Behringer Harvard Holdings LLC, the real estate investment firm, is about to drop a bombshell on its clients: one of its funds for wealthy, accredited investors is under water.
Launched in 2005, the Behringer Harvard Strategic Opportunity Fund I raised $65 million and invested in six properties, including a hotel on Wilshire Boulevard in Los Angeles and an office building in Amsterdam.
A related fund, Strategic Opportunity Fund II, raised $62 million over a similar period of time.
Like so many American homeowners who bought real estate at the top of the market in 2006 or 2007, the fund is underwater. Its debt far outweighs the fund's equity.
The Strategic Opportunity Fund I's “liabilities are greater than its assets,” said Michael O'Hanlon, chief executive of the funds that comprise Behringer Harvard's opportunity platform. The fund is negotiating with banks over one property, the hotel in Los Angeles, that is a “swing issue,” he said.
Behringer Harvard informed brokers last week of the fund's problems and is preparing to inform investors by Friday.
“The acquisition period was 2005 to 2007, and assets were bought in a dramatically different economy than now,” Mr. O'Hanlon said. He noted that Behringer Harvard put $47.2 million back into the two funds through loans, deferred fees and other items. It did take out $8 million in fees from the first fund.
It has been a difficult year for Behringer Harvard and its investors.
Behringer Harvard Opportunity REIT I saw its estimated value decline 46% at the end of 2011 to $4.12 a share, from $7.66 a year earlier. In June, one property in that REIT went into bankruptcy protection.
Also as of Dec. 31, investors in the Behringer Harvard Short-Term Opportunity Fund I LLP, which had about $130 million in total assets, saw its valuation drop to 40 cents a share, down drastically from $6.48 a share as of Dec. 31, 2010.
According to the company's web site, the programs sponsored and managed by the Behringer Harvard group of companies have attracted more than $5 billion in equity which has been invested into more than $11 billion in assets.
The problems of the Behringer Harvard fund stand out for two reasons, said Dana Woodbury, president of Buttonwood Investment Services LLC, a due diligence firm for broker-dealers.
First, while many real estate deals known as TICs – or tenant in common exchanges – have gone under since the collapse in real estate, only one commercial property is contained in a TIC offering, he noted. The Behringer Harvard fund had six properties.
Further, while other product sponsors created real estate funds with “opportunistic” real estate holdings, which may have problems and often require an infusion of capital to improve performance, the Behringer Harvard fund was exclusively concentrated on such real estate holdings, Mr. Woodbury said.
“This is rare,” he said. “Other sponsors spread the risk more throughout the portfolio and had more diversity. This is not to fault Behringer Harvard. They thought they saw an opportunity in the market with this type of offering, and the short term nature of the fund, to mature over three to five years, had a lot of appeal to investors.”
Many such real estate funds have longer life spans, typically between seven to 10 years, he said.