OZ Belpointe PREP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Organization, Business Purpose and Capitalization

Organization and Business Purpose

Belpointe PREP, LLC (together with its subsidiaries, the “Company,” “we,” “us,” or “our”) was formed on January 24, 2020 as a Delaware limited liability company. We operate in a manner that allows 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, which enables us to be classified as a “qualified opportunity fund” as defined in the U.S. Internal Revenue Code of 1986, as amended (the “Code”). We qualified as a qualified opportunity fund beginning with our taxable year ended December 31, 2020.

We commenced principal operations on October 28, 2020. All of our assets are held by, and all of our operations are conducted through, one or more operating companies (each an “Operating Company” and together, our “Operating Companies”), either directly or indirectly through their subsidiaries. We are externally managed by Belpointe PREP Manager, LLC (our “Manager”), an affiliate of our sponsor, Belpointe, LLC (our “Sponsor”). Subject to the oversight of our board of directors (our “Board”), our Manager is responsible for managing our affairs on a day-to-day basis and for identifying and making acquisitions and investments on our behalf.

Capitalization

We are offering Class A units in our ongoing initial public offering (our “Primary Offering”) directly to investors and not through any underwriters, dealer-managers or other agents who would be paid commissions by us or any of our affiliates. In the future, however, we may engage the services of one or more underwriters, dealer-managers or other offering participants to participate in our Primary Offering or in other public offerings that we may conduct. The amount of selling commissions, deal manager fees or other offering fees that we or our investors would pay to such underwriters, dealer managers or other offering participants will depend on the terms of their engagement. Our Primary Offering is a “best efforts” offering and we undertake closings on a rolling basis.

We set our Primary Offering price at $100.00 per Class A unit. No later than the first quarter following the December 31, 2022 year end, and every quarter thereafter, we plan to calculate our net asset value (“NAV”) within approximately 60 days of the last day of each quarter (the “Determination Date”). If our NAV increases above or decreases below the price per Class A unit as stated in our prospectus, we will adjust the Primary Offering price, effective as of the first business day following its public announcement. The adjusted Primary Offering price will be equal to our adjusted NAV as of the Determination Date (rounded to the nearest dollar) divided by the number of Class A Units outstanding on the Determination Date.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting and conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and Article 8 of Regulation S-X of the rules and regulations of the U.S. Securities and Exchange Commission.

In the opinion of management, all adjustments considered necessary for a fair presentation of our financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The consolidated financial statements as of March 31, 2022, and for the three months ended March 31, 2022 and 2021 are unaudited and may not include year-end adjustments necessary to make them comparable to audited results. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2021 included in our Annual Report on Form 10-K. The operating results for interim periods are not necessarily indicative of operating results for any other interim period or for the entire year.

Basis of Consolidation

The accompanying unaudited consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portion of members’ capital (deficit) in controlled subsidiaries that are not attributable, directly or indirectly, to us are presented in noncontrolling interest. All significant intercompany accounts and transactions have been eliminated.

We have evaluated our economic interest in entities to determine if they are deemed to be variable interest entities (“VIEs”) and whether the entities should be consolidated. An entity is a VIE if it has any one of the following characteristics: (i) the entity does not have enough equity at risk to finance its activities without additional subordinated financial support; (ii) the at-risk equity holders, as a group, lack the characteristics of a controlling financial interest; or (iii) the entity is structured with non-substantive voting rights. The distinction between a VIE and other entities is based on the nature and amount of the equity investment and the rights and obligations of the equity investors. Fixed price purchase and renewal options within a lease, as well as certain decision-making rights within a loan or joint-venture agreement, can cause us to consider an entity a VIE. Limited partnerships and other similar entities that operate as a partnership will be considered VIEs unless the limited partners hold substantive kick-out rights or participation rights.

Significant judgment is required to determine whether a VIE should be consolidated. We review all agreements and contractual arrangements to determine whether (i) we or another party have any variable interests in an entity, (ii) the entity is considered a VIE, and (iii) which variable interest holder, if any, is the primary beneficiary of the VIE. Determination of the primary beneficiary is based on whether a party (a) has the power to direct the activities that most significantly impact the economic performance of the VIE, and (b) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.

The following table presents the financial data of the consolidated VIEs included in the consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively (amounts in thousands):

An interest in a VIE requires reconsideration when an event occurs that was not originally contemplated. At each reporting period we will reassess whether there are any events that require us to reconsider our determination of whether an entity is a VIE and whether it should be consolidated.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jump Start Our Business Startups Act of 2012 (“JOBS Act”). Under Section 107 of the JOBS Act, emerging growth companies are permitted to use an extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards that have different effective dates for public and private companies. We have elected to use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company, or (ii) affirmatively and irrevocably opt out of the extended transition period provided in Section 7(a)(2)(B). By electing to extend the transition period for complying with new or revised accounting standards, these consolidated financial statements may not be comparable to the consolidated financial statements of companies that comply with public company effective dates.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and the accompanying notes. Actual results could materially differ from those estimates.

Risks and Uncertainties

The spread of COVID-19 has caused significant disruptions to the U.S. and global economy and normal business operations worldwide, and has, among other things, created ongoing disruptions in global supply chains, impacted job markets and adversely affected a number of industries. With vaccines now more widely available the global economy has started to reopen and restrictions previously imposed by governmental and other authorities to contain the spread of the virus, such as business closures and limitations on travel, as well as responses by businesses and individuals to reduce the risk of exposure to infection, including through reduced travel, cancellation of in-person events, and implementation of work-at-home policies, have begun to ease. Nevertheless, the recovery remains uneven and is subject to setbacks. As a result, COVID-19 continues to present 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 government and regulatory policies applicable to us. We are closely monitoring the potential impact of COVID-19 on all aspects of our business.

Note 3 – Related Party Arrangements

Our Transaction with Norpointe, LLC

On January 3, 2022, through an indirect wholly-owned subsidiary, we provided a commercial mortgage loan in the principal amount of $30.0 million (the “Norpointe Loan”) to Norpointe, LLC (“Norpointe”), an affiliate of our Chief Executive Officer. Norpointe is the owner of certain real property located at 41 Wolfpit Avenue, Norwalk, Connecticut 06851 (the “Norpointe Property”). The Norpointe Loan is evidenced by a promissory note bearing interest at a rate of 5.0% per annum, due and payable on December 31, 2022, and is secured by a first mortgage lien on the Norpointe Property.

Our Relationship with Our Manager and Sponsor

Our Manager and its affiliates, including our Sponsor, will receive fees or reimbursements in connection with our Primary Offering and the management of our investments.

The following table presents a summary of fees incurred on our behalf by, and expenses reimbursable to, our Manager and its affiliates, including our Sponsor, in accordance with the terms of the relevant agreements (amounts in thousands):

The following table presents a summary of amounts included in Due to affiliates in the consolidated balance sheets (amounts in thousands):

Organizational, Primary Offering and Merger Expenses

Our Manager and its affiliates, including our Sponsor, will be reimbursed, as described in the following paragraph, for organizational and offering expenses incurred in connection with our organization and Primary Offering and for expenses incurred in connection with our exchange offer and second-step merger to acquire all of the issued and outstanding shares of common stock of Belpointe REIT, Inc. (collectively, the “Transaction”). We became liable to reimburse our Manager and its affiliates, including our Sponsor, when the first closing was held in connection with our Primary Offering, which occurred in October 2021.

There were no organization or Primary Offering costs incurred by our Manager and its affiliates during the three months ended March 31, 2022. During the three months ended March 31, 2021, our Manager and its affiliates, including our Sponsor, incurred organization and Primary Offering expenses of $0.4 million as well as Transaction expenses of $0.1 million on our behalf, all of which have been fully repaid.

Other Operating Expenses

Pursuant to a management agreement by and among the Company, Operating Companies and our Manager (the “Management Agreement”), we reimburse our Manager, Sponsor and their respective affiliates for actual expenses incurred on our behalf in connection with the selection, acquisition or origination of investments, whether or not we ultimately acquire or originate an investment. We also reimburse our Manager, Sponsor and their respective affiliates for out-of-pocket expenses paid to third parties in connection with providing services to the Company.

Pursuant to an employee and cost sharing agreement by and among the Company, Operating Companies, our Manager and Sponsor, we reimburse our Sponsor and Manager for expenses incurred for our allocable share of the salaries, benefits and overhead of personnel providing services to us. During the three months ended March 31, 2022 and 2021, our Manager and its affiliates, including our Sponsor, have incurred operating expenses of $0.5 million and $0.1 million, respectively, on our behalf. The expenses are payable, 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. As of March 31, 2022, all expenses incurred since inception have been paid in cash.

Management Fee

Subject to the oversight of our Board, our Manager is responsible for managing the Company’s affairs on a day-to-day basis and for the origination, selection, evaluation, structuring, acquisition, financing and development of our commercial real estate properties, real estate-related assets, including but not limited to commercial real estate loans, and debt and equity securities issued by other real estate-related companies, as well as private equity acquisitions and investments, and opportunistic acquisitions of other qualified opportunity funds and qualified opportunity zone businesses.

Pursuant to the Management Agreement we will pay our Manager a quarterly management fee in arrears of one-fourth of 0.75%. The management fee is based on our NAV at the end of each quarter, which, no later than the first quarter following the December 31, 2022 year end, and every quarter, thereafter, will be announced within approximately 60 days of the last day of each quarter. During the three months ended March 31, 2022, we incurred management fees of $0.6 million which are included in Property expenses in the unaudited consolidated statements of operations. There were no management fees incurred for the three months ended March 31, 2021.

Development Fees

Affiliates of our Sponsor are entitled to receive (i) development fees on each project in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project, and (ii) reimbursements for their expenses, such as employee compensation and other overhead expenses incurred in connection with the project.

On March 29, 2022, construction commenced on one of our properties located in Sarasota, Florida. As a result of revising the budget upon commencement of construction, we incurred an additional upfront development fee of $1.6 million, which is included in Real estate under construction in our unaudited consolidated balance sheet. The remaining development fee for this project will be earned throughout the project in accordance with the development management agreement. As of March 31, 2022 and December 31, 2021, $1.6 million and zero, respectively, remained due and payable to our affiliates for development fees.

During the three months ended March 31, 2022, we incurred employee reimbursement expenditures to our development managers of $0.3 million, of which $0.2 million is included in Real estate under construction in our unaudited consolidated balance sheet and $0.1 million is included in General and administrative expenses in our unaudited consolidated statement of operations. During the three months ended March 31, 2021, we incurred employee reimbursement expenditures to our development managers of $0.1 million, of which less than $0.1 million is included in Real estate under construction in our unaudited consolidated balance sheet and less than $0.1 million is included in General and administrative expenses in our unaudited consolidated statement of operations. As of March 31, 2022 and December 31, 2021, $0.4 million and $0.4 million, respectively, remained due and payable to our affiliates for employee reimbursement expenditures.

Acquisition Fees

We will pay our Manager, Sponsor, or an affiliate of our Manager or Sponsor, an acquisition fee equal to 1.5% of the total value of any acquisition transaction, including any acquisition through merger with another entity (but excluding any transactions in which our Sponsor, or an affiliate of our Manager or Sponsor, would otherwise receive a development fee). We did not incur any acquisition fees during the three months ended March 31, 2022 and 2021, since all investments acquired during these periods were or will be subject to payment of development fees.

Our Transactions with Belpointe Specialty Insurance, LLC

Certain immediate family members of our Chief Executive Officer have a passive indirect minority beneficial ownership interest in Belpointe Specialty Insurance, LLC (“Belpointe Specialty Insurance”). Belpointe Specialty Insurance has acted as our broker in connection with the placement of insurance coverage for certain of our properties and operations. Belpointe Specialty Insurance earns brokerage commissions related to the brokerage services that it provides to us, which commissions vary, are based on a percentage of the premiums that we pay and are set by the insurer. We have also engaged Belpointe Specialty Insurance to provide us with contract insurance consulting services related to owner controlled insurance programs, for which we pay an administration fee.

During the three months ended March 31, 2022, we obtained insurance premiums in the aggregate amount of $4.5 million, from which Belpointe Specialty Insurance earned commissions of $0.4 million. During the three months ended March 31, 2022, Belpointe Specialty Insurance earned administration fees of less than $0.1 million. 

Economic Dependency

Under various agreements we have engaged our Manager and its affiliates, including in certain cases our Sponsor, to provide certain services that are essential to the Company, including asset management services, asset acquisition and disposition services, