BEHRINGER HARVARD SHORT-TERM LIQUIDATING TRUST – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto with respect to our predecessor in interest, the Partnership, as of December 31, 2012.

Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of operations of the Partnership are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. 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.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the Partnership's accounts and the accounts of its 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 the Partnership is 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 the Partnership has control and/or substantive participating rights under the respective ownership agreement.

There are judgments and estimates involved in determining if an entity in which the Partnership has made an investment is a VIE and if so, if it is 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 the Partnership's financial statements.

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Impairment of Long-Lived Assets

Prior to the Effective Date, management monitored 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 assets for potential impairment include, but were not limited to: a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset was 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. Assets may have at times been concentrated in limited geographic locations and, to the extent that the Partnership's portfolio was concentrated in limited geographic locations, downturns specifically related to such regions may have resulted in tenants defaulting on their lease obligations at a portion of its properties within a short time period, which might result in asset impairments. When such events or changes in circumstances were present, management assessed 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 exceeded the estimated future undiscounted operating cash flows, the Partnership recognized an impairment loss to adjust the carrying amount of the asset to its estimated fair value. Management considered projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in their assessment of whether impairment conditions existed. While management believes estimates of future cash flows were 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 have resulted in understating or overstating the book value of our investments, which could be material to the 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. Management 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 estimated future selling prices, costs spent to date, estimated additional future costs and management's plans for the property.

   Overview and Background   

During 2012, the U.S. economic recovery, although still slow by most measures, survived uncertainties over the general election and the fiscal cliff and exhibited visible improvements in many fundamentals. One of the more important factors was the stabilization of the housing sector, a sector that historically has been important in prior economic recoveries. In the second half of the year, home price indexes for the largest 20 cities in the U.S. had recovered to 2003 levels. While these are still not at pre-recession highs, these are levels that show improvement in inventories, foreclosures and distressed sales. With recent government initiatives to encourage private investment of single family homes, many analysts are projecting a faster pace to clear the supply of foreclosed and vacant properties. Other improvements were made in factory output, particularly autos and other durable goods, corporate profits and modest gains in employment. Regarding employment, the economy averaged 165,000 new jobs in the fourth quarter of 2012, higher than prior quarters, but because that is barely exceeding new workers entering the market, it is a level that is consistent with a slow, gradual recovery. Also helping the U.S. are improvements, or at least stabilization, of global economic issues. The European debt crisis, which created uncertainty over sovereign defaults and departures from the Euro and European Union that were constant drags on the U.S. economy for the last couple of years, has now reached a point where the worst of the scenarios appear less likely. Global growth, as forecast by the World Bank, is projected at 2.4% for 2013. This compares to an expected 2.3% for 2012 and while less than earlier projections, is not expected to be a serious drag on the U.S.

Offsetting these factors and likely contributors to a slower, moderate recovery are uneven private consumption, as individual savings rates continue to rise; continued decline in new business creation, as investors are reluctant to increase their risk capital; and decreases in the labor force, as the long term unemployed are not returning to the work force and may be structurally unemployed. Also, there is concern over the consequences and uncertainty related to political gridlock, which was reported as a major factor in the negative GDP report for the fourth quarter of 2012. The debate over the debt limit appears to be continuing for an extended period and risks a downgrade of U.S. credit and increased borrowing costs. The federal government has not passed a budget in the last four years and appears to be in a prolonged debate over spending and tax levels. We believe that businesses and consumers tend to be very conservative when confronted with these kinds of issues, which could disrupt what could otherwise be a stronger recovery. On a net basis, we believe the U.S. economy can overcome a certain degree of these issues, and with most analysts, we expect a moderate, but uneven U.S. growth for the near term. However, these issues have the potential to be very significant to the economy.

Our primary objectives will be to continue to preserve value, protecting and selling our remaining assets, providing for our liabilities and distributing the remaining proceeds. 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.

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Our remaining operating real estate asset, Hotel Palomar, is located in Dallas, Texas. Smith Travel Research indicates that the national overall occupancy rate for hospitality properties in the United States increased from 60.1% in 2011 to 61% in 2012 and the national overall Average Daily Rate ("ADR") increased from $101.64 in 2011 to $106.10 during 2012. The forecast for the 2013 Dallas hotel market indicates modest increases in occupancy and ADR.

