Unable to restructure some of the overwhelming debt it has accumulated over the past few years, Behringer Harvard Opportunity REIT I opted to place some of its subsidiaries under Chapter 11 bankruptcy protection earlier in June.
Moreover, a significant disclosure in a Behringer Harvard Opportunity REIT I March 31, 2012, quarterly Securities and Exchange Commission filing regarding a three-story office building in Dallas known as Bent Tree Green stands out as a significant conflict of interest and a red flag that Behringer Harvard’s financial future may be grim.
Specifically, in its quarterly report filed March 31, 2012, Behringer Harvard Opportunity REIT I discloses the following:
“On September 26, 2011, we, through a wholly-owned subsidiary of our operating partnership, entered into a lease agreement with Behringer Harvard REIT I, Inc., a real estate investment program sponsored by our sponsor Behringer Harvard Holdings LLC, to lease approximately 14,500 rentable square feet at Bent Tree Green to Behringer Harvard REIT I, Inc.”
The above disclosure means that this particular Behringer Harvard non-traded REIT is receiving money from another Behringer Harvard non-traded REIT that is also struggling to stay afloat. This not only represents a conflict of interest but highlights the fact that Behringer Harvard is both lending money to its own REITs and moving investors’ money around between some of its non-traded REITs. Since most of the terms of the lease agreement are not disclosed, it is not possible to determine if the rent being paid by one of Behringer’s non-traded REITs to the other is fair and/or competitive. What Behringer Harvard does disclose in its filing is that the agreement is a 66-month term lease, which includes six months of free rent.
LOAN DEFAULTS
On June 13, 2012, in a form 8-K filed with the SEC, Behringer Harvard Opportunity REIT I disclosed that several of its wholly-owned subsidiaries failed to pay the outstanding balance of a $43.6 million loan for a development in the state of Texas. This event of default came after the non-traded REIT had already negotiated an extension on the loan with Bank of America once before on Aug. 28, 2011.
The failure to pay the outstanding balance on the loan also triggered the acceleration of a different loan — with the same lender — for $4.6 million. In total, the Behringer Harvard subsidiaries are in default with Bank of America for more than $48 million, according to SEC filings. In an article in the Dallas Business Journal on June 20, 2012, Behringer Harvard Chief Operating Officer Jason Mattox stated that he “expects the bankruptcy filing and subsequent reorganization to have a minimal short-term impact on current operations.”
However, Mattox failed to address that although the Behringer Harvard subsidiaries are currently under Chapter 11 protection, according to Behringer Harvard’s own filings the non-traded REIT itself “unconditionally guaranteed the payments of the Notes payable” related to the loans above. See Behringer Harvard Opportunity REIT I quarterly report filed March 31, 2012.
COMING DUE
But digging deeper into this Behringer Harvard non-traded REIT, the above default only reveals a partial picture of what it is on the horizon for Behringer Harvard Opportunity REIT I investors. Specifically, the non-traded REIT discloses in its latest quarterly report that several other loans “have matured or will mature within the next twelve months.” These other loans amount to approximately $70 million dollars.
An example of a loan that is set to mature in December of this year is a $24.8 million loan in a 46,000 square feet long-term leasehold interest in London known as Becket House. This particular acquisition executed in 2007 is composed of three different loans. Two of the loans — amounting to $18.7 million — have a variable interest rate, and one loan for $6.2 million has afixed interest rate of 15 percent.
LIQUIDITY, DEBT AND OTHER PROBLEMS
Behringer Harvard Opportunity REIT I is having difficulties keeping up with the monthly payments on the Becket House loan and other loans. According to its own filings, Behringer Harvard Opportunity REIT I received a loan from Behringer Harvard Opportunity Advisors I — which is the advisor responsible for managing day-to-day affairs — for $2.5 million to “further bridge [its] short-term liquidity needs.”
Not only is Behringer Harvard Opportunity REIT I having trouble keeping up with the monthly payments on Becket House, but also it was “not in compliance with covenants related to Becket House” as of March 31, 2012.
Specifically, the loan requires “that a hedging arrangement remains in place during the term of the loan.” As of its latest filing, Behringer Harvard does not have a hedge in place. This could be considered an event of default — and a possible acceleration on the loan — if the lending institution notifies the non-traded REIT in writing that it has failed to place a hedge.
As of March 31, 2012, the date of its latest quarterly report, Behringer Harvard Opportunity REIT I was approximately $264.9 million in debt. Alarmingly, more than 85 percent of its overall debt is subject to variable interest rates. To put this in context, Behringer Harvard disclosed in its quarterly report that it only had a tangible net worth of approximately $209 million — a 126 percent debt to asset ratio.
In its annual report filed with the SEC on Dec. 31, 2011, Behringer Harvard Opportunity REIT I disclosed a value per share of $4.12, a decline in value of almost 60 percent of its original $10 per share.
All of the above represents concerns for investors who have been trapped in this non-traded REIT since Jan. 10, 2011, when Behringer Harvard “suspended the redemption program with respect to all redemption requests until further notice.”
About Vernon Litigation Group: The Vernon Litigation Group law firm, based in Naples, Florida, has been investigating non-traded REITs for more than three years on behalf of investors and has filed more than $5 million in arbitration claims on behalf of investors before the Financial Industry Regulatory Authority against broker-dealers selling non-traded REITs.