Popular nontraded REIT puts development into bankruptcy

A leading sponsor of nontraded real estate investment trusts, Behringer Harvard Holdings LLC, is struggling to make payments on loans in two of its offerings — and is losing real estate assets as a result.
After months of failed negotiations over $48.3 million of debt, the nontraded Behringer Harvard Opportunity REIT I Inc. this month had several properties go into bankruptcy protection. And a private placement, the Behringer Harvard Short-Term Opportunity Fund I LP, this month entered a “deed in lieu of foreclosure agreement” that transferred properties to the lender. The Behringer Harvard fund had owed $20.2 million on those properties.
The two real estate offerings have been in decline for some time. Both saw their estimated valuations decline dramatically over the last year.
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.
Also as of Dec. 31, investors in the Behringer Harvard Short-Term Opportunity Fund I LP, 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.
Chapter 11 bankruptcy protection is not uncommon in real estate, and the properties in Opportunity REIT I that are in bankruptcy protection are separate from other assets in the portfolio. But it can be ominous news for investors in a REIT that’s had difficulties, industry executives said.
“Every time something like that happens, shareholders take a bite in their investment,” said Anthony Chereso, chief executive of FactRight LLC, a due-diligence firm for private and alternative investments. “It doesn’t bode well for shareholders.”
Jason Mattox, chief operating officer of Behringer Harvard Holdings, said in a statement that
“We do not forecast a per-share valuation for any investment program in advance of a future valuation process.

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The two real estate offerings could be facing more trouble. The Opportunity REIT I, with $524.4 million in total assets, is sitting on an additional $68.4 million in debt that is maturing this year.
And the move to shed real estate cuts the total assets of the Short-Term Opportunity Fund I essentially in half. On a pro forma (or non-GAAP basis) and taking into account the recent loss of real estate, the fund had $64.5 million in total assets. That’s compared with $112.5 million in total assets at the end of March, according to a filing with the Securities and Exchange Commission.
Mr. Chereso said that the Opportunity REIT was unlike other real estate trusts because it invested in higher-risk assets with the aim of turning them around in three to four years. The REIT also stands out for raising money between 2005 and 2007, the height of the real estate bubble, Mr. Chereso said.
When asked how the move to Chapter 11 for some of its properties would affect the REIT’s estimated value, Mr. Chereso said: “You can’t put a dollar and cents amount on this. We don’t have enough data to put an effective value on the shares post Chapter 11,” he said.
Mr. Mattox said that the filing for bankruptcy was “clearly the best option to preserve value for our shareholders, creditors, tenants, customers and all stakeholders” at the development, called Frisco Square, in Frisco, Texas.
Behringer Harvard has been a leading seller of nontraded REITs during and after the real estate bubble, selling $5.5 billion in nontraded REITs since 2003.