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”). History and Development of the Company We are the successor in interest to Belpointe REIT, Inc., a Maryland corporation (“Belpointe REIT”), incorporated on June 19, 2018. During the year ended December 31, 2021, we acquired all of the outstanding shares of common stock of Belpointe REIT in an exchange offer and related conversion and merger transaction. On May 9, 2023, the SEC declared effective our follow-on registration statement on Form S-11, as amended (File No. 333-271262) (the “Follow-on Registration Statement”), registering the offer and sale of up to $750,000,000 of our Class A units on a continuous “best efforts” basis by any method deemed to be an “at the market” offering pursuant to Rule 415(a)(4) under the Securities Act of 1933, as amended (the “Securities Act”), including by offers and sales made directly to investors or through one or more agents. 42 Table of Contents In connection with the Follow-on Registration Statement, we entered into a non-exclusive dealer manager agreement with Emerson Equity LLC (the “Dealer Manager”), a registered broker-dealer, for the sale of our Class A units through the Dealer Manager. The Dealer Manager will enter into participating dealer agreements and wholesale agreements with other broker-dealers, referred to as “selling group members,” to authorize those broker-dealers to solicit offers to purchase our Class A units. We will pay our Dealer Manager commissions of up to 0.25%, and the selling group members commissions ranging from 0.25% to 4.50%, of the principal amount of Class A unit sold in the Follow-on Offering. In addition, our Follow-on Registration Statement constitutes a post-effective amendment to the registration statement on Form S-11, as amended (File No. 333-255424), registering the offer and sale of our ongoing initial public offering of up to $750,000,000 of our Class A units, declared effective by the SEC on September 30, 2021 (our “Primary Offering” and, together with our Follow-on Offering, our “Public Offerings”) conforming our Primary Offering to our Follow-on Offering. For the year ended December 31, 2024, we issued 41,774 Class A units in connection with our Public Offerings. Together with the gross proceeds raised by Belpointe REIT in its prior offerings, as of December 31, 2024, we have raised aggregate gross offering cash proceeds of $357.3 million. The purchase price for Class A units in our Public Offerings is the lesser of (i) the NAV of our Class A units, and (ii) the average of the high and low sale prices of our Class A units on the NYSE American during regular trading hours on the last trading day immediately preceding the investment date on which the NYSE American was open for trading and trading in our Class A units occurred. Each quarter, our Manager calculates our NAV and NAV per Class A unit as of the last day of the quarter (the “Determination Date”). Our NAV per Class A unit is equal to our NAV as of the Determination Date, divided by the number of Class A units outstanding on the Determination Date. We disclose our determination of NAV and NAV per Class A unit within approximately 60 days of the Determination Date. Any adjustments to our NAV and the per Class A unit purchase price take effect as of the first business day following its public announcement. As of December 31, 2024, our NAV per Class A units was $119.94. Our Business Outlook Despite expectations of the U.S. falling into recession, market conditions for multifamily and mixed-use rental properties in the geographic regions in which we operate 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 rent growth, rate of new construction, rate of absorption, 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. 43 Table of Contents Results of Operations As a result of the placement of Aster & Links in service and the commencement of operations during the year ended December 31, 2024 (see Part I, Item 1—Our Investments ), we have revised our reportable segments to include two distinct segments: Commercial and Mixed-use properties. We believe that segment net operating income (loss) (“Segment NOI”) provides a useful measure of our performance of our business, as it reflects the core rental operations of our operating real estate. Segment NOI is calculated as total revenues, less property expenses, excluding corporate level items, such as management fees incurred to our Manager, depreciation and amortization, general and administrative expenses, interest expense, and other non-operating items. The following table details the results of Segment NOI, a supplemental financial measure, reconciled to our consolidated statement of operations for the