Belpointe PREP, LLC 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K (this “Form 10-K”). This discussion contains forward-looking statements that are subject to risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. The factors listed under “Risk Factors” and “Forward-Looking Statements” in this Form 10-K provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in any forward-looking statements. Overview We are the only publicly traded qualified opportunity fund listed on a national securities exchange. We are a Delaware limited liability company formed to invest in and manage a portfolio consisting primarily of commercial real estate properties, real estate-related assets, including commercial real estate loans and mortgages, and debt and equity securities issued by other real estate-related companies, and private equity acquisitions and investments, and opportunistic acquisitions of other qualified opportunity funds and qualified opportunity zone businesses. We currently intend to operate in a manner that will allow us to qualify as a partnership for U.S. federal income tax purposes. We are focused on identifying, acquiring, developing or redeveloping and managing commercial real estate located within qualified opportunity zones. At least 90% of our assets consist of qualified opportunity zone property. We qualified as a qualified opportunity fund beginning with our taxable year ended December 31, 2020. Because we are a qualified opportunity fund certain of our investors are eligible for favorable capital gains tax treatment on their investments. All of our assets are and will continue to be held by, and all of our operations are and will continue to be conducted through, one or more of our Operating Companies, either directly or indirectly through subsidiaries. We are externally managed by Belpointe PREP Manager, LLC (our “Manager”), which is an affiliate of our sponsor, Belpointe, LLC (our “Sponsor”). On September 30, 2021, the U.S. Securities and Exchange Commission (the “SEC”) declared effective our registration statement on Form S-11, as amended (File No. 333-255424) (the “Registration Statement”), registering up to $750,000,000 of our Class A units on a continuous “best efforts” basis, as part of our ongoing initial public offering (the “Primary Offering”), at an initial price equal to $100.00 per Class A unit. Our Transactions with Belpointe REIT, Inc. During the year ended December 31, 2021, pursuant to the terms of an Agreement and Plan of Merger (the “Merger Agreement”), we conducted an offer to exchange (the “Offer”) each outstanding share of common stock (the “Common Stock”), of Belpointe REIT, Inc. (“Belpointe REIT”) validly tendered in the Offer for 1.05 of our Class A units, with any fractional Class A units rounded up to the nearest whole unit (the “Transaction Consideration”). The Offer was completed on September 14, 2021. Following the Offer, and in accordance with the terms of the Merger Agreement, Belpointe REIT converted from a corporation into a limited liability company (the “Conversion”) named BREIT, LLC (“BREIT”). In the Conversion each outstanding share of Common Stock was converted into a limited liability company interest (an “Interest”) in BREIT. The Conversion was completed on October 1, 2021. Following the Conversion, and in accordance with the terms of the Merger Agreement, BREIT merged with and into BREIT Merger, LLC (“BREIT Merger”), our wholly-owned subsidiary (the “Merger”). In the Merger, each outstanding Interest was converted into the right to receive the Transaction Consideration. The Merger was completed on October 12, 2021. Prior to and in connection with the Offer and Merger (collectively, the “Transaction”), we entered into a series of loan transactions with Belpointe REIT, whereby Belpointe REIT advanced us an aggregate of $74.0 million evidenced by a series of secured promissory notes (the “Secured Notes”) bearing interest at an annual rate of 0.14%, due and payable on December 31, 2021, and secured by all of our assets. Upon consummation of the Merger, BREIT Merger acquired the Secured Notes as successor in interest to Belpointe REIT and, effective October 12, 2021, we entered into a Release and Cancellation of Indebtedness agreement with BREIT Merger pursuant to the terms of which BREIT Merger cancelled the Secured Notes and discharged us from all obligations to repay the principal and any accrued interest on the Secured Notes. 46 Table Of Contents Our Business Outlook While market conditions for multifamily and mixed-use rental properties have remained strong over the past several quarters, future economic conditions and the demand for multifamily and mixed-use rental properties are, and the real estate industry in general is, subject to uncertainty as a result of a number of factors, including, among others, the rate of unemployment, increasing interest rates, higher rates of inflation, instability in the banking system, the availability of credit, financial market volatility, general economic uncertainty, increasing energy costs, supply chain disruptions and labor shortages. The potential effect of these and other factors and the projected impact of these and other events on our business, results of operations and financial performance, presents material uncertainty and risk with respect to our future performance and financial results, including the potential to negatively impact our costs of operations, our financing arrangements, the value of our investments, and the laws, regulations and governmental and regulatory policies applicable to us. As a result, our past performance may not be indicative of future results. Given the evolving nature of certain of these factors, the extent to which they may impact our future performance and financial results will depend on future developments which remain highly uncertain and, as a result, at this time we are unable to estimate the impact that these factors may have on our future financial results. Our Manager continuously reviews our investment and financing strategies for optimization and to reduce our risk in the face of the fluidity of these and other factors. Results of Operations Year Ended December 31, (amounts in thousands) 2022 2021 $ Change % Change Revenue Rental revenue $ 1,391 $ 997 $ 394 40 % Other income — — — 100 % Total revenue 1,391 997 394 40 % Expenses Property expenses 3,809 1,140 2,669 234 % General and administrative 5,798 2,924 2,874 98 % Depreciation and amortization expense 1,291 588 703 120 % Total expenses 10,898 4,652 6,246 134 % Other income (loss) Gain on redemption of equity investment — 251 (251 ) (100 )% Interest income 1,850 369 1,481 401 % Other income (expense) (469 ) (7 ) (462 ) 6600 % Total other income (loss) 1,381 613 768 125 % Loss before income taxes (8,126 ) (3,042 ) (5,084 ) 167 % Provision for income taxes (112 ) — (112 ) 100 % Net loss (8,238 ) (3,042 ) (5,196 ) 171 % Net loss (income) attributable to noncontrolling interests 555 (93 ) 648 (697 )% Net loss attributable to Belpointe PREP, LLC $ (7,683 ) $ (3,135 ) $ (4,548 ) 145 % 47 Table Of Contents Revenue Rental Revenue For the year ended December 31, 2022 as compared to the same period in 2021, rental revenue increased by $0.4 million. This increase is primarily due to an increase in lease revenues as a result of our 2022 property acquisitions in addition to a full year of activity related to our 2021 property acquisitions, partially offset by a decrease in rental revenue as a result of the sole tenant vacating 1900 Fruitville. Expenses Property Expenses For the year ended December 31, 2022, property expenses consisted of management fees, property operational expenses, real estate taxes, and utilities and insurance expenses incurred in relation to our 2022 and 2021 property acquisitions. For the year ended December 31, 2021, property expenses consisted of property expenses, real estate taxes, and utilities and insurance expenses incurred in relation to our 2021 property acquisitions. For the year ended December 31, 2022, as compared to the same period in 2021, property expenses increased by $2.7 million. This increase is primarily due to management fees incurred following the Registration Statement covering our Primary Offering having been declared effective, and our acquisition of additional properties during 2022 and 2021. See “ Business—Overview of Our Business and Operations ” for additional details regarding our Primary Offering. General and Administrative For the year ended December 31, 2022 as compared to the same period in 2021, general and administrative expenses increased by $2.9 million. General and administrative expenses for the year ended December 31, 2022 primarily consisted of employee cost sharing expenses (pursuant to our management agreement and employee and cost sharing agreement), marketing expenses, legal, audit, tax and accounting fees. We became liable for general and administrative expenses in October 2021, in connection with the first closing in our Primary Offering, and as such general and administrative expenses for the year ended December 31, 2021 primarily consisted of employee cost sharing expenses (pursuant to our management agreement and employee and cost sharing agreement). See “ Certain Relationships and Related Transactions, and Director Independence—Our Management Agreement ” for additional details regarding our management agreement and “ Certain Relationships and Related Transactions, and Director Independence—Our Employee and Cost Sharing Agreement ” for additional details regarding our employee and cost sharing agreement . Depreciation and Amortization For the year ended December 31, 2022 as compared to the same period in 2021, depreciation and amortization increased by $0.7 million. This increase is primarily due to our acquisition of operating properties during 2022 and 2021. Other Income (Loss) Gain on Redemption of Equity Investment On September 30, 2021, we lent approximately $3.5 million to CMC (the “CMC Loan”), pursuant to the terms of a non-recourse promissory note secured by a Mortgage Deed and Security Agreement on a property owned by CMC located in Mansfield, Connecticut. CMC used the proceeds from the CMC Loan to enter into a Redemption Agreement with BPOZ 497 Middle Holding, LLC (“BPOZ 497”), an indirect majority-owned subsidiary of Belpointe REIT, to redeem BPOZ 497’s preferred equity investment in CMC in furtherance of our Transaction with Belpointe REIT. See “ —Our Transactions with Belpointe REIT, Inc. ” for additional details regarding the Transaction. On June 28, 2022, CMC repaid the CMC Loan in full. In connection with CMC’s redemption of BPOZ 497’s preferred equity investment, we recognized a gain on redemption of equity investment of $0.3 million for the year ended December 31, 2021. There was no comparable activity for the year ended December 31, 2022. 48 Table Of Contents Interest Income On January 3, 2022, we lent $30.0 million (the “Norpointe Loan”) to Norpointe, LLC (“Norpointe”), an affiliate of our Chief Executive Officer, pursuant to the terms of a promissory note secured by a first mortgage lien on certain real property located at 41 Wolfpit Avenue, Norwalk, Connecticut 06851 (the “Norpointe Property”). On June 28, 2023, for purposes of complying with the qualified opportunity fund requirements under the Code and related Treasury Regulations, we restructured the Norpointe Loan (the “Restructured Norpointe Loan”). The Restructured Norpointe Loan was evidenced by a promissory note and was secured by a first mortgage lien on the Norpointe Property. On December 13, 2022, the Restructured Norpointe Loan was repaid in full. See “ Certain Relationships and Related Transactions, and Director Independence—Our Affiliate Transactions—Our Transaction with Norpointe, LLC ” for additional details regarding our transactions with Norpointe. On February 23, 2022, we lent approximately $5.0 million to Visco Propco, LLC (the “Visco Loan”), pursuant to the terms of a promissory note secured by a first lien deed of trust on certain real property located at 801 Visco Drive, Nashville, Tennessee 37210. On December 2, 2022, the Visco Loan was repaid in full. For the year ended December 31, 2022, interest income was $1.9 million and is primarily related to interest of $0.7 million earned on the Norpointe Loan, $0.7 million earned on the Restructured Norpointe Loan, $0.2 million earned on the CMC Loan, and $0.2 million earned on the Visco Loan. Effective September 14, 2021, Belpointe REIT lent $24.8 million to Belpointe Investment Holding, LLC (“BI Holding”), an affiliate of our Sponsor, pursuant to the terms of a secured promissory note (the “BI Secured Note”). Interest accrued on the BI Secured Note at an annual rate of 5.0% and was repaid on November 30, 2021, in connection with our acquisition of 1991 Main. For the year ended December 31, 2021, interest income was $0.4 million and is primarily related to interest of $0.3 million earned on the BI Secured Note, and $0.1 million earned on the CMC Loan. Further information regarding our commercial real estate loan transactions is provided in “ Note 8 – Loans Receivable ” in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. Other Income (Expense) On June 28, 2022, through an indirect majority-owned subsidiary of our Operating Company, we acquired a 70.2% controlling interest in CMC (the “CMC Interest”), for an initial capital contribution of $3.8 million. As part of the transaction two unaffiliated joint venture partners (the “CMC JV Partners”) were deemed to have made a combined initial capital contribution of $3.1 million. Following our acquisition of the CMC Interest, we discovered that one of the CMC JV Partners had misappropriated cash from the other CMC JV Partner’s cash account. As a result, the CMC JV Partner agreed to forfeit its interest in CMC as of March 24, 2023. Other income (expense) for the year ended December 31, 2022, primarily relates to a loss of $0.4 million recorded in connection with the misappropriated cash. For the year ended December 31, 2021, Other income (expense) relates to primarily relates to sales tax in connection with the 1991 Main parking garage easement agreement and interest expense on the 900 Eighth Promissory Note. Provision for Income Taxes For the year ended December 31, 2022, provision for income taxes relates to taxes incurred (including penalties and interest) in connection with our acquisition of Belpointe REIT. As a result of the Conversion of Belpointe REIT into BREIT, Belpointe REIT was deemed to have been liquidated and its tax year ended on October 1, 2021. Belpointe REIT’s deemed liquidation resulted in a taxable gain for the year ended October 1, 2021. In connection with the Conversion, we filed an extension for the time to file Belpointe REIT’s 2021 tax returns, however, we did not make an estimated payment at that time as we had not yet calculated Belpointe REIT’s 2021 tax liability. As of the date of this Form 10-K, we have paid the outstanding income tax liability, including interest, and intend to seek an administrative waiver from the IRS with respect to the outstanding penalties. Net Loss Attributable to Noncontrolling Interest Net loss attributable to noncontrolling interest represents the share of earnings generated in entities we consolidate in which we do not own 100% of the equity. For the year ended December 31, 2022 as compared to the same period in 2021, net losses attributable to noncontrolling interest increased by $0.6 million. This increase primarily relates to losses allocated to noncontrolling interest holders on our CMC and 900 8th Avenue South investments based upon an allocation of each investment’s net assets at book value as if the investments were hypothetically liquidated at the end of each reporting period. Liquidity and Capital Resources Our primary needs for liquidity and capital resources are to fund our investments, including construction and development costs, pay our offering and operating fees and expenses, pay any distributions that we make to the holders of our units and pay interest on any outstanding indebtedness that we incur. 49 Table Of Contents Our offering and operating fees and expenses include, among other things, legal, audit and valuation fees and expenses, federal and state filing fees, SEC, FINRA and NYSE American filing fees, printing expenses, administrative fees, transfer agent fees, marketing and distribution fees, the management fee that we pay to our Manager, and fees and expenses related to acquiring, financing, appraising, and managing our commercial real estate properties. We do not have office or personnel expenses as we do not have any employees. Where our Manager and its affiliates, including our Sponsor, have funded, and in the future if they continue to fund, our liquidity and capital resource needs by advancing us offering and operating fees and expenses, we reimburse our Manager and its affiliates, including our Sponsor, pursuant to the terms of our Management Agreement and Employee and Cost Sharing Agreement. Fees payable and expenses reimbursable to our Manager and its affiliates, including our Sponsor, may be paid, at the election of the recipient, in cash, by issuance of our Class A Units at the then-current NAV, or through some combination of the foregoing. There were no organization or Primary Offering costs incurred by our Manager and its affiliates during the year ended December 31, 2022 . During the year ended December 31, 2021, our Manager and its affiliates, including our Sponsor, incurred organization and Primary Offering expenses of $0.6 million. During the years ended December 31, 2022 and 2021, our Manager and its affiliates, including our Sponsor, incurred operating expenses of $2.9 million and $1.3 million, respectively, on our behalf. During the year ended December 31, 2022, our indirect wholly owned subsidiary entered into a construction management agreement for the development of 1991 Main. For additional details regarding our acquisition of 1991 Main, see “ —Our Investments—Investments in Multifamily and Mixed-Use Rental Properties—1991 Main Street - Sarasota Florida. ” The construction management agreement contains terms and conditions that are customary for a project of this type and will be subject to guaranteed maximum price. As of December 31, 2022, we had an unfunded capital commitment of $144.3 million under the terms of this agreement. We currently anticipate that the remaining funding for construction and soft costs associated with the development of 1991 Main will be a minimum of $218.9 million (inclusive of the aforementioned unfunded capital commitment). We expect to obtain the liquidity and capital resources that we need over the short and long-term from the proceeds of our Primary Offering and any future offerings that we may conduct, from the advancement of reimbursable fees and expenses by our Manager and its affiliates, including our Sponsor, from secured or unsecured financings from banks and other lenders and from any undistributed funds from operations. For additional details regarding our Primary Offering, see “ Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Use of Proceeds from Registered Sales of Securities ” We currently anticipate that our available capital resources, including the proceeds from our Primary Offering and the proceeds from any construction or other loans that we may incur, when combined with cash flow generated from our operations, will be sufficient to meet our anticipated working capital and capital expenditure requirements over the next 12 months and beyond. 