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   

Fiscal year ended December 31, 2012 as compared to the fiscal year ended December 31, 2011

As of December 31, 2012, the Partnership owned interests in Hotel Palomar and approximately five acres of land at 1221 Coit Road. The Partnership had ownership in four properties as of December 31, 2011. During the year ended December 31, 2012 the Partnership sold two office properties and returned Cassidy Ridge and Palomar Residences to the respective lenders. During the year ended December 31, 2011 the Partnership sold three office properties and a single family home development and returned a shopping/service center and undeveloped land back to the respective lenders. All investments in partnerships and joint ventures were consolidated with and into our accounts.

   Continuing Operations   

Rental Revenue. Rental revenue for the years ended December 31, 2012 and 2011 was $0.6 million and $0.8 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 year ended December 31, 2012 was primarily due to the loss of a retail tenant at Hotel Palomar. We expect rental revenue to remain at current levels until we lease the vacant retail space.

Hotel Revenue. Hotel revenue for the years ended December 31, 2012 and 2011 was $14.0 million and $14.2 million, respectively, and was comprised of revenue generated by the operations of Hotel Palomar. The decrease in hotel revenue for the year ended December 31, 2012 is primarily due to the hotel hosting Dallas-Fort Worth area Super Bowl events in February 2011. For the year ended December 31, 2012, year over year occupancy and ADR at the hotel remained relatively flat. We expect revenue to increase modestly as the economy continues to improve.

Real Estate Inventory Sales. Real estate inventory sales for the year ended December 31, 2011 was $5.6 million and was primarily comprised of revenue generated by the sale of home inventory and developed land at our luxury home development, Bretton Woods. There was no inventory sales during the year ended December 31, 2012.

Property Operating Expenses. Property operating expenses for the years ended December 31, 2012 and 2011 were $11.1 million and $11.8 million, respectively, and were comprised of expenses related to the daily operations of our properties. The decrease in property operating expenses for the year ended December 31, 2012 is primarily due to the disposal of development properties during the second quarter of 2012. We expect property operating expenses to remain constant in the near future.

Asset Impairment Loss. As a result of projected selling prices, an impairment loss of approximately $0.5 million and $1.4 million was recorded for the years ended December 31, 2012 and 2011, respectively, related to the land at 1221 Coit Road and the undeveloped land held in Melissa, Texas.

Inventory Valuation Adjustment. The inventory valuation adjustment for the year ended December 31, 2011 was $26.8 million and was composed of adjustments of $26.3 million to adjust the value of the condominiums at Cassidy Ridge to their fair value and $0.5 million related to the luxury homes and developed land lots at Bretton Woods. The U.S. housing market continued to experience its nationwide downturn, an oversupply of homes available for sale, reduced availability, deterioration in the credit markets, rising foreclosure activity, reduced selling prices and relatively high unemployment and deteriorating conditions in the overall economy. There was no inventory valuation adjustments during the year ended December 31, 2012.

Interest Expense. Interest expense, net of amounts capitalized, for the years ended December 31, 2012 and 2011 was $3.4 million and $5.3 million, respectively, and was primarily comprised of interest expense and amortization of deferred financing fees. The decrease in interest expense during the year ended December 31, 2012 was primarily due to the disposal of development properties and the paydown of loan balances. Unless we have additional borrowings in the future, we expect interest expense to remain relatively constant.

Real Estate Taxes. Real estate taxes, net of amounts capitalized, for the years ended December 31, 2012 and 2011 were $0.9 million and $0.7 million, respectively, and were comprised of real estate taxes from each of the properties.

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Property and Asset Management Fees. Property and asset management fees for years ended December 31, 2012 and 2011 were $0.8 million and $0.9 million, respectively, and were comprised of property and asset management fees from the consolidated properties. Asset management fees of approximately $50,000 were waived by Behringer Advisors II for the year ended December 31, 2011.

General and Administrative Expenses. General and administrative expenses for the years ended December 31, 2012 and 2011 were $1.2 million and $0.9 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. The advisor waived reimbursement of general and administrative expenses of $0.3 million for the year ended December 31, 2011. The liquidating trust structure is intended to reduce future general and administrative costs.