years ended December 31, 2024, and 2023 (amounts in thousands): Years Ended December 31, 2024 2023 Commercial Segment Mixed-use Segment Total Commercial Segment Mixed-use Segment Total Segment NOI: Rental revenue $ 1,099 $ 1,576 $ 2,675 $ 1,769 $ 485 $ 2,254 Property expenses (1,145 ) (2,989 ) (4,134 ) (730 ) (756 ) (1,486 ) Total Segment NOI $ (46 ) $ (1,413 ) $ (1,459 ) $ 1,039 $ (271 ) $ 768 Non-segment items: Management fees, included in Property expenses (2,705 ) (2,693 ) General and administrative (5,111 ) (6,335 ) Interest expense (10,006 ) — Depreciation and amortization (4,215 ) (2,067 ) Impairment of real estate (777 ) (4,060 ) Interest income 646 113 Other expense (228 ) (87 ) Loss before income taxes (23,855 ) (14,361 ) Provision for income taxes (1 ) (1 ) Net loss (23,856 ) (14,362 ) Net loss attributable to noncontrolling interests — 11 Net loss attributable to Belpointe PREP, LLC $ (23,856 ) $ (14,351 ) Comparison of the Year Ended December 31, 2024 to the Year Ended December 31, 2023 Segment NOI Commercial Segment For the year ended December 31, 2024, as compared to the same period in 2023, Segment NOI decreased by $1.1 million. This decrease is primarily due to lower below-market rent intangible amortization impacting rental revenue, as certain intangible liabilities were fully amortized in 2023, as well as higher real estate taxes and insurance expenses. Mixed-use Segment For the year ended December 31, 2024, as compared to the same period in 2023, Segment NOI decreased by $1.1 million. This decrease is primarily due to the recent placement of Aster & Links in service during the current year. As the property is still in its initial lease-up phase, rental revenue has not yet fully stabilized to offset property expenses. General and Administrative General and administrative expenses primarily consists of employee cost sharing expenses (pursuant to our Management Agreement and Employee and Cost Sharing Agreement), marketing expenses, legal, audit, tax and accounting fees. 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. 44 Table of Contents For the year ended December 31, 2024, as compared to the same period in 2023, general and administrative expenses decreased by $1.2 million. This decrease is primarily due to lower marketing expenses, a decrease in dead deal costs, and a decrease in allocation of costs incurred by our Manager and its affiliates. Interest Expense During the years ended December 31, 2024 and 2023, interest expense totaled $10.0 million and zero, respectively, due to gross interest expense of $12.1 million and $0.5 million, respectively, and the impact of non-cash amortization of debt discount and debt issuance costs of $2.3 million and $0.6 million, respectively, partially offset by capitalized interest and fees of $4.4 million and $1.1 million, respectively. Depreciation and Amortization For the year ended December 31, 2024, as compared to the same period in 2023, depreciation and amortization increased by $2.1 million. This increase is primarily due to the placement of fixed assets in service at Aster & Links during 2024, partially offset by lower in-place lease intangible amortization as certain intangible assets were fully amortized in 2023. Impairment of Real Estate During the years ended December 31, 2024, and 2023, we recorded impairment charges of $0.8 million and $4.1 million, respectively, in relation to one of our real estate assets located in Nashville, Tennessee, based on our conclusion that the estimated fair market value of the real estate asset was lower than the carrying value, and as a result, we reduced the carrying value to the fair market value. Interest Income Interest income for the periods presented were comprised of interest earned from cash balances held in interest bearing bank accounts. The increase in the current year periods as compared to the prior year periods were attributable to higher cash balances in interest bearing accounts. Other expense Other expense for the periods presented were primarily comprised of gains and losses in connection with our interest rate caps. Please see “ Note 9 – Derivative Instruments ” in our consolidated financial statements in this Form 10-K for additional information. Liquidity and Capital Resources Overview Our primary needs for liquidity and capital resources are to fund our investments, including construction and development costs, pay our Public Offering and operating fees and expenses, pay any distributions that we may make to the holders of our units and pay interest on our outstanding indebtedness. Our Public 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 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. Liquidity Our