50 Table Of Contents Leverage We employ leverage in order to provide more funds available for investment. We believe that careful use of conservatively structured leverage will help us to achieve our diversification goals and potentially enhance the returns on our investments. Our targeted aggregate property-level leverage, excluding any debt at the Company level or on assets under development or redevelopment, after we have acquired a substantial portfolio of stabilized commercial real estate, is between 50-70% of the greater of the cost (before deducting depreciation or other non-cash reserves) or fair market value of our assets. During the period when we are acquiring, developing and redeveloping our investments, we may employ greater leverage on individual assets. An example of property-level leverage is a mortgage loan secured by an individual property or portfolio of properties incurred or assumed in connection with our acquisition of such property or portfolio of properties. An example of debt at the Company level is a line of credit obtained by us or our Operating Companies. Our Manager may from time to time modify our leverage policy in its discretion in light of then-current economic conditions, relative costs of debt and equity capital, market values of our assets, general conditions in the market for debt and equity securities, growth and acquisition opportunities or other factors. There is no limit on the amount we may borrow with respect to any individual property or portfolio. 51 Table Of Contents Cash Flows The following table provides a breakdown of the net change in our cash and cash equivalents and restricted cash (amounts in thousands): For the Year Ended 2022 2021 Cash flows used in operating activities $ (6,651 ) $ (2,268 ) Cash flows used in investing activities (63,530 ) (43,365 ) Cash flows provided by financing activities 22,802 231,401 Net (decrease) increase in cash and cash equivalents and restricted cash $ (47,379 ) $ 185,768 As of December 31, 2022 and 2021, cash and cash equivalents and restricted cash totaled approximately $145.0 million and $192.3 million, respectively. Cash flows used in operating activities for the year ended December 31, 2022 primarily relates to the payment of management fees and employee cost sharing expenses as well as payments for marketing, legal, tax and accounting fees. These outflows were partially offset by interest received on our Norpointe Loan, Restructured Norpointe Loan and CMC Loan during the period. Cash flows used in operating activities for the year ended December 31, 2021 primarily relates to operating properties acquired. Cash flows used in investing activities for the year ended December 31, 2022 relate primarily to funding of loans receivable in addition to funding costs for our development properties and investments in real estate. These outflows were partially offset by inflows from the repayment of the CMC and Restructured Norpointe Loans during the period as well as cash acquired as part of the acquisition of CMC ( Note 8 ). Cash flows used in investing activities for the year ended December 31, 2021 primarily relates to properties acquired and property deposits paid, costs paid for our development properties and funding of a loan receivable, all of which were offset by CMC’s redemption of BPOZ 497’s preferred equity interest, the cash acquired in connection with the acquisition of the 1991 Main Interest and the Offer. For additional details regarding the Offer, see Item 1. “Business—Our Transactions with Belpointe REIT, Inc.” Cash flows provided by financing activities for the year ended December 31, 2022 primarily relate to net proceeds received from the Primary Offering partially offset by the repayment of the Acquisition Loan. Cash flows provided by financing activities for the year ended December 31, 2021 primarily relate to net proceeds received from the Primary Offering and Secured Notes funded by Belpointe REIT. Critical Accounting Policies Our audited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. Our significant accounting policies are described in “ Note 3 — Summary of Significant Accounting Policies. ” Many of these accounting policies require judgment and the use of estimates and assumptions when applying these policies in the preparation of our consolidated financial statements. On a quarterly basis, we evaluate these estimates and judgments based on historical experience as well as other factors that we believe to be reasonable under the circumstances. These estimates are subject to change in the future if underlying assumptions or factors change. Certain accounting policies, while significant, may not require the use of estimates. The recent accounting changes that may potentially impact our business are described under “Recent Accounting Pronouncements” in “ Note 3 — Summary of Significant Accounting Policies. ” Off-Balance Sheet Arrangements We currently have no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. We are a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K, as as a result are not required to provide the information required by this Item. 52 Table Of Contents