Depreciation and Amortization Expense. Depreciation and amortization expense for the years ended December 31, 2012 and 2011 was $1 million and $2 million, respectively, and included depreciation and amortization of buildings, furniture and equipment and real estate intangibles associated with the consolidated properties. The decrease in depreciation and amortization expense for the years ended December 31, 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 year ended December 31, 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 years ended December 31, 2012 and 2011 was $0.9 million and $1 million, respectively, and represented the other partners' proportionate share of losses from investments in the partnerships that are consolidated.

Fiscal year ended December 31, 2011 as compared to the fiscal year ended December 31, 2010

The Partnership had ownership interests in four properties and ten properties as of December 31, 2011 and 2010, respectively. All investments in partnerships and joint ventures were consolidated with and into the Partnership accounts. During the year ended December 31, 2011, Landmark I and II and 5050 Quorum were sold and Plaza Skillman was returned to the lender. In addition, during the year ended December 31, 2011, the remaining developed land lots and luxury homes at Bretton Woods, five previously leased condominiums as well as one model unit at the Palomar Residences were sold and the undeveloped land in Melissa, Texas was returned to the lender.

    Continuing Operations    

Rental Revenue. Rental revenue for the years ended December 31, 2011 and 2010 totaled $0.8 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.

Hotel Revenue. Hotel revenue for the years ended December 31, 2011 and 2010 was $14.2 million and $12.7 million, respectively, and was comprised of revenue generated by the hotel operations of Hotel Palomar. The increase in hotel revenue is primarily due to the hotel hosting Dallas-Fort Worth area Super Bowl events in February 2011.

Real Estate Inventory Sales Revenue. Real estate inventory sales revenue for the years ended December 31, 2011 and 2010 was $5.6 million and $1.7 million, respectively. Revenue for each year is primarily the result of sales of home inventory and developed land lots at Bretton Woods.

Property Operating Expenses. Property operating expenses for the years ended December 31, 2011 and 2010 were $11.8 million and $11.2 million, respectively, and were comprised of expenses related to the daily operations of our properties. The increase in operating expenses for the year ended December 31, 2011 is primarily due to certain costs for Cassidy Ridge no longer being capitalized as a result of construction being complete and increased activity at Hotel Palomar.

Asset Impairment Loss. As a result of projected selling prices, an asset impairment loss of approximately $1.4 million was recognized for the year ended December 31, 2011 related to the undeveloped land held in Melissa, Texas. There was no asset impairment loss during the year ended December 31, 2010.

Inventory Valuation Adjustment. The inventory valuation adjustments for the years ended December 31, 2011 and 2010 were $26.8 million and $1.9 million, respectively. The inventory valuation adjustment for the year ended December 31, 2011 was composed of adjustments of $26.3 million to adjust the value of the condominiums at Cassidy Ridge to their fair value and $0.5 million related to the luxury homes and developed land lots at Bretton Woods. Inventory valuation adjustments for the year ended December 31, 2010 were composed of non-cash adjustments to reduce the carrying value of the luxury homes and developed land lots at Bretton Woods to their estimated fair value.

Interest Expense. Interest expense for the years ended December 31, 2011 and 2010 was $5.3 million and $2.2 million, respectively, and was comprised of interest expense and amortization of deferred financing fees related to the notes associated with the acquisition and development of our consolidated properties. The increase in interest expense during the year ended December 31, 2011 is primarily due to interest costs for Cassidy Ridge no longer being capitalized as a result of the construction being completed and the accrual of default interest on certain matured loans during the period. The Partnership capitalized interest costs of $0.7 million and $2.2 million for Cassidy Ridge during the years ended December 31, 2011 and 2010, respectively.

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Real Estate Taxes. Real estate taxes for the years ended December 31, 2011 and 2010 were $0.7 million and $0.8 million, respectively, and were comprised of real estate taxes from each of the properties.

Property and Asset Management Fees. Property and asset management fees for the years ended December 31, 2011 and 2010 were $0.9 million and $0.7 million, respectively. Asset management fees of approximately $50,000 and $65,000 were waived by Behringer Advisors II for the years ended December 31, 2011 and 2010, respectively.

General and Administrative Expenses. General and administrative expenses for the years ended December 31, 2011 and 2010 were $0.9 million and $1.1 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. The advisor waived reimbursement of general and administrative expenses of $0.3 million and $0.4 million for the years ended December 31, 2011 and 2010, respectively.