future needs for liquidity will depend on a variety of factors, including, without limitation, our ability to generate cash flows from operations, the timing and availability of net proceeds from our Public Offerings and any future offerings that we may conduct, the timing and extent of our real estate acquisition and disposition activities, and the timing and extent of our construction and development costs. Economic uncertainty, uncertainty surrounding legislation, regulation and government policy at the U.S. federal level, fluctuating interest rates, unemployment rates, energy prices, tariffs, immigration, taxes, inflation, volatility in the real estate markets, slowdowns in transaction volume, delays in financings from banks and other lenders and other negative trends may, in the future, adversely impact our ability to timely access potential sources of liquidity. If we are unable to raise additional capital when desired, or on terms that are acceptable to us, our business, financial condition and results of operations could be adversely affected. We believe that our cash on-hand, the anticipated net proceeds from our Public Offerings, the projected cash flows from our real estate assets and our current and anticipated financing activities will be sufficient to meet our liquidity and capital resource requirements for the next 12 months from the date of issuance of this Form 10-K. 45 Table of Contents Capital Requirements and Resources Where our Manager and its affiliates, including our Sponsor, have funded, and in the future if they continue to fund, our capital requirements 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 Public Offering costs incurred by our Manager and its affiliates during the years ended December 31, 2024 and 2023. During the years ended December 31, 2024 and 2023, our Manager and its affiliates, including our Sponsor, incurred operating expenses of $2.6 million and $2.9 million, respectively, on our behalf. During the year ended December 31, 2022, our indirect majority-owned subsidiary entered into a construction management agreement for the development of 1991 Main. For additional details regarding 1991 Main, see “ Part I, Item 1—Our Investments—1991 Main Street – Sarasota, Florida (“Aster & Links”) .” 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, 2024, we had an unfunded capital commitment totaling $9.7 million under the terms of this agreement. As of the date of this Form 10-K, we currently anticipate that the remaining funding for construction and soft costs associated with the development of Aster & Links will be a minimum of $25.5 million (inclusive of the aforementioned unfunded capital commitment). During the year ended December 31, 2023, our indirect majority-owned subsidiary entered into a variable-rate construction loan agreement for up to $130.0 million in principal amount to fund the development of Aster & Links. Advances under the 1991 Main Construction Loan bear interest at a per annum rate equal to the one-month term SOFR plus 3.45%, subject to a minimum all-in per annum rate of 8.51%. The 1991 Main Construction Loan has an initial maturity date of May 12, 2027 and contains a one-year extension option, subject to certain restrictions. As of December 31, 2024, we have drawn down $97.5 million on the 1991 Main Construction Loan. On January 31, 2024, our indirect majority-owned subsidiary entered into a mezzanine loan agreement for up to $56.4 million in principal amount. The 1991 Main Mezzanine Loan bears interest at a rate of 13.0% per annum, and is secured by Aster & Links. In connection with the 1991 Main Mezzanine Loan, we are required to maintain an interest reserve and carry reserve for purposes of paying accrued but unpaid interest on the 1991 Main Mezzanine Loan and interest, principal and other obligations under the 1991 Main Construction Loan. As of December 31, 2024, the 1991 Main Mezzanine Loan balance was $46.2 million. Proceeds under the 1991 Main Mezzanine Loan may be used to reimburse the Company for certain costs and expenses incurred in relation to, and to fund the continued development of, Aster & Links. The 1991 Main Mezzanine Loan has an initial maturity date of May 12, 2027 and contains a one-year extension option, subject to certain restrictions. For additional details regarding the 1991 Main Mezzanine Loan, see “ Part I, Item 1—Our Investments—1991 Main Street – Sarasota, Florida (also known as “Aster & Links”) .” In April 2023, our indirect majority-owned subsidiary entered into a construction management agreement for the development of Viv. For additional details regarding Viv, see “ Part I, Item 1—Our Investments—1000 First Avenue North and 900 First Avenue North – St. Petersburg, Florida (“Viv”). ” 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, 2024, we had an unfunded capital commitment totaling $50.3 million under the terms of this agreement. We currently anticipate that the remaining funding for construction and soft costs associated with the development of 1000 First will be a minimum of approximately $62.5 million (inclusive of the aforementioned unfunded capital commitment). On June 28, 2024, our indirect majority-owned subsidiary entered into a variable-rate construction loan agreement for up to $104.0 million in principal amount. The 1000 First Construction Loan bears interest at a per annum rate equal to the one-month term SOFR plus 3.80%, subject to a minimum all-in per annum rate of 7.55%, and is secured by Viv. Advances under the 1000 First Construction Loan may be used to fund the development of Viv. The 1000 First Construction Loan has an initial maturity date of June 28, 2027 and contains two one-year extension options, subject to certain restrictions. For additional details regarding the 1000 First Construction Loan, see “ —Our Investments—1000 First Avenue North and 900 First Avenue North – St. Petersburg, Florida (“Viv”) ”. As of December 31, 2024, we have drawn down $29.5 million on the 1000 First Construction Loan. On June 26, 2024, our indirect majority-owned subsidiary entered into a fixed-rate loan for $10.0 million in principal amount with KHRE SMA Funding, LLC, which is secured by 900 8th Avenue South. The 900 8th Land Loan bears interest at a rate of 9.50% per annum, and is due to mature on June 26, 2025, with two six-month extension options, subject to certain restrictions. For additional details regarding the 900 8th Land Loan, see “ —Our Investments—900 8th Avenue South – Nashville, Tennessee .” 46 Table of Contents We expect to continue to obtain the capital resources that we need over the short and long-term from cash on-hand, from the proceeds of our Public Offerings 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 the proceeds of secured or unsecured financing from banks and other lenders, from projected operating funds from our real estate assets and from any other undistributed cash flow generated from operations. For additional details regarding our Public Offerings, 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 .” 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. Cash Flows The following table provides a breakdown of the net change in our cash and cash equivalents and restricted cash (amounts in thousands): Years Ended December 31, 2024 2023 Cash flows used in operating activities $ (13,689 ) $ (6,945 ) Cash flows used in investing activities (138,089 ) (145,123 ) Cash flows provided by financing activities 157,024 30,686 Net increase (decrease) in cash and cash equivalents and restricted cash $ 5,246 $ (121,382 ) As of December 31, 2024 and 2023, cash and cash equivalents and restricted cash totaled approximately $28.8 million and $23.6 million, respectively. Net cash flows used in operating activities for the year ended December 31, 2024 primarily relates to interest expense incurred on our indebtedness, the payment of employee cost sharing expenses as well as payments for property management, legal, and accounting fees. Net cash flows used in operating activities for the year ended December 31, 2023 primarily relates to the payment of management fees and employee cost sharing expenses as well as payments for marketing, legal, tax and accounting fees. Net cash flows used in investing activities for the year ended December 31, 2024 primarily relates to the funding of development properties. For additional details regarding our development properties, see “ Part I, Item 1—Our Investments. ” Net cash flows used in investing activities for the year ended December 31, 2023 primarily relates to the funding of development properties. Net cash flows provided by financing activities for the year ended December 31, 2024 primarily relates to net proceeds from financings, including the 1991 Main Mezzanine Loan, the 1991 Main Construction Loan, the 1000 First Construction Loan, and the 900 8th Land Loan. For additional details regarding our outstanding indebtedness, see “ —Liquidity and Capital Resources .” Net cash flows provided by financing activities for the year ended December 31, 2023 primarily relates to the net proceeds from 1991 Main Construction Loan, proceeds from our Public Offerings, and proceeds from our loan from an affiliate. 47 Table of Contents 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 2 — 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 2 — 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. 48 Table of Contents