87.29% interest in the Royal Island and a third party owned a non-controlling 12.71% interest.

 

On May 23, 2017, the Ablon at Frisco Square Venture, in which we had a 90% ownership interest, sold the Ablon at a Frisco Square, a 275-unit multifamily project located in Frisco, Texas, to an unaffiliated third party at a contractual sales price of $53.5 million.

 

On June 2, 2017, we sold the Chase Park Plaza Hotel, located in St. Louis, Missouri, to an unaffiliated third party at a contractual sales price of approximately $87.8 million.

 

On June 7, 2017, we sold our 47.01% interest in the Central Europe Joint Venture to our joint venture partner at a contractual sales price of €6.1 million, which was equivalent to $6.8 million at the closing date.

 

 

On May 5, 2016, we executed a purchase and sale agreement for The Lodge and Spa at Cordillera for an initial contractual purchase price of $10.0 million, subject to five incremental increases of $0.1 million up to $10.5 million if the purchaser elected to extend the closing date. On February 28, 2017 we ceased to operate the hotel. On June 29, 2017, the contractual purchase price was further amended from $10.5 million to $10.6 million. The sale of the property closed on August 1, 2017. In connection with the closing, we provided short-term financing in the amount of $1.5 million to the unrelated third party buyer at a fixed interest rate of 12% with monthly interest-only payments through its maturity date of November 20, 2017

 

Debt Financings and Asset Foreclosures

 

One of our principal short-term and long-term liquidity requirements was the repayment of maturing debt.  However, as of September 30, 2017, we had no remaining outstanding indebtedness.

 

Our non-recourse debt secured by Northborough Tower matured on January 11, 2016. The property was transferred to the lender via a deed-in-lieu of foreclosure on May 9, 2016. The principal balance of the debt at the transfer was $15.9 million.

 

Our non-recourse debt secured by Northpoint Central matured on May 6, 2017 and we did not repay the debt which constituted a maturity default. Prior to the debt maturity we had actively marketed the property for sale but did not receive any offers above the loan balance. On July 4, 2017, ownership of Northpoint Central was transferred to the lender via foreclosure. The principal balance of the debt at the transfer was $10.0 million. Additionally, the BHFS Loans for our Frisco Square mixed-use project were scheduled to initially mature in February 2018 and had two one-year extension options. However, we repaid the BHFS Loans in full on September 6, 2017.

 

Our loan agreements stipulated that we comply with certain reporting and financial covenants.  These covenants included, among other things, maintaining minimum debt service coverage ratios, loan to value ratios, and liquidity.  Prior to the loan maturing on May 6, 2017, we did not meet the debt service coverage requirement for our Northpoint Central loan.

 

Our ability to fund our liquidity requirements during our liquidation is expected to come from cash and cash equivalents (which total $56.0 million as of September 30, 2017), operating cash flow and net sales proceeds from the eventual disposition of our one remaining property.

 

Loan Modifications

 

In February 2011, Behringer Harvard Royal Island Debt, LP secured a $10.4 million loan (the “Debt LP Loan”) for the purpose of preserving and protecting the collateral securing the Royal Island bridge loan. In February 2013 and June 2013, the lender increased the amount available to draw on the Debt LP Loan to $11.6 million and $12.4 million, respectively. Beginning in October 2013 through June 2014, the lender increased the availability of the Debt LP Loan each month by the amount of the monthly operating costs. The lender ceased funding the monthly operating costs in July 2014. On January 25, 2016, the lender increased the amount of the loan by $0.6 million to $14.4 million to fund the estimated operating costs through the sale of the property. On April 30, 2016, the lender increased the amount of the Debt LP Loan by an additional $0.1 million to $14.5 million to fund additional operating costs of the property while approval from the Commonwealth of the Bahamas to dispose of the property was pending. We received a short-term extension of the loan secured by Royal Island, extending our maturity date from November 10, 2016 to November 30, 2016. However, the lender did not further extend the maturity date and the loan matured and the debt was not repaid. On May 8, 2017, the asset was sold to the lender and the loan and related accrued interest aggregating $25.0 million was discharged in full.

 

On August 4, 2016, we modified the Chase Park Plaza loan to extend the completion date for the required room and common area renovations from August 10, 2016 to August 10, 2017. The Company previously provided a completion guarantee of $6.5 million for the required renovations and that guarantee was reaffirmed with the modification. The modified loan continued to bear interest at 4.95% and was scheduled to mature on August 11, 2017 with two one-year extensions available. Under the modification the property was required to have a debt service coverage ratio, as defined, of 1.35 to exercise the extension options. Under the modified loan, we were required to escrow $1.5 million with the lender for the estimated 2017 property tax increase due to the expiration of the 10-year property tax abatement program in December 2016.

 

The Chase Park Plaza loan modification also required the establishment of a $3.1 million escrow related to certain facade repairs and enhancements. The lender was required to disburse funds from the escrow monthly to pay the construction contract draws as the construction repair project is invoiced and completed. The Park Plaza Residential Association was responsible for reimbursing 39.3% of the construction cost as invoiced. The project was expected to be completed in December 2017.

 

 

On June 2, 2017, we sold the Chase Park Plaza Hotel and in connection with the closing, a portion of the proceeds from the sale were used to pay off in full the existing indebtedness of approximately $60.2 million secured by the property.

 

Results of Operations

 

Due to the adoption of liquidation basis accounting as of February 1, 2017, the results of operations for the current year periods are not comparable to the prior year periods. Our remaining investment property continues to perform in a manner that is relatively consistent with prior reporting periods and we have not experienced any significant changes in leased percentages or rental rates at this property.

 

Changes in Net Assets in Liquidation

 

Period from February 1, 2017 through September 30, 2017

 

Our net assets in liquidation were $110.1 million and $110.0 million as of September 30, 2017 and February 1, 2017 (the date we adopted the liquidation basis of accounting), respectively.

 

 

Cash Flow Analysis

 

During the one month ended January 31, 2017, net cash used in operating activities was $1.8 million compared to net cash provided by operating activities of $0.6 million for the nine months ended September 30, 2016. The primary reason for the decrease in cash flow from operating activities was the change in working capital, including the timing of receipts on accounts receivable and payments of accrued liabilities.

 

Net cash used in investing activities for the one month ended January 31, 2017 was $0.1 million compared to net cash provided by investing activities of $12.0 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2016, we received $21.9 million of aggregate proceeds from the dispositions of Las Colinas Commons, Northborough Tower and Frisco Square land parcels. Additionally, the difference also reflects a decrease in capital expenditures of $9.1 million in the 2017 period.

 

Net cash used in financing activities for the one month ended January 31, 2017 was approximately $0.3 million compared to net cash used in financing activities of $11.5 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2016, we paid off the existing indebtedness totaling approximately $11.3 million associated with Las Colinas Commons and a $3.6 million lender required excess principal payment to reduce Northpoint Central’s allocated loan balance with proceeds from the sale of Las Colinas Commons. Under the terms of the loan, the lender required a release price payment of $14.9 million to release the Las Colinas Commons property from the loan. This was partially offset by draws of $7.6 million under the Ablon Frisco Square Venture construction loan during the nine months ended September 30, 2016.

 

Funds from Operations

 

Funds from operations (“FFO”) is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. Because we have entered our disposition phase, we no longer believe FFO is a meaningful measurement of our operating performance; and therefore, we are no longer providing the calculation.

 

Distributions

 

Distributions have been authorized at the discretion of our board of directors based on its analysis of our forthcoming cash needs, earnings, cash flow, anticipated cash flow, capital expenditure requirements, cash on hand, general financial condition and other factors that our board deems relevant. The board’s decision has been and will be influenced, in substantial part, by its obligation to ensure that we maintain our status as a REIT. On March 28, 2011, our board of directors discontinued regular quarterly distributions. We have not paid any distributions since 2011.

 

On January 30, 2017, our stockholders approved the Plan of Liquidation and we currently anticipate paying one or more liquidating distributions to our stockholders. We intend to pay the final liquidating distribution to our stockholders no later than 24 months after January 30, 2017, although the timing and amounts of any distributions, including the final liquidating distribution, will depend on various factors such as when we sell our assets. We can provide no assurances that the final liquidating distribution will be paid within a 24-month period.

 

The actual amounts and times of payment of the liquidating distributions to be paid to our stockholders will be determined by our board of directors in its sole discretion.

 

Off-Balance Sheet Arrangements

 

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

 

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP.  The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including net assets in liquidation, revenues and expenses, and related disclosure of contingent assets and liabilities.  We evaluate these estimates on a regular basis. Investment impairment estimates were evaluated on a regular basis prior to adopting the liquidation basis of accounting. Under the liquidation basis of accounting, we use estimates to adjust our assets to liquidation value. These estimates include the amount of cash that we expect to collect on disposal of assets, payment of obligations, and accrued income and expenses as we implement the Plan of Liquidation. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates.

 

A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 22, 2017 and See Note 3, "Summary of Significant Accounting Policies" of the Notes to Unaudited Condensed Consolidated Financial Statements.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

Interest Rate Risk

 

We have no outstanding indebtedness as of September 30, 2017. As a result, we are no longer exposed to interest rate risk.

 

Foreign Currency Exchange Risk

 

On June 7, 2017, we sold our 47.01% interest in a joint venture consisting of 17 properties in the Czech Republic and Poland that held local currency-denominated accounts at European financial institutions.  As a result, we are no longer exposed to foreign currency exchange risk.

 

Inflation

 

The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. However, we include provisions in the majority of our tenant leases that would protect us from the impact of inflation. These provisions include reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance.

 

 

Item 4.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our Principal Executive Officer and Principal Financial Officer, evaluated, as of June 30, 2017, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e) using the criteria established in Internal Control - New Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2017, to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized, and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

 

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in internal control over financial reporting that occurred during the quarter ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

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

 

Item 1A.

Risk Factors.

 

None.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

Unregistered Sales of Common Stock

 

During the period covered by this quarterly report, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

 

Share Redemption Program

 

In February 2006, our board of directors authorized a share redemption program for stockholders who held their shares for more than one year.  Under the program, our board reserved the right in its sole discretion at any time, and from time to time, to (1) waive the one-year holding period in the event of the death, disability or bankruptcy of a stockholder or other exigent circumstances, (2) reject any request for redemption, (3) change the purchase price for redemptions, or (4) terminate, suspend, or amend the share redemption program.

 

Our board of directors has not considered requests for redemptions (“Ordinary Redemptions”) for reasons other than in the event of death, disability or need for long-term care since March 2009 when the board determined not to accept, and to suspend until further notice, Ordinary Redemptions.

 

In January 2011, the board completely suspended the redemption program and has not considered any redemption requests since 2010.  Therefore, we did not redeem any shares of our common stock during the nine months ended September 30, 2017.

 

We have not presented information regarding submitted and unfulfilled redemptions as our share redemption program has been completely suspended since the first quarter of 2011 and we believe many stockholders who may otherwise desire to have their shares redeemed have not submitted a request due to the program’s suspension.

 

Any redemption requests submitted while the program is suspended will be returned to investors and must be resubmitted upon resumption of the share redemption program.  As our stockholders have approved the Plan of Liquidation, we do not expect to resume our share redemption program; however, if the share redemption program is resumed, we will give all stockholders notice that we are resuming redemptions, so that all stockholders will have an equal opportunity to submit shares for redemption.  Upon resumption of the program, any redemption requests will be honored pro rata among all requests received based on funds available and will not be honored on a first come, first served basis.

 

Item 3.

Defaults Upon Senior Securities.

 

None.

 

Item 4.

Mine Safety Disclosures.

 

None.

 

Item 5.

Other Information.

 

None.

 

Item 6.

Exhibits.

 

The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	Behringer Harvard Opportunity REIT I, Inc.
Dated: November 14, 2017	By:	/s/ Donna Brandin
		Donna Brandin
		Chief Financial Officer
		Principal Financial Officer

 

 

Index to Exhibits

 

Exhibit Number		Description
2.1		Plan of Complete Liquidation and Dissolution of Behringer Harvard Opportunity REIT I, Inc. (previously filed in and incorporated by reference to Definitive Proxy Statement on Schedule 14A, filed on November 2, 2016)
3.1		Second Articles of Amendment and Restatement of the Registrant (previously filed in and incorporated by reference to Form 8-K, filed on July 29, 2008)
3.2		Certificate of Correction to Second Articles of Amendment and Restatement of the Registrant (previously filed in and incorporated by reference to Form 8-K, filed on June 9, 2011)
3.3		Articles of Amendment of the Registrant (previously filed in and incorporated by reference to Form 8-K, filed on February 24, 2017)
3.4		Second Amended and Restated Bylaws of the Registrant (previously filed in and incorporated by reference to Form 8-K, filed on February 24, 2017)
10.1		Termination of Advisory Management Agreement among Behringer Harvard Opportunity REIT I, Inc., Behringer Harvard Opportunity Advisors I, LLC, and Stratera Holdings, LLC effective as of February 10, 2017 (previously filed in and incorporated by reference to Form 10-K, filed on March 22, 2017)
10.2		Termination of Property Management and Leasing Agreement among Behringer Harvard Opportunity REIT I, Inc., Behringer Harvard Opportunity OP I, LP and several affiliated special purpose entities, Behringer Harvard Opportunity Management Services, LLC, and Behringer Harvard Real Estate Services, LLC, and Stratera Holdings, LLC effective as of February 10, 2017 (previously filed in and incorporated by reference to Form 10-K, filed on March 22, 2017)
10.3		Advisory Management Agreement among Behringer Harvard Opportunity REIT I, Inc., Behringer Harvard Opportunity OP I, LP and LSG-BH I Advisor LLC effective as of February 10, 2017 (previously filed in and incorporated by reference to Form 10-K, filed on March 22, 2017)
10.4		Property Management and Leasing Agreement among Behringer Harvard Opportunity REIT I, Inc., Behringer Harvard Opportunity OP I, LP and several affiliated special purpose entities, and LSG-BH I Property Manager LLC effective as of February 10, 2017 (previously filed in and incorporated by reference to Form 10-K, filed on March 22, 2017)
10.5		Purchase and Sale Agreement among Chase Park Plaza Hotel, LLC, and CPPH, LLC, as seller, and Hospitality Properties Trust, as purchaser, effective as of March 16, 2017. (previously filed in and incorporated by reference to Form 10-Q, filed on May 15, 2017)
10.6		Second Amendment to Purchase and Sale Agreement among Chase Park Plaza Hotel, LLC, and CPPH, LLC, as seller, and Hospitality Properties Trust, as purchaser, effective as of April 24, 2017. (previously filed in and incorporated by reference to Form 10-Q, filed on May 15, 2017)
10.7		Purchase and Sale Agreement among The Ablon at Frisco Square, LLC, as seller, and The Rose at Frisco Square, LLC , as purchaser, effective as of April 10, 2017. (previously filed in and incorporated by reference to Form 10-Q, filed on August 14, 2017)
14.0		Code of Business Conduct and Ethics (previously filed in and incorporated by reference to Form 10-Q, filed on August 14, 2017)
31.1*		Rule 13a-14(a)/15d-14(a) Certification
31.2*		Rule 13a-14(a)/15d-14(a) Certification
32.1*	(1)	Section 1350 Certification
32.2*	(1)	Section 1350 Certification
101*		The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed on November 14, 2017, formatted in XBRL: (i) Condensed Consolidated Statement of Net Assets, (ii) Condensed Consolidated Balance Sheet, (iii) Condensed Consolidated Statement of Changes in Net Assets, (iv) Condensed Consolidated Statements of Operations, (v) Condensed Consolidated Statements of Equity, (vi) Condensed Consolidated Statements of Cash Flows, and (vii) Notes to the Condensed Consolidated Financial Statements.

 

 

*filed herewith

 

(1)

In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.  Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.