Depreciation and Amortization Expense. Depreciation and amortization expense for the years ended December 31, 2011 and 2010 was $2 million and $2.2 million, respectively, and includes depreciation and amortization of buildings, furniture and equipment, and real estate intangibles associated with the wholly-owned properties and investments in partnerships.

Net Loss Attributable to Noncontrolling Interest. Net loss attributable to noncontrolling interest for the years ended December 31, 2011 and 2010 was $1 million and $1.4 million, respectively, and represents the other partners' proportionate share of losses from investments in the partnerships that are consolidated.

    Cash Flow Analysis    

Fiscal year ended December 31, 2012 as compared to the fiscal year ended December 31, 2011

Cash used in operating activities for the year ended December 31, 2012 was $7.4 million and was comprised primarily of net income of $16.7 million, adjusted for the gain on the sale of discontinued operations of $15.6 million, the gain on troubled restructuring of $8 million, changes in operating assets and liabilities of $3.2 million, offset by depreciation and amortization of $2.5 million. Cash used in operating activities for the year ended December 31, 2011 was $2.5 million and was comprised primarily of the net loss of $50.2 million, adjusted for asset impairment charges of $21.8 million, inventory valuation adjustments of $26.8 million, which was primarily composed of adjustments to the development of the condominiums at Cassidy Ridge, changes in operating assets and liabilities of $6.4 million and depreciation and amortization of $5.6 million offset by gains on troubled debt restructuring of $12.8 million.

Cash provided by investing activities for the year ended December 31, 2012 was $46 million and was primarily comprised of proceeds from the sale of 1221 Coit Road, 250/290 John Carpenter Freeway and condominiums at the Palomar Residences. Cash provided by investing activities for the year ended December 31, 2011 was $23 million and was primarily comprised of proceeds from the sale of assets including Landmark I & II and 5050 Quorum.

Cash used in financing activities for the year ended December 31, 2012 was $36.6 million and consisted primarily of payments on notes payable, net of proceeds. Cash used in financing activities for the year ended December 31, 2011 was $19.2 million and consisted primarily of payments on the notes payable, net of proceeds, of $22.3 million offset by contributions from the General Partners of $3.7 million.

Fiscal year ended December 31, 2011 as compared to the fiscal year ended December 31, 2010

Cash used in operating activities for the year ended December 31, 2011 was $2.5 million and was comprised primarily of the net loss of $50.2 million, adjusted for asset impairment charges of $21.8 million, inventory valuation adjustments of $26.8 million, which was primarily composed of adjustments to the development of the condominiums at Cassidy Ridge, changes in operating assets and liabilities of $6.4 million and depreciation and amortization of $5.6 million offset by gains on troubled debt restructuring of $12.8 million. Cash used in operating activities for the year ended December 31, 2010 was $17.8 million and was comprised primarily of the net loss of $18.7 million, adjusted for depreciation and amortization of $7.4 million, asset impairment loss of $5.1 million, inventory valuation adjustments of $1.9 million and the increase in real estate inventory of $14.2 million, which was primarily composed of development of the condominiums at Cassidy Ridge.

Cash provided by investing activities for the year ended December 31, 2011 was $23 million and was primarily comprised of proceeds from the sale of assets including Landmark I & II and 5050 Quorum. Cash used in investing activities for the year ended December 31, 2010 was $1.2 million and was comprised of capital expenditures for real estate of $0.7 million and change in restricted cash of $0.5 million.

Cash used in financing activities for the year ended December 31, 2011 was $19.2 million and consisted primarily of payments on the notes payable, net of proceeds, of $22.3 million offset by contributions from the General Partners of $3.7 million. Cash provided by financing activities was $19.0 million in 2010 and consisted primarily of proceeds from notes payable, net of payments, of $12.1 million and contributions from the General Partners of $7 million.

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Liquidity and Capital Resources

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

The Partnership's cash and cash equivalents were $5.3 million at December 31, 2012. Our principal demands for funds in the next twelve months and beyond will be for the payment of operating expenses, costs associated with lease-up and capital improvements for our remaining operating property and for the payment of recurring debt service, further principal paydowns and reserve requirements on our outstanding indebtedness as required by our lenders. The timing and amount of cash distributed to beneficial interest unitholders will be determined by the Managing Trustee and will be dependent on a number of factors, including funds available for payment of distributions, financial condition and capital expenditures.

