Behringer Harvard REIT Investigation Ramps Up

January 13, 2012

Salas Wang LLC was already investigating and bringing cases for investments in Behringer Harvard.  But, as the Investment News points out, Behringer Harvard is actually starting to admit that its investors lost 60% of their original investment.  Our investigation has been focused on the details of the investment that brokers aren’t telling their clients.  Specifically, the risk of this investment as show by its March 31, 2011 10-K:

  • Lack of the ability to redeem shares: “As of January 10, 2011, our board of directors suspended our share redemption program for all investors. We currently have no plans to resume the share redemption program; therefore, you will likely not be able to sell your shares under the program. If you are able to sell your shares under the program, you will likely not be able to recover the amount of your investment in our share. . .  If you are able to resell your shares to us pursuant to our share redemption program, you will likely receive substantially less than the amount paid to acquire the shares from us or the fair market value of your shares, depending upon how long you owned the shares.” p. 11.
  • Inaccurate Valuation: The estimated per share value of our common stock determined pursuant to our valuation policy is subject to certain limitations and qualifications and may not reflect the amount an investor would obtain if he tried to sell his shares or if we liquidated our assets. p. 12.
  • International Investments in Risky Loans:  We have purchased real estate assets located outside the United States and have made mortgage, bridge, mezzanine or other loans or participations in mortgage, bridge, mezzanine or other loans made by a borrower located outside the United States or secured by property located outside the United States. These investments may be affected by factors peculiar to the laws of the jurisdiction in which the borrower or the property is located. These laws may expose us to risks that are different from and in addition to those commonly found in the United States. p. 14.
  • Conflicts of Interest:  Because a number of other Behringer Harvard sponsored real estate programs use investment strategies that are similar to ours, our executive officers, our Advisor and its executive officers face conflicts of interest. p. 16.
  • Disclaimer of Fiduciary Duties: Our Advisor and its affiliates, including all of our executive officers and some of our directors, face conflicts of interest caused by their compensation arrangements with us, which could result in actions that are not in the long-term best interests of our stockholders. p. 18.
  • Lock-up Clauses that May Discourage Control Premium:  “Unless exempted by our board of directors, no person may own more than 9.8% of our outstanding shares of common or preferred stock.  This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide stockholders with the opportunity to receive a control premium for their shares.” p. 20.  “. . . our board of directors could authorize the issuance of such stock with terms and conditions that could subordinate the rights of the holders of our current common stock or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.” Id.
  • Stockholders Have No Say in Operations:  “Our board of directors determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders.”  Stockholders have limited voting rights. p. 23.
  • Board of Directors May Unilaterally Change Entire Investment Objective:  Our board of directors may change our investment policies and objectives generally and at the individual investment level without stockholder approval, which could alter the nature of your investment. p. 25.
  • Possibility of Indefinite Illiquidity:  We may not successfully implement our exit strategy, in which case you may have to hold your investment for an indefinite period.  p. 24.
  • Board Reserves Right to Dilute Shares:  Your percentage interest in Behringer Harvard Opportunity REIT I will be reduced if we issue additional shares. p. 25.
  • Self-Dealing Fees to “Advisor”:  Payment of fees to our Advisor and its affiliates will reduce cash available for funding our operating activities. p. 25.
  • Inability to Fire Incompetent Employees:  “We may be restricted in our ability to replace our property manager under certain circumstances.  Under the terms of our property management agreement, we may terminate the agreement upon 30 days’ notice in the event of, and only in the event of, a showing of willful misconduct, gross negligence, or deliberate malfeasance by the property manager in performing its duties. Our board of directors may find the performance of our property manager to be unsatisfactory. However, unsatisfactory performance by the property manager may not constitute ‘willful misconduct, gross negligence, or deliberate malfeasance.’ As a result, we may be unable to terminate the property management agreement at the desired time, which may have an adverse effect on the management and profitability of our properties.” (emphasis added). Id.
  • Disclaimer of Adequate Insurance:  “Uninsured losses relating to real property or excessively expensive premiums for insurance coverage may adversely affect your returns. . . We cannot assure you that we will have adequate coverage for such losses. In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by the amount of any such uninsured loss.” p. 33.
  • Refusal to Adequately Geographically Diversify:  “A concentration of our investments in any one property class or geographic region may leave our profitability vulnerable to a downturn in such sector or geographic region.  At any one time, a significant portion of our investments could be in one property class or concentrated in one or several geographic regions that are subject to higher risk of foreclosure.” p. 34.

These risks should not be taken lightly.  If you invested in Behringer Harvard REIT I or Behringer Harvard Opportunity REIT I, please contact Jeffrey Salas at 312.803.4963, or fill out the contact form below.

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