UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number: 000-51291

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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.45 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

BEHRINGER HARVARD SHORT-TERM OPPORTUNITY FUND I LP

FORM 10-Q

Quarter Ended June 30, 2012

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

Behringer Harvard Short-Term Opportunity Fund I LP

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except unit amounts)

See Notes to Condensed Consolidated Financial Statements.

Behringer Harvard Short-Term Opportunity Fund I LP

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except per unit amounts)

See Notes to Condensed Consolidated Financial Statements.

Behringer Harvard Short-Term Opportunity Fund I LP

Condensed Consolidated Statements of Equity (deficit)

(Unaudited)

(in thousands)

See Notes to Condensed Consolidated Financial Statements.

Behringer Harvard Short-Term Opportunity Fund I LP

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

See Notes to Condensed Consolidated Financial Statements.

Behringer Harvard Short-Term Opportunity Fund I LP

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Business

Behringer Harvard Short-Term Opportunity Fund I LP (which may be referred to as the “Partnership,” “we,” “us,” or “our”) is a limited partnership formed in Texas on July 30, 2002. Our general partners are Behringer Harvard Advisors II LP (“Behringer Advisors II”) and Robert M. Behringer (collectively, the “General Partners”). We were funded through capital contributions from our General Partners and initial limited partner on September 20, 2002 (date of inception) and offered our limited partnership units pursuant to a public offering which commenced on February 19, 2003 and was terminated on February 19, 2005 (the “Offering”). The Offering was a best efforts continuous offering, and we admitted new investors until the termination of the Offering. Our limited partnership units are not currently listed on a national exchange, and we do not expect any public market for the units to develop. We used the proceeds from the Offering, after deducting offering expenses, to acquire interests in twelve properties, including seven office building properties (one of which has been converted to a data center), one shopping/service center, a hotel redevelopment with an adjoining condominium development, two development properties and undeveloped land. We do not actively engage in the business of operating the hotel. We disposed of two properties during the six months ended June 30, 2012 and as a result, three of the twelve properties we acquired remain in our portfolio, of which one is classified as held for sale on our balance sheet. Our Agreement of Limited Partnership, as amended (the “Partnership Agreement”), provides that we will continue in existence until the earlier of December 31, 2017 or termination of the Partnership pursuant to the dissolution and termination provisions of the Partnership Agreement.

Our principal demands for funds in the next twelve months and beyond will be for the payment of Partnership operating expenses, costs associated with lease-up and maintenance of our operating properties and for the payment of recurring debt service, further principal paydowns and reserve requirements on our outstanding indebtedness as required by our lenders. As a result of current economic and market conditions, our ability to continue as a going concern is dependent on our ability to resolve our current debt maturities and the willingness and ability of our General Partners or their affiliates to provide us with sources of liquidity. During the six months ended June 30, 2012, Behringer Advisors II or its affiliates waived reimbursement of administrative services totaling $0.1 million. During the six months ended June 30, 2011, Behringer Advisors II or its affiliates waived reimbursement of administrative services, asset management fees and reimbursement of operating expenses totaling $2.8 million, of which $2.6 million was classified as a capital contribution from our General Partners on our condensed consolidated statement of equity (deficit). Although we have had to extend beyond our original target life of three to five years after the end of the Offering, we are designed to be self-liquidating and thus do not intend to continue as a long-term going concern.

In order to provide additional liquidity for the execution of our current business plan, we have identified certain assets for disposition in 2012. We have entered into a contract to sell 1221 Coit Road and continue to work towards a sale of 250/290 John Carpenter Freeway. As a result of our current liquidity needs and unstable credit market conditions limiting available resources through additional borrowings for a closed-end, finite life fund, we may have to sell a property under terms that are less advantageous than we could achieve with a longer holding period. However, there can be no assurance these future dispositions will occur, or, if they occur, that they will help us to achieve our liquidity objectives.

The effects of the recent economic downturn caused us to reconsider our strategy for certain properties where we believed the principal balance of the debt encumbering the property exceeded the value of the asset under current market conditions. In those cases where we believed the value of a property was not likely to recover in the near future, we believed there were more effective uses for our capital, and as a result we ceased making debt service payments on certain property level debt, resulting in defaults or events of default under the related loan agreements. We were in active negotiations with certain lenders to refinance or restructure debt in a manner that we believed was the best outcome for us and our unitholders. We resolved some of these recourse loans by negotiating agreements conveying the properties to the lender as we did with two properties during the six months ended June 30, 2012 and two properties during the year ended December 31, 2011.

Including the note for 1221 Coit Road classified as held for sale, we had notes payable totaling $76.1 million at June 30, 2012 of which $62.8 million was secured by our three remaining properties. As of June 30, 2012, $53 million of our notes payable have matured or were set to mature in the next twelve months and $50.8 million was recourse to us. We continue to have negotiations and discussions with lenders to modify or restructure loans, outcomes of which may include a sale to a third party or returning the property to the lender. We currently expect to use proceeds from the disposition of properties and additional borrowings to continue making our scheduled debt service payments on certain properties until the maturity dates of the loans are extended, the loans are refinanced or the outstanding balances of the loans are completely paid off. There is no guarantee that we will be able to refinance our borrowings with more or less favorable terms or extend the maturity dates of such loans. In the event that any of the lenders demand immediate payment of an entire loan balance, we would have to consider all available alternatives, including transferring legal possession of the relevant property to the lender.

Behringer Harvard Short-Term Opportunity Fund I LP

Notes to Condensed Consolidated Financial Statements

(Unaudited)

As is usual for opportunity style real estate programs, we are structured as a finite life vehicle with the intent to full cycle by selling off our assets. Although we have extended beyond our original target life, as previously reported, we have entered into our disposition phase and we are in the process of selling our assets and winding up operations over approximately the next two years, with the goal of returning capital to our investors.  As is typical in the commercial real estate industry, the original purchases of the portfolio properties were financed using leverage. Thus, as these dispositions are made, the associated debt on the properties must first be repaid before any remaining proceeds are returned to investors.

The preparation of financial statements of a going concern generally contemplates realization of assets and settlement of liabilities in the normal course of business.  The conditions and events described above raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability of assets or the amounts of liabilities that may result should we be unable to continue as a going concern.  Our current plans are to use proceeds from the disposition of properties and additional borrowings to make payments on our outstanding debt until the maturity dates of the loans are extended, the loans are refinanced or the outstanding balances of the loans are completely paid off, pay for on-going capital needs, fund operations and, if available, make special distributions to our unitholders.      

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. Our accompanying condensed consolidated balance sheet as of June 30, 2012 and our condensed consolidated statements of operations, equity and cash flows for the periods ended June 30, 2012 and 2011 have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly our financial position as of June 30, 2012 and December 31, 2011 and our consolidated results of operations and cash flows for the periods ended June 30, 2012 and 2011. Such adjustments are of a normal recurring nature.

We have evaluated subsequent events for recognition or disclosure in our condensed consolidated financial statements.

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. 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. 

Behringer Harvard Short-Term Opportunity Fund I LP

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Real Estate

As of June 30, 2012 and December 31, 2011, accumulated depreciation and amortization related to direct investments in real estate assets and related lease intangibles were as follows:

(1) Excludes 1221 Coit Road which was classified as held for sale as of June 30, 2012.

Real Estate Held for Sale

We classify properties as held for sale when certain criteria are met, in accordance with GAAP. At that time, we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property. Properties held for sale are reported at the lower of their carrying amount or their estimated sales price, less estimated costs to sell. We had one property, 1221 Coit Road, which we classified as held for sale at June 30, 2012. On July 5, 2012, we executed an agreement for the sale of 1221 Coit Road. We expect to complete the sale in August 2012. We had no properties classified as held for sale at December 31, 2011.

Impairment of Long-Lived Assets

For all of our real estate, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable. Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to: a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers and changes in the global and local markets or economic conditions. Our assets may at times be concentrated in limited geographic locations and, to the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at 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. 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. We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. 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.

Management monitors events and changes in circumstances indicating that the carrying amounts of our real estate assets may not be recoverable. In order to execute our business plan and provide additional liquidity, we identified a number of our investments for possible disposition in 2011 and 2012, thus decreasing our projected hold period for these investments. As a result of bona fide purchase offers which were below our carrying values, we recorded non-cash impairment charges of approximately $18.8 million for the six months ended June 30, 2011, of which $8.6 million is included in discontinued operations. There was no asset impairment loss for the six months ended June 30, 2012.

Real estate values may continue to have fluctuations due to, among other things, the current economic environment and, as a result, there can be no assurance we will not have impairments in the future. Any such charges could have an adverse effect on our consolidated financial position and operations.

Real Estate Inventory

Real estate inventory was stated at the lower of cost or fair market value and consisted of developed land, condominiums and constructed homes. In addition to land acquisition costs, land development costs and construction costs, costs included interest and real estate taxes, which were capitalized during the period beginning with the commencement of development and ending with the completion of construction.

Behringer Harvard Short-Term Opportunity Fund I LP

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Inventory Valuation Adjustment

For real estate inventory, at each reporting date, management compared the estimated fair value less costs to sell to the carrying value. An adjustment was recorded to the extent that the fair value less costs to sell was less than the carrying value. We determined the estimated fair value based on comparable sales in the normal course of business under existing and anticipated market conditions. This evaluation took into consideration factors such as current selling prices, estimated future selling prices, costs spent to date, estimated additional future costs, appraisals and management’s plans for the property. Estimates used in the determination of the estimated fair value of real estate inventory were based on factors known to management at the time such estimates were made. We recognized no inventory valuation adjustments for the six months ended June 30, 2012 and 2011.

Revenue Recognition

We recognize rental income generated from leases on real estate assets on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any. The total net increase to rental revenues due to straight-line rent adjustments for the six months ended June 30 2012 was $0.7 million and the net decrease to rental revenues due to straight-line rent adjustments for the six months ended June 30, 2011 was approximately $0.2 million. Our rental revenue also includes amortization of above and below market leases. Any payments made to tenants that are considered lease incentives or inducements are being amortized to revenue over the life of the respective leases. Revenues relating to lease termination fees are recognized at the time a tenant’s right to occupy the space is terminated and when we have satisfied all obligations under the agreement.

We also recognize revenue from the operations of a hotel. Hotel revenues consisting of guest room, food and beverage, and other revenue are derived from the operations of the boutique hotel portion of Hotel Palomar and are recognized as the services are rendered.

Noncontrolling Interest

We hold a direct or indirect majority controlling interest in certain real estate partnerships and thus, consolidate the accounts with and into our accounts. Noncontrolling interests in partnerships represent the third-party partners’ proportionate share of the equity in consolidated real estate partnerships. Income and losses are allocated to noncontrolling interest holders based on their weighted average percentage ownership during the year.

During the six months ended June 30, 2012, we issued notes receivable totaling approximately $23,000 to our 30% noncontrolling interest partner in Mockingbird Commons LLC (“Mockingbird Commons Partnership”). Proceeds from the notes receivable were recognized as capital contributions and contra-equity to the minority interest partner on our condensed consolidated statement of equity (deficit) for the six months ended June 30, 2012.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include such items as impairment of long-lived assets, depreciation and amortization and allowance for doubtful accounts. Actual results could differ from those estimates.

In May 2011, the Financial Accounting Standards Board (“FASB”) issued updated guidance for fair value measurements.  The guidance amends existing guidance to provide common fair value measurements and related disclosure requirements between GAAP and International Financial Reporting Standards (“IFRS”).  This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance did not have a material impact on our financial statements or our disclosures.    

Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be 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 was established by FASB 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).

Behringer Harvard Short-Term Opportunity Fund I LP

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or 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 which 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 entire 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.

Nonrecurring Fair Value Measurements

Asset Impairment Losses

Management monitors events and changes in circumstances indicating that the carrying amounts of our real estate assets may not be recoverable. There was no asset impairment loss for the six months ended June 30, 2012. In order to execute our business plan and provide additional liquidity, we identified a number of our investments for possible disposition in 2011, thus decreasing our projected hold period for those investments. We entered into a contract for the sale of 250/290 John Carpenter Freeway in 2011. The contract sales price of the property, which provides for contingent consideration, was less than our carrying value of the asset, thus we recognized an asset impairment loss of approximately $10.2 million for the year ended December 31, 2011. In addition, as a result of projected sales prices and the subsequent return of the property to the lender, we recognized an asset impairment loss of approximately $1.4 million for the year ended December 31, 2011 related to the undeveloped land held in Melissa, Texas. On June 14, 2011 we entered into a contract for the sale of Landmark I and Landmark II and subsequently sold them on June 30, 2011. The contract sales price of $16.2 million, which retains a back-end promoted interest in distributable cash related to the buildings if a certain threshold is met, was less than our carrying value of the asset. As a result, we recognized an asset impairment loss of approximately $8.6 million for the year ended December 31, 2011. We sold 5050 Quorum on December 16, 2011. The contract sales price was less than our carrying value and as a result we recognized an asset impairment loss of approximately $1.6 million for the year ended December 31, 2011. Asset impairment losses recognized for Landmark I, Landmark II and 5050 Quorum were included in discontinued operations in our consolidated statements of operations on Form 10-K for the year ended December 31, 2011.

The inputs used to calculate the fair value of these assets included projected cash flow, risk-adjusted rates of return that we estimated would be used by a market participant in valuing this asset and third-party opinions of values.

Inventory Valuation Adjustment

The housing and related condominium market continued to experience difficult conditions, and as a result we evaluated our real estate inventory for potential impairment. As a result of our evaluations, for the year ended December 31, 2011 we recognized inventory valuation adjustments of $26.3 million related to our 23-unit condominium property in Telluride, Colorado (“Cassidy Ridge”). The inputs used to calculate the fair value of these assets included current local market conditions, current selling prices, estimated future selling prices, costs spent to date and estimated additional future costs.

The following fair value hierarchy table presents information about our assets measured at fair value on a nonrecurring basis for the year ended December 31, 2011. We had no assets measured at fair value on a nonrecurring basis during the six months ended June 30, 2012.

Behringer Harvard Short-Term Opportunity Fund I LP

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1) Excludes approximately $10.1 million of impairment loss included in discontinued operations for the year ended December 31, 2011 as presented in our Form 10-K filed with the SEC.

Fair Value Disclosures

Fair value of financial instruments

Our notes payable, including the 1221 Coit Road Loan classified as held for sale at June 30, 2012, totaling approximately $76.1 million and $123.7 million as of June 30, 2012 and December 31, 2011, respectively, have a fair value of approximately $75.2 million and $122.7 million, respectively. The fair value of our notes payable is categorized as Level 2 in the fair value heirarchy.  The fair value is estimated using a discounted cash flow analysis valuation on the borrowing rates currently available to us 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.

As of June 30, 2012 and December 31, 2011, management estimated the carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses were at amounts that reasonably approximated their fair value.

The fair value estimates presented herein are based on information available to our management as of June 30, 2012 and December 31, 2011. We determined the above disclosure of estimated fair values using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value. Accordingly, the estimates presented herein 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. 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 consolidated financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein.

As of June 30, 2012 we owned interests in a data center, an office building and a hotel redevelopment. In the aggregate, the data center and office property represent approximately 0.7 million rentable square feet. As of December 31, 2011, we owned interests in a data center, an office building, a hotel redevelopment with an adjoining condominium development and a condominium project. The following table presents certain additional information about our properties as of June 30, 2012:

Dispositions

On May 17, 2012, Behringer Harvard Mountain Village, LLC, our wholly-owned subsidiary, entered into a Deed in Lieu of Foreclosure Agreement with Credit Union Liquidity Services, LLC (“CULS”) effective May 8, 2012, whereby ownership of Cassidy Ridge was transferred to CULS, resulting in full settlement of the outstanding debt to the lender. As a result, we recognized a gain on troubled debt restructuring of $7.1 million which is included in our condensed consolidated statement of operations for the three and six months ended June 30, 2012. On September 29, 2006 the borrower entered into a loan agreement with CULS to borrow a total principal amount of up to $27.7 million to construct Cassidy Ridge (“Cassidy Ridge Loan Agreement”). The outstanding principal balance, together with all accrued but unpaid interest, was due and payable on the maturity date of October 1, 2011. The loan, which was recourse to us, had an outstanding principal balance of approximately $28.4 million at May 17, 2012.

Behringer Harvard Short-Term Opportunity Fund I LP

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On June 8, 2012, the Mockingbird Commons Partnership entered into a Deed in Lieu of Foreclosure Agreement with Westdale Capital Investors I, Ltd (“Mockingbird Lender”) whereby 39 luxury high-rise condominiums and 1.4 acres of excess land located in Dallas, Texas (“Palomar Residences”) were transferred to the Mockingbird Lender, resulting in full settlement of the outstanding debt. As a result, we recognized a gain on troubled debt restructuring of $1.0 million of which $0.9 million is included in discontinued operations on our statement of operations for the three and six months ended June 30, 2012. The outstanding principal balance under the loan agreement was approximately $19.4 million at June 8, 2012.

Certain costs associated with the Cassidy Ridge development were capitalized. Construction of the condominiums was essentially complete at March 31, 2011 and as a result, we no longer capitalized indirect costs associated with the project. For the six months ended June 30, 2011 we capitalized a total of $0.1 million in costs associated with the development of Cassidy Ridge to real estate inventory. The amount of costs capitalized for the period ended June 30, 2011 is net of $1.1 million in vendor credits received. During the six months ended June 30, 2011 we capitalized $0.7 million in interest costs for Cassidy Ridge. As discussed in Note 6 above, the property was returned to the lender via a deed in lieu of foreclosure on May 17, 2012.

The following table sets forth the principal balance of our notes payable as of June 30, 2012 and December 31, 2011:

Including the 1221 Coit Road Loan classified as held for sale, we had notes payable totaling $76.1 million at June 30, 2012 of which $62.8 million was secured by our three remaining properties. As of June 30, 2012, $53 million of our notes payable have matured or were set to mature in the next twelve months and $50.8 million was recourse to us. We currently expect to use proceeds from the disposition of properties and additional borrowings to continue making our scheduled debt service payments on certain properties until the maturity dates of the loans are extended, the loans are refinanced or the outstanding balances of the loans are completely paid off. There is no guarantee that we will be able to refinance our borrowings with more or less favorable terms or extend the maturity dates of such loans. In the event that any of the lenders demand immediate payment of an entire loan balance, we would have to consider all available alternatives, including transferring legal possession of the relevant property to the lender.

Behringer Harvard Short-Term Opportunity Fund I LP

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The effects of the recent economic downturn caused us to reconsider our strategy for certain of our properties where we believed the principal balance of the debt encumbering the property exceeded the value of the asset under current market conditions. In those cases where we believed the value of the property was not likely to recover in the near future, we believed there were more effective uses of our capital, and as a result we ceased making debt service payments on certain property level debt, resulting in defaults or events of default under the related loan agreements. We are in active negotiations with certain lenders to refinance or restructure debt in a manner that we believe is the best outcome for us and our unitholders. Some loans may be resolved through a discounted purchase or payoff of the debt and, in certain situations, other loans may be resolved by negotiating agreements conveying the properties to the lender such as we did with the Cassidy Ridge and Palomar Residences loans discussed below.

The Mockingbird Commons Partnership entered into a promissory note payable to CULS, an unaffiliated third party, whereby the borrower was permitted to borrow up to $34 million (“Palomar Residences Loan Agreement”) to construct the Palomar Residences. The borrower did not pay the outstanding principal balance, together with all accrued, but unpaid interest due on the maturity date of October 1, 2011, as we continued to negotiate with the lender. In December 2011, the parties had negotiated a recapitalization of the Palomar Residences Loan Agreement; however, the transaction ultimately was not approved by the credit union regulator and could not be completed. Subsequently, on January 5, 2012, the borrower received notice from the lender demanding immediate payment of the entire outstanding loan balance and all accrued but unpaid interest. The note was subsequently sold to the Mockingbird Lender on April 18, 2012. On June 8, 2012, the borrower entered into a Deed in Lieu of Foreclosure Agreement with the Mockingbird Lender whereby ownership of the Palomar Residences was transferred to the lender, resulting in full settlement of the outstanding debt. The outstanding principal balance under the Palomar Residences Loan Agreement, which was recourse to us, was approximately $19.4 million at June 8, 2012.

Behringer Harvard Mountain Village, LLC entered into the Cassidy Ridge Loan Agreement to construct Cassidy Ridge. The outstanding principal balance, together with all accrued, but unpaid interest was due and payable on the maturity date of October 1, 2011, which amount was not paid as we continued to negotiate with the lender. In December 2011, the parties had negotiated a recapitalization of the Cassidy Ridge Loan Agreement; however, the transaction ultimately was not approved by the credit union regulator and could not be completed. Subsequently, on January 5, 2012, the borrower received notice from the lender demanding immediate payment of the entire outstanding principal balance of $27.7 million and all accrued but unpaid interest. On May 17, 2012, the borrower entered into a Deed in Lieu of Foreclosure Agreement with CULS whereby ownership of Cassidy Ridge was transferred to the lender, resulting in full settlement of the outstanding debt. The loan, which was recourse to us, had an outstanding principal balance of approximately $28.4 million at May 17, 2012.

In addition, on October 1, 2010, Behringer Harvard Mountain Village, LLC entered into the BHH Cassidy Ridge Loan. Proceeds from the loan were used to complete construction of the condominiums at Cassidy Ridge. The loan bears interest at 5% and matured on October 1, 2011. We have not received notice of demand for payment from Behringer Holdings and have been informed that it currently has no intention to do so. The outstanding principal balance under the loan was $0.9 million at June 30, 2012 and December 31, 2011, respectively.

The Bank of America loan for Hotel Palomar and the Revolver Agreement contain cross-default and cross-collateralization provisions. The majority of our notes payable require payments of interest only, with all unpaid principal and interest due at maturity. Further, our loan agreements stipulate that we comply with certain reporting and financial covenants. These covenants include, among other things, notifying the lender of any change in management and maintaining certain loan to value ratios. Each loan, with the exception of the Mockingbird Commons Partnership Loan, the BHH Loan and the BHH Cassidy Ridge Loan, is secured by the associated real property. In addition, the Hotel Palomar loan and Revolver Agreement are recourse to us. We or our subsidiaries were in default under the Mockingbird Commons Partnership Loans and the BHH Cassidy Ridge Loan at June 30, 2012.

Troubled Debt Restructuring

On May 17, 2012 we entered into a Deed in Lieu of Foreclosure Agreement with CULS effective May 8, 2012, transferring ownership of Cassidy Ridge to CULS, resulting in full settlement of the outstanding debt to the lender resulting in a gain on troubled debt restructuring of $7.1 million which is included in our condensed consolidated statement of operations for the three and six months ended June 30, 2012. The loan, which was recourse to us, had an outstanding principal balance of approximately $28.4 million at May 17, 2012.

On June 8, 2012, the Mockingbird Commons Partnership entered into a Deed in Lieu of Foreclosure Agreement with the Mockingbird Lender whereby the Palomar Residences were transferred to the Mockingbird Lender, resulting in full settlement of the outstanding debt resulting in a gain on troubled debt restructuring of $1.0 million of which $0.9 million is included in discontinued operations on our statement of operations for the three and six months ended June 30, 2012. The outstanding principal balance under the loan agreement was approximately $19.4 million at June 8, 2012.

Behringer Harvard Short-Term Opportunity Fund I LP

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The General Partners and certain of their affiliates are entitled to receive fees and compensation in connection with the management and sale of our assets, and have received fees in the past in connection with the Offering and acquisitions. Our General Partners have agreed that all of these fees and compensation will be allocated to Behringer Advisors II since the day-to-day responsibilities of serving as our general partner are performed by Behringer Advisors II through the executive officers of its general partner.

For the management and leasing of our properties, we pay HPT Management Services, LLC, Behringer Harvard Short-Term Management Services, LLC or Behringer Harvard Real Estate Services, LLC, or their affiliates (individually or collectively referred to as “Property Manager”), affiliates of our General Partners, property management and leasing fees equal to the lesser of: (a) the amounts charged by unaffiliated persons rendering comparable services in the same geographic area or (b)(1) for commercial properties that are not leased on a long-term net lease basis, 4.5% of gross revenues, plus separate leasing fees of up to 1.5% of gross revenues based upon the customary leasing fees applicable to the geographic location of the properties, and (2) in the case of commercial properties that are leased on a long-term net lease basis (ten or more years), 1% of gross revenues plus a one-time initial leasing fee of 3% of gross revenues payable over the first five years of the lease term. We reimburse the costs and expenses incurred by our Property Manager on our behalf, including the wages and salaries and other employee-related expenses of all on-site employees who are engaged in the operation, management, maintenance and leasing or access control of our properties, including taxes, insurance and benefits relating to such employees, and legal, travel and other out-of-pocket expenses that are directly related to the management of specific properties. We incurred property management fees payable to our Property Manager of less than $0.1 million and $0.2 million for the six months ended June 30, 2012 and 2011, respectively, of which $0.1 million is included in discontinued operations for the six months ended June 30, 2011.

We pay Behringer Advisors II or its affiliates an annual asset management fee of 0.5% of the contract purchase price of our assets. Any portion of the asset management fee may be deferred and paid in a subsequent year. During the six months ended June 30, 2012, we incurred asset management fees of $0.4 million of which $0.1 million was included in discontinued operations. During the six months ended June 30, 2011, we incurred asset management fees of $0.5 million, of which less than $0.1 million was capitalized to real estate inventory, $0.2 million was included in discontinued operations and approximately $29,000 was waived.

In connection with the sale of our properties, we will pay to the General Partners or their affiliates a real estate commission in an amount not exceeding the lesser of: (a) 50% of the reasonable, customary and competitive real estate brokerage commissions customarily paid for the sale of a comparable property in light of the size, type and location of the property, or (b) 3% of the gross sales price of each property, subordinated to distributions to limited partners from the sale proceeds of an amount which, together with prior distributions to the limited partners, will equal (1) 100% of their capital contributions plus (2) a 10% annual cumulative (noncompounded) return of their net capital contributions. Subordinated real estate commissions that are not payable at the date of sale, because limited partners have not yet received their required minimum distributions, will be deferred and paid at such time as these subordination conditions have been satisfied. In addition, after the limited partners have received a return of their net capital contributions and a 10% annual cumulative (noncompounded) return on their net capital contributions, then the General Partners are entitled to receive 15% of the remaining residual proceeds available for distribution (a subordinated participation in net sale proceeds and distributions); provided, however, that in no event will the General Partners receive in the aggregate more than 15% of sale proceeds remaining after the limited partners have received a return of their net capital contributions. Since the conditions above have not been met at this time, we incurred no such real estate commissions for the six months ended June 30, 2012 and 2011.

We may reimburse Behringer Advisors II for costs and expenses paid or incurred to provide services to us including direct expenses and the costs of salaries and benefits of certain persons employed by those entities and performing services for us, as permitted by our Partnership Agreement. For the six months ended June 30, 2012 we incurred $0.2 million for administrative services, of which $0.1 million was waived. For the six months ended June 30, 2011 we incurred such costs for administrative services totaling $0.2 million, all of which was waived. In addition, Behringer Advisors II or its affiliates waived $2.6 million for reimbursement of operating expenses for the six months ended June 30, 2011, which is classified as a capital contribution on our condensed consolidated statement of equity (deficit).

On March 29, 2011, we entered into the Fifth Amended and Restated Promissory Note to amend the terms of the BHH Loan to a maximum borrowing amount of $25 million with all borrowings and accrued interest due on March 29, 2014. The outstanding principal balance under the BHH Loan at June 30, 2012 and December 31, 2011 was $11.1 million. Borrowings under the BHH Loan are being used principally to finance general working capital and capital expenditures. The BHH Loan is unsecured, has an interest rate of 5.0% per annum and requires no monthly payments of interest or principal. On July 5, 2012 we entered into the Note Modification Agreement and Assignment of Proceeds with BHH whereby the maturity date of the BHH Loan was extended to May 31, 2014. In order to secure payment of the BHH Loan, we assigned net proceeds from the sale of 1221 Coit Road, 250/290 John Carpenter Freeway and the back-end promoted interest in distributable cash related to Landmark I & II and 5050 Quorum properties which were sold in 2011. All assigned proceeds will be applied to the payment of the note and all accrued but unpaid interest.

Behringer Harvard Short-Term Opportunity Fund I LP

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In addition, on October 1, 2010, Behringer Harvard Mountain Village, LLC entered into the BHH Cassidy Ridge Loan. Proceeds from the loan were used to complete construction of the condominiums at Cassidy Ridge. The loan bears interest at 5% and matured on October 1, 2011. We have not received notice of demand for payment from Behringer Holdings and have been informed that it currently has no intention to do so. The outstanding principal balance under the loan was $0.9 million at June 30, 2012 and December 31, 2011, respectively.

We had payables to related parties of approximately $4.2 million and $3.4 million at June 30, 2012 and December 31, 2011, respectively. These balances consist primarily of interest accrued on the BHH Loan and management fees payable to our Property Manager.

We are dependent on Behringer Advisors II, our Property Manager, or their affiliates, for certain services that are essential to us, including disposition decisions, property management and leasing services and other general and administrative responsibilities. In the event that these companies are unable to provide the respective services to us, we will be required to obtain such services from other sources.

On June 8, 2012, the Mockingbird Commons Partnership transferred ownership of the previously leased condominiums at the Palomar Residences to the Mockingbird Lender. This resulted in full settlement of the outstanding debt resulting in a gain on troubled debt restructuring of $1.0 million of which $0.9 million is included in discontinued operations for the three and six months ended June 30, 2012. We sold seven previously leased condominiums at the Palomar Residences during the six months ended June 30, 2012 and an additional five in 2011. On December 16, 2011, we sold 5050 Quorum for a contract sales price of $6.8 million. Proceeds from the sale were used to fully satisfy the existing indebtedness associated with the property. On June 30, 2011, we sold Landmark I and Landmark II. The contract sales price for Landmark I and II of $16.2 million was used to fully satisfy the existing indebtedness associated with the property. In addition, on July 5, 2011, pursuant to a foreclosure, we transferred ownership of the Plaza Skillman property to the associated lender and we classified 1221 Coit Road as held for sale at June 30, 2012.

In accordance with GAAP, the results of operations for the properties above are classified as discontinued operations in the accompanying consolidated statements of operations. Certain amounts in the accompanying financial statements have been recast to conform to the current presentation. The following table summarizes the results of discontinued operations for the three and six months ended June 30, 2012 and 2011:

Behringer Harvard Short-Term Opportunity Fund I LP

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The major classes of assets and liabilities associated with real estate held for sale at June 30, 2012 are as follows:

On July 5, 2012, we entered into a contract for the sale of 1221 Coit Road to Carter Validas Properties, LLC, an unaffiliated third party. The contract sales price for the property is $20.0 million. The purchaser made an earnest money deposit of $0.5 million as required by the contract.

On July 5, 2012 we entered into the Note Modification Agreement and Assignment of Proceeds with BHH whereby the maturity date of the BHH Loan was extended to May 31, 2014. In order to secure payment of the BHH Loan, we assigned proceeds from the sale of 1221 Coit Road, 250/290 John Carpenter Freeway and the back-end promoted interest in distributable cash related to Landmark I & II and 5050 Quorum properties which were sold in 2011. All assigned proceeds will be applied to the payment of the note and all accrued but unpaid interest. The outstanding principal balance and all accrued but unpaid interest under the BHH Loan at June 30, 2012 and December 31, 2011 was $13.3 million and $13.0 million, respectively.

*****

The following discussion and analysis should be read in conjunction with our accompanying financial statements and the notes thereto:

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include discussion and analysis of the financial condition of us and our subsidiaries, including our ability to rent space on favorable terms, 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 future distributions to our unitholders, the estimated per unit value of our limited partnership units 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 unitholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC and the factors described below:

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 or false. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results except as required by applicable law. We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.

Cautionary Note

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

Liquidity and Capital Resources

The effects of the recent economic downturn caused us to reconsider our strategy for certain of properties where we believed the principal balance of the debt encumbering the property exceeded the value of the asset under current market conditions. In those cases where we believed the value of a property was not likely to recover in the near future, we believed there were more effective uses for our capital, and as a result we ceased making debt service payments on certain property level debt, resulting in defaults or events of default under the related loan agreements. We were in active negotiations with certain lenders to refinance or restructure debt in a manner that we believed was the best outcome for us and our unitholders and we resolved some of these recourse loans by negotiating agreements conveying the properties to the lender as we did with two properties during the six months ended June 30, 2012 and two properties during the year ended December 31, 2011. There is no guarantee that we will not have to negotiate agreements conveying properties to lenders in the future.

Our cash and cash equivalents were $4.1 million at June 30, 2012. Our principal demands for funds in the next twelve months and beyond will be for the payment of Partnership operating expenses, costs associated with lease-up and maintenance of our operating properties and for the payment of recurring debt service, further principal paydowns and reserve requirements on our outstanding indebtedness as required by our lenders. As a result of current economic and market conditions, our ability to continue as a going concern is dependent on our ability to resolve our current debt maturities and the willingness and ability of our General Partners or their affiliates to provide us with sources of liquidity. During the six months ended June 30, 2012, Behringer Advisors II or its affiliates waived reimbursement of administrative services totaling $0.1 million. During the six months ended June 30, 2011, Behringer Advisors II or its affiliates waived reimbursement of administrative services, asset management fees and reimbursement of operating expenses totaling $2.8 million, of which $2.6 million was classified as a capital contribution from our General Partners on our condensed consolidated statement of equity (deficit). Although we have had to extend beyond our original target life of three to five years after the end of the Offering, we are designed to be self-liquidating and thus do not intend to continue as a long-term going concern.

In order to provide additional liquidity for the execution of our current business plan, we have identified certain assets for disposition in 2012. We continue to work towards a sale of 250/290 John Carpenter Freeway which contains approximately 539,000 rentable square feet and plan to sell 1221 Coit Road during the year. As a result of our current liquidity needs and unstable credit market conditions limiting available resources through additional borrowings for a closed-end, finite life fund, we may have to sell a property under terms that are less advantageous than we could achieve with a longer holding period. However, there can be no assurance these future dispositions will occur, or, if they occur, that they will help us to achieve our liquidity objectives. In addition, to preserve cash, it may be in the best interests of unit holders to allow lenders to take possession of certain properties when they are no longer economically viable.

We had notes payable, including the 1221 Coit Road Loan classified as held for sale, totaling $76.1 million at June 30, 2012 of which $62.8 million was secured by our three remaining properties. As of June 30, 2012, $53 million of our notes payable were set to mature in the next twelve months and $50.8 million was recourse to us. We currently expect to use proceeds from the disposition of properties and additional borrowings to continue making our scheduled debt service payments on certain properties until the maturity dates of the loans are extended, the loans are refinanced or the outstanding balances of the loans are completely paid off. There is no guarantee that we will be able to refinance our borrowings with more or less favorable terms or extend the maturity dates of such loans. In the event that any of the lenders demand immediate payment of an entire loan balance, we would have to consider all available alternatives, including transferring legal possession of the relevant property to the lender.

As previously noted, we or our subsidiaries were in default under the Mockingbird Commons Partnership Loans and the BHH Cassidy Ridge Loan at June 30, 2012. The Bank of America loan for Hotel Palomar and the Revolver Agreement contain cross-default and cross-collateralization provisions. The majority of our notes payable require payments of interest only, with all unpaid principal and interest due at maturity. Further, our loan agreements stipulate that we comply with certain reporting and financial covenants. These covenants include, among other things, notifying the lender of any change in management and maintaining certain loan to value ratios. Each loan, with the exception of the Mockingbird Commons Partnership Loan, the BHH Loan and the BHH Cassidy Ridge Loan, is secured by the associated real property. In addition, the Hotel Palomar loan and Revolver Agreement are recourse to us.

The preparation of financial statements of a going concern generally contemplates realization of assets and settlement of liabilities in the normal course of business.  The conditions and events described above raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability of assets or the amounts of liabilities that may result should we be unable to continue as a going concern.  Our current plans are to use proceeds from the disposition of properties and additional borrowings to make payments on our outstanding debt until the maturity dates of the loans are extended, the loans are refinanced or the outstanding balances of the loans are completely paid off, pay for on-going capital needs, fund operations and, if available, make special distributions to our unitholders.      

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including investment impairment. 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.

Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include our accounts and the accounts of our subsidiaries. All inter-company transactions, balances and profits have been eliminated in consolidation. Interests in entities acquired are evaluated based on applicable GAAP, which includes the consolidation of variable interest entities (“VIEs”) in which we are deemed to be the primary beneficiary. If the interest in the entity is determined not to be a VIE, then the entities are evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.

There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and if so, if we are the primary beneficiary. The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity. Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility and using a discount rate to determine the net present value of those future losses. A change in the judgments, assumptions and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment on the equity method that should in fact be consolidated, the effects of which could be material to our financial statements.

Impairment of Long-Lived Assets

For all of our real estate, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable. Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to: a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers and changes in the global and local markets or economic conditions. Our assets may at times be concentrated in limited geographic locations and, to the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at 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. 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. We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. 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. A 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.

Real Estate Inventory

Real estate inventory was stated at the lower of cost or fair market value and consisted of developed land, condominiums and constructed homes. In addition to land acquisition costs, land development costs and construction costs, costs included interest and real estate taxes, which were capitalized during the period beginning with the commencement of development and ending with the completion of construction.

Inventory Valuation Adjustment

For real estate inventory, at each reporting date, management compared the estimated fair value less costs to sell to the carrying value. An adjustment was recorded to the extent that the fair value less costs to sell was less than the carrying value. We determined the estimated fair value based on comparable sales in the normal course of business under existing and anticipated market conditions. This evaluation took into consideration factors such as current selling prices, estimated future selling prices, costs spent to date, estimated additional future costs, appraisals and management’s plans for the property.

Market Overview

Conflicting macro economic forces, both domestically and globally, continue to result in an uneven recovery for the U.S. economy. Job growth was below 100,000 new jobs for each month in the second quarter of 2012. While positive, this is below the approximate 125,000 new job seekers that enter the labor market every month and is further impacting spending, particularly among middle income households. Globally, Spain and Greece were front and center in the European debt crisis. On an almost daily basis, the European credit “haves” and “have-nots” debated austerity versus relief, where one set of countries enjoyed unusually low borrowing rates while others struggled to attract new lenders. This along with increased concerns over a slowdown in China are exacerbating international financial uncertainty over world-wide demand. In the U.S. this resulted in dampening exports, a slowdown in manufacturing and a pullback in new investments. On the positive side, the economy has now been modestly growing for 12 consecutive quarters since the recession officially ended in 2009 with positive economic news during the second quarter primarily related to increased construction spending and improvements in the housing market. Energy prices during the quarter were also favorable, freeing up consumer spending and reducing operating costs for businesses. However, on a net basis, all of this has led the Federal Reserve, and on a global perspective the International Monetary Fund, to reduce their growth forecasts for the rest of 2012 with many analysts projecting another round of quantitative easing.

Our primary objectives will be to continue to preserve capital, as well as sustain and enhance property values, while continuing to focus on the disposition of our properties. Our ability to dispose of our properties will be subject to various factors, including the ability of potential purchasers to access capital debt financing. If we are unable to sell a property when we determine to do so, it could have a significant adverse effect on our cash flows and results of operations. Given the disruptions in the capital markets and the current lack of available credit, our ability to dispose of our properties may be delayed, or we may receive lower than anticipated returns. In addition, a more prolonged economic downturn could negatively affect our ability to attract and retain tenants.

Our remaining real estate assets are located in Texas, all of which are located in the Dallas-Fort Worth metropolitan area. We have entered into a contract to sell 1221 Coit Road and continue to work towards a sale of 250/290 John Carpenter Freeway. We did not experience any significant tenant defaults resulting in the loss of material rental income during the six months ended June 30, 2012. Real gross domestic product rose 1.5% in the second quarter after rising 2% in the first quarter of 2012. Smith Travel Research indicates that the year-to-date national overall occupancy rate for hospitality properties in the United States increased to 61% and the national overall Average Daily Rate (“ADR”) increased to $105.13. Additionally, if the economy continues to improve, we expect occupancy and room rates for hotels to increase since increased demand for hotel rooms generally correlates with growth in the U.S. gross domestic product (GDP). The hotel industry is expected to see continued modest growth in 2012.

Current economic conditions discussed above make it difficult to predict future operating results. There can be no assurance that we will not experience further declines in revenues or earnings for a number of reasons, including, but not limited to the possibility of greater than anticipated weakness in the economy and the continued impact of the trends mentioned above.

Results of Operations

Three months ended June 30, 2012 as compared to the three months ended June 30, 2011

Continuing Operations

We had one wholly-owned property and interests in two properties through investments in partnerships and joint ventures as of June 30, 2012. We had six wholly-owned properties and interests in two properties through investments in partnerships and joint ventures as of June 30, 2011. All investments in partnerships and joint ventures were consolidated with and into our accounts for the three months ended June 30, 2012 and 2011.

Rental Revenue. Rental revenue for the three months ended June 30, 2012 and 2011 was $0.6 million and $0.7 million, respectively, and was comprised of revenue, including adjustments for straight-line rent and amortization of above- and below-market leases. The decrease in rental revenue for the three month period ended June 30, 2012 was due to lower recovery of expenses from tenants. Management expects rental revenue to remain relatively flat unless we are able to lease-up available space.

Hotel Revenue. Hotel revenue for the three months ended June 30, 2012 and 2011 was $3.7 million and $3.4 million, respectively, and was comprised of revenue generated by the operations of Hotel Palomar. We expect hotel revenue to increase as the hospitality industry continues to see modest growth.

Property Operating Expenses. Property operating expenses for the three months ended June 30, 2012 and 2011 were $3.2 million and $3.3 million, respectively, and were comprised of expenses related to the daily operations of our properties. We expect property operating expenses to remain at current levels unless we are able to lease-up available space and lodging demand increases.

Asset Impairment Loss. Asset impairment loss for the three months ended June 30, 2011 was $7.5 million. We entered into a contract for the sale of 250/290 John Carpenter Freeway in April 2011. The sales contract was subsequently restructured to provide for contingent consideration which is subject to certain conditions, thus lowering the contract sales price on which an impairment loss is recognized. As a result, we recognized an additional asset impairment loss of approximately $7.5 million for the three months ended June 30, 2011 to adjust the carrying value of the asset to estimated fair value. There was no asset impairment loss for the three months ended June 30, 2012. Real estate values may continue to have fluctuations due to, among other things, the current economic environment and, as a result, there can be no assurance we will not have impairments in the future.

Interest Expense. Interest expense, net of amounts capitalized, for the three months ended June 30, 2012 and 2011 was $0.9 million and $1.3 million, respectively, and was primarily comprised of interest expense and amortization of deferred financing fees related to the notes associated with the acquisition and development of our properties. The decrease in interest expense during the three months ended June 30, 2012 was primarily due to the disposal of development properties.

Real Estate Taxes. Real estate taxes, net of amounts capitalized, for each of the three months ended June 30, 2012 and 2011 were $0.3 million and were comprised of real estate taxes from each of our properties.

Property and Asset Management Fees. Property and asset management fees for each of the three months ended June 30, 2012 and 2011 were $0.3 million and were comprised of property and asset management fees from our consolidated properties. Asset management fees of approximately $14,000 were waived by Behringer Advisors II for the three months ended June 30, 2011. We expect property and asset management fees to remain relatively constant in the near future.

General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2012 and 2011 were $0.4 million and $0.3 million, respectively. General and administrative expenses were comprised of auditing fees, transfer agent fees, tax preparation fees, directors’ and officers’ insurance premiums, legal fees, printing costs and other administrative expenses. Our advisor waived reimbursement of general and administrative expenses of $0.1 million for the three months ended June 30, 2011. Unless the advisor waives additional reimbursements, we expect general and administrative expenses to remain relatively constant in the near future.

Depreciation and Amortization Expense. Depreciation and amortization expense for the three months ended June 30, 2012 and 2011 was $0.5 million and $0.8 million, respectively, and included depreciation and amortization of buildings, furniture and equipment and real estate intangibles associated with our consolidated properties. The decrease for the three months ended June 30, 2012 was the result of certain furniture, fixtures and equipment becoming fully depreciated in 2011.

Gain on Troubled Debt Restructuring. Gain on troubled debt restructuring for the three months ended June 30, 2012 was $7.2 million. On May 17, 2012 we entered into a Deed in Lieu of Foreclosure Agreement with CULS whereby ownership of Cassidy Ridge was transferred to CULS, resulting in full settlement of the outstanding debt to the lender resulting in a gain on troubled debt restructuring of $7.1 million. On June 8, 2012, the Mockingbird Commons Partnership entered into a Deed in Lieu of Foreclosure Agreement with the Mockingbird Lender whereby the Palomar Residences were transferred to the Mockingbird Lender, resulting in full settlement of the outstanding debt resulting in a gain on troubled debt restructuring of $1.0 million of which $0.9 million is included in discontinued operations on our statement of operations for the three months ended June 30, 2012.

Net Income (Loss) Attributable to Noncontrolling Interest. Net income attributable to noncontrolling interest for the three months ended June 30, 2012 was $0.2 million and net loss attributable to noncontrolling interest for the three months ended June 30, 2011 was $0.5 million, respectively, and represented the other partners’ proportionate share of income and losses from investments in the partnerships that we consolidate.

Six months ended June 30, 2012 as compared to the six months ended June 30, 2011

Continuing Operations

We had one wholly-owned property and interests in two properties through investments in partnerships and joint ventures as of June 30, 2012. We had six wholly-owned properties and interests in two properties through investments in partnerships and joint ventures as of June 30, 2011. All investments in partnerships and joint ventures were consolidated with and into our accounts for the six months ended June 30, 2012 and 2011.

Rental Revenue. Rental revenue for the six months ended June 30, 2012 and 2011 was $1.5 million and $1.4 million, respectively, and was comprised of revenue, including adjustments for straight-line rent and amortization of above- and below-market leases. Management expects rental revenue to remain relatively flat unless we are able to lease-up available space.

Hotel Revenue. Hotel revenue for the six months ended June 30, 2012 and 2011 was $7.2 million and $7.5 million, respectively, and was comprised of revenue generated by the operations of Hotel Palomar. The decrease in hotel revenue was primarily due to the hotel hosting Dallas-Fort Worth area Super Bowl events in February 2011. We expect hotel revenue to increase as the hospitality industry continues to see modest growth.

Property Operating Expenses. Property operating expenses for the six months ended June 30, 2012 and 2011 were $6.5 million and $6.6 million, respectively, and were comprised of expenses related to the daily operations of our properties. We expect property operating expenses to remain at current levels unless we are able to lease-up available space and lodging demand increases.

Asset Impairment Loss. Asset impairment loss for the six months ended June 30, 2011 was $10.2 million. We entered into a contract for the sale of 250/290 John Carpenter Freeway in April 2011. The contract sales price was less than our carrying value of the asset. As a result, we recognized an asset impairment loss of approximately $10.2 million for the six months ended June 30, 2011. There was no asset impairment loss for the six months ended June 30, 2012. Real estate values may continue to have fluctuations due to, among other things, the current economic environment and, as a result, there can be no assurance we will not have impairments in the future.

Interest Expense. Interest expense, net of amounts capitalized, for the six months ended June 30, 2012 and 2011 was $2.2 million and $1.9 million, respectively, and was primarily comprised of interest expense and amortization of deferred financing fees related to the notes associated with the acquisition and development of our properties. The increase in interest expense during the six months ended June 30, 2012 was primarily due to the accrual of default interest on certain loans during the period and interest costs for Cassidy Ridge no longer being capitalized as a result of the construction being completed. We capitalized interest costs of $0.7 million for Cassidy Ridge during the six months ended June 30, 2011. We expect interest expense to decrease in the future as a result of the disposition of development properties.

Real Estate Taxes. Real estate taxes, net of amounts capitalized, for the six months ended June 30, 2012 and 2011 were $0.7 million and $0.6 million, respectively, and were comprised of real estate taxes from each of our properties. We expect real estate taxes to remain flat in the near future.

Property and Asset Management Fees. Property and asset management fees for the six months ended June 30, 2012 and 2011 were $0.6 million and $0.5 million, respectively, and were comprised of property and asset management fees from our consolidated properties. Asset management fees of approximately $29,000 were waived by Behringer Advisors II for the six months ended June 30, 2011. We expect property and asset management fees to remain relatively constant in the near future.

General and Administrative Expenses. General and administrative expenses for the six months ended June 30, 2012 and 2011 were $0.6 million and $0.5 million, respectively. General and administrative expenses were comprised of auditing fees, transfer agent fees, tax preparation fees, directors’ and officers’ insurance premiums, legal fees, printing costs and other administrative expenses. Our advisor waived reimbursement of general and administrative expenses of $0.1 million and $0.2 million for the six months ended June 30, 2012 and 2011, respectively. Unless the advisor waives additional reimbursements, we expect general and administrative expenses to remain relatively constant in the near future.

Depreciation and Amortization Expense. Depreciation and amortization expense for the six months ended June 30, 2012 and 2011 was $1.0 million and $1.8 million, respectively, and included depreciation and amortization of buildings, furniture and equipment and real estate intangibles associated with our consolidated properties. The decrease for the six months ended June 30, 2012 was the result of certain furniture, fixtures and equipment becoming fully depreciated in 2011.

Gain on Troubled Debt Restructuring. Gain on troubled debt restructuring for the six months ended June 30, 2012 was $7.2 million and was the result of transferring ownership, through a deed in lieu of foreclosure, of Cassidy Ridge and the Palomar Residences to the respective lenders, resulting in full settlement of the outstanding debt to the lenders.

Net Income (Loss) Attributable to Noncontrolling Interest. Net income attributable to noncontrolling interest for the six months ended June 30, 2012 was $0.8 million and net loss attributable to noncontrolling interest for the six months ended June 30, 2011 was $0.8 million, respectively, and represented the other partners’ proportionate share of income and losses from investments in the partnerships that we consolidate.

Cash Flow Analysis

Cash used in operating activities for the six months ended June 30, 2012 was $3.2 million and was comprised primarily of net income of $3.1 million, adjusted for depreciation and amortization of $1.7 million and gain on troubled debt restructuring of $8.1 million. Cash used in operating activities for the six months ended June 30, 2011 was $4.8 million and was comprised of the net loss of approximately $20.1 million, adjusted for non-cash impairment charges of $18.8 million, a gain on troubled debt restructuring associated with the sale of Landmark I and II of $4.9 million and depreciation and amortization of $3.3 million, offset by an increase in real estate inventory of $1.9 million.

Cash provided by investing activities for the six months ended June 30, 2012 was $3.8 million and was comprised of proceeds from the sale of condominiums at the Palomar Residences of $2.9 million and the change in restricted cash related to our properties of approximately $2 million, partially offset by capital expenditures for real estate of $1 million. Cash provided by investing activities for the six months ended June 30, 2011 was $16.8 million and was primarily comprised of proceeds from the sale of Landmark I & II of $16.2 million and the change in restricted cash related to our properties of $0.9 million.

Cash provided by financing activities for the six months ended June 30, 2012 was $0.2 million and consisted primarily of payments on notes payable, net of proceeds. Cash used in financing activities for the six months ended June 30, 2011 was $12 million and consisted primarily of payments on notes payable, net of proceeds, of $14.6 million, offset by contributions from our general partner, Behringer Advisors II, of $2.6 million.

Net Operating Income

Net operating income (“NOI”) is a non-GAAP financial measure that is defined as total revenue less property operating expenses, real estate taxes, property management fees, advertising costs and the cost of real estate inventory sales. We believe that NOI provides an accurate measure of the operating performance of our operating assets because NOI excludes certain items that are not associated with management of our properties. NOI should not be considered as an alternative to net income (loss), or an indication of our liquidity. NOI is not indicative of funds available to meet our cash needs or our ability to make distributions and should be reviewed in connection with other GAAP measurements. To facilitate understanding of this financial measure, a reconciliation of NOI to net loss attributable to the Partnership in accordance with GAAP has been provided. Our calculations of NOI for the three and six months ended June 30, 2012 and 2011 are presented below (in thousands).

Performance Reporting Required by the Partnership Agreement

Section 15.2 in our Partnership Agreement requires us to provide our limited partners with our net cash from operations, a non-GAAP financial measure, which is defined as net income, computed in accordance with GAAP, plus depreciation and amortization on real estate assets, adjustments for gains from the sale of assets and gains on the sale of discontinued operations, debt service and capital improvements (“Net Cash From Operations”). Our calculations of Net Cash From Operations for the six months ended June 30, 2012 and 2011 are presented below (in thousands):

Disposition Policies

We believe it makes economic sense to sell properties in today’s market in certain instances, such as when the value of the in-place cash flows from existing tenants is stable, predictable and attractive to potential buyers, when the property has limited or no equity with a near-term debt maturity, or when the equity in a property can be redeployed in the portfolio in order to achieve better returns or strategic goals. Therefore, we will evaluate each real property in which we have invested until such time as sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met. We will also consider factors such as potential capital appreciation, cash flow and federal income tax considerations, including possible adverse federal income tax consequences to our limited partners, the current state of the general economy and whether waiting to dispose of a property will allow us to realize additional value for our limited partners. Our General Partners may exercise their discretion as to whether and when to sell a property, and we will have no obligation to sell properties at any particular time, except upon our termination on December 31, 2017, or earlier if our General Partners determine to liquidate us, or, if investors holding a majority of the units vote to liquidate us in response to a formal proxy to liquidate. Instead of causing us to liquidate, our General Partners, in their sole discretion, may determine to offer to limited partners the opportunity to convert their units into interests in another public real estate program sponsored by our General Partners or their affiliates, through a plan of merger, plan of exchange or plan of conversion, provided that the transaction is approved by holders of such percentage of units as determined by our General Partners, but not less than a majority and excluding those units held by our General Partners and their affiliates. If such an opportunity is provided to our limited partners, it may involve the distribution to limited partners of freely traded securities that are listed on a securities exchange.

Cash flow from operations will not be invested in the acquisition of new properties. However, our General Partners may determine not to distribute net sales proceeds if such proceeds are:

Thus, we are intended to be self-liquidating in nature.

We will not pay, directly or indirectly, any commission or fee, except as specifically permitted under Article XII of our Partnership Agreement, to our General Partners or their affiliates in connection with the distribution of proceeds from the sale, exchange or financing of our properties.

Although not required to do so, we will generally seek to sell our real estate properties for cash. We may, however, accept terms of payment from a buyer that include purchase money obligations secured by mortgages as partial payment, depending upon then-prevailing economic conditions customary in the area in which the property being sold is located, credit of the buyer and available financing alternatives. Some properties we sell may be sold on an installment basis under which only a portion of the sales price will be received in the year of sale, with subsequent payments spread over a number of years. In such event, our full distribution of the net proceeds of any sale may be delayed until the notes are paid, sold or financed.

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.

We may be exposed to interest rate changes primarily from variable interest rate debt incurred to acquire and develop properties, issue loans and make other permitted investments. Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps or floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate portion of our variable rate debt. Of our approximately $76.1 million in notes payable at June 30, 2012, approximately $50.8 million represented debt subject to variable interest rates, of which $9.7 million is subject to minimum interest rates. If our variable interest rates increased 100 basis points, we estimate that total annual interest expense would increase by approximately $0.4 million.

At June 30, 2012, we did not have any foreign operations and thus were not exposed to foreign currency fluctuations.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, the management of Behringer Advisors II, our general partner, including the Chief Executive Officer and Chief Financial Officer of our general partner, evaluated as of June 30, 2012 the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of Behringer Advisors II, our general partner, concluded that our disclosure controls and procedures, as of June 30, 2012, were effective for the purpose of ensuring 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 management, including the Chief Executive Officer and Chief Financial Officer of Behringer Advisors II, 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 systems 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 partnership 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 June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

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

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2011.

None.

As previously disclosed in this Quarterly Report on Form 10-Q, as of June 30, 2012, we or our subsidiaries remain in default under the BHH Cassidy Ridge Loan and the Mockingbird Commons Partnership Loans. See note 8, “Notes Payable” for additional information regarding events of default.

None.

None.

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.

Index to Exhibits

* Filed herewith

** 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.