In order to provide additional liquidity and execute the Partnership's plan of selling assets and winding up operations over the next three years, it sold 1221 Coit Road and 250/290 John Carpenter Freeway during the year ended December 31, 2012. Proceeds from the sale of these properties were used to fully satisfy the existing indebtedness associated with the properties and pay down additional liabilities of the fund. As a result of 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 Partnership had notes payable totaling $41.1 million at December 31, 2012 of which $31 million was secured by the hotel property. We may use proceeds from the prior disposition of properties to continue making our scheduled debt service payments 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.

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 the Partnership 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 the Partnership, 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 the Partnership 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 the Partnership, had an outstanding principal balance of approximately $28.4 million at May 17, 2012.

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On August 16, 2012, 1221 Coit Road was sold for a contract sales price of $20.0 million and on August 17, 2012 250/290 John Carpenter was sold for a contract sales price of $22.8 million. Proceeds from the sales of these properties were used to fully satisfy the existing indebtedness associated with the properties and additional liabilities of the fund.

On December 20, 2012 the Mockingbird Commons Partnership entered into a promissory note agreement with Great American Life Insurance Company ("Palomar Lender") to borrow $31 million (the "Hotel Palomar Loan"). Proceeds from the loan and additional cash were used to pay off the outstanding principal balance of a $31.6 million note with Bank of America and all associated closing costs. The Hotel Palomar Loan bears interest at a fixed rate of 5.75% per annum and requires monthly payments of interest only during the first 18 months with 30-year amortization thereafter. The loan, which matures on December 19, 2015, contains two one year extension options if certain conditions are met and does not allow prepayment in whole or in part during the first 12 months. Prepayment in whole (but not in part) from months 13 through 30 will include a yield maintenance premium as defined under the terms of the loan. The Hotel Palomar Loan is secured by the associated property. We have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts in favor of the Palomar Lender with respect to the loan.

On March 29, 2011, the Partnership entered into the Fifth Amended and Restated Promissory Note to amend the terms of a loan from Behringer Holdings (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 December 31, 2012 and December 31, 2011 was $8.8 million and $11.1 million, respectively. 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 the Partnership entered into the Note Modification Agreement and Assignment of Proceeds with Behringer Holdings whereby the maturity date of the BHH Loan was extended to May 31, 2014. In order to secure payment of the BHH Loan, the Partnership 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. On November 9, 2012 the Partnership entered into the Pledge and Security Agreement with Behringer Holdings whereby net proceeds from the sale of the remaining real estate and the remaining land at 1221 Coit Road, as well as the net proceeds previously assigned under the Note Modification Agreement and Assignment of Proceeds, were pledged as security for the payment of all obligations owed to Behringer Holdings or its subsidiaries, including principal, interest, fees or reimbursement of expenses. Unless approved, net proceeds from the sale of real estate, if not reinvested in remaining properties, are to be remitted to Behringer Holdings within 365 days of the sale. On December 28, 2012 the Partnership remitted net proceeds of $6 million to Behringer Holdings and its subsidiaries to completely payoff the BHH Cassidy Ridge Loan and for payment of fees, expenses, interest and principal on the BHH Loan.

While there have been signs of improvement in the overall economy, management does not expect conditions to improve significantly in the near future. As a result, we expect that we may continue to require this liquidity support from our Sponsor during 2013. Our Sponsor, subject to its approval, may make available to us additional funds under the BHH Loan through 2013, potentially up to the borrowing limits thereunder. There is no guarantee that our Sponsor will provide additional liquidity to us.

On October 1, 2010, Behringer Harvard Mountain Village, LLC entered into a loan with Behringer Harvard Holdings, LLC (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. The Partnership completely paid off the outstanding principal of $0.9 million and all accrued but unpaid interest on the loan on December 28, 2012.

The Hotel Palomar Loan requires payments of interest only during the first 18 months with 30-year amortization thereafter. Our remaining loans accrue interest that may be paid at any time. Further, the loan agreements stipulate that the Partnership 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. The Hotel Palomar Loan is secured by the associated real property and we have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts in favor of the Palomar Lender. At December 31, 2012 the Partnership or its subsidiaries were in default under loans made by the Mockingbird Commons Partnership noncontrolling interest partner in the amount of $1.3 million.

On February 11, 2013, the Partnership's sole remaining General Partner elected to liquidate the Partnership and transfer its remaining assets and liabilities to the Liquidating Trust as a cost saving alternative that the General Partners believed to be in the best interests of the investors. The expenses associated with operating a public reporting entity, like the Partnership, are comparatively high and therefore detract from distributable proceeds and returns it can make to its investors. The reorganization into a liquidating trust enables us to reduce costs associated with public reporting obligations and related audit expenses that are not applicable to the Liquidating Trust, helping to preserve capital throughout our disposition phase for the benefit of our investors. Cutting expenses and maximizing investor returns is our primary focus.

   35        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 and the cost of real estate inventory sales. Management believes 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 the 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 the Partnership's NOI for the years ended December 31, 2012, 2011 and 2010 are presented below (in thousands).

                                                      2012         2011          2010      Total revenues                               $ 14,619     $  20,501     $  15,093      Operating expenses     Property operating expenses                    11,144        11,825        11,168     Real estate taxes, net                            918           679           765     Property and asset management fees                765           891           655     Cost of real estate inventory sales                 -         5,414         1,718     Less: Asset management fees                      (304 )        (410 )        (229 )     Total operating expenses                       12,523        18,399        14,077      Net operating income                         $  2,096     $   2,102     $   1,016      Reconciliation to Net loss     Net operating income                         $  2,096     $   2,102     $   1,016      Less: Depreciation and amortization            (1,017 )      (2,008 )      (2,213 )     General and administrative expenses            (1,161 )        (896 )      (1,143 )     Interest expense, net                          (3,394 )      (5,339 )      (2,224 )     Asset management fees                            (304 )        (410 )        (229 )     Asset impairment loss (1)                        (456 )      (1,412 )           -     Inventory valuation adjustment                      -       (26,768 )      (1,886 )     Provision for income taxes                       (137 )        (112 )        (166 )     Add: Interest income                              295           179           132     Gain on troubled debt restructuring             7,163             -           125     Loss on derivative instruments, net                 -             -           (39 )     Other income                                      200             -             -     Income (loss) from discontinued operations     13,371       (15,493 )     (12,087 )      Net income (loss)                            $ 16,656     $ (50,157 )   $ (18,714 )    

1) Excludes approximately $20.4 million and $5.1 million of impairment loss

    included in loss from discontinued operations for the years ended     December 31, 2011 and 2010, respectively.    

Performance Reporting Required by the Partnership Agreement

Section 15.2 of the Partnership Agreement required the Partnership to provide its limited partners with its 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"). Calculations of the Partnership's Net Cash From Operations for the years ended December 31, 2012, 2011 and 2010 are presented below (in thousands):

   36                                                              2012          2011          2010   Net income (loss)                                  $  16,656     $ (50,157 )   $ (18,714 )

Net loss attributable to noncontrolling interest 259 2,016 2,100

Adjustments

Real estate depreciation and amortization (1) 1,799 3,941 6,116

  Asset impairment loss (1)                                410        21,765         5,119  Inventory valuation adjustment                             -        26,768         1,886  (Gain) loss on sale of assets (1)                       (114 )          11             -  Gain on sale of discontinued operations (1)          (14,561 )         (75 )           -  Gain on troubled debt restructuring (1)               (7,741 )     (12,842 )           - 

Debt service, net of amounts capitalized (1) (4,632 ) (7,192 ) (5,382 )

  Capital improvements (1)                                (949 )      (1,035 )        (603 )   Net cash used in operations                        $  (8,873 )   $ (16,800 )   $  (9,478 )     

(1) This represents our ownership portion of the properties that we consolidate.

Off-Balance Sheet Arrangements

The Partnership had no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on the financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources of the Partnership or the Liquidating Trust, as successor in interest.

   Contractual Obligations   

The following table sets forth certain information concerning the Partnership's contractual obligations and commercial commitments as of December 31, 2012, and outlines expected future payments to be made by the Liquidating Trust under such obligations and commitments (in thousands):

                                         Payments due by period                  Totals       2013         2014         2015       2016      2017      Thereafter Notes payable   $ 41,095     $ 1,294     $  8,987     $ 30,814     $   -     $   -     $         - Interest           6,184       2,551        1,911        1,722         -         -               - Total           $ 47,279     $ 3,845     $ 10,898     $ 32,536     $   -     $   -     $         -     Inflation   

The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. The majority of the leases contain inflation protection provisions applicable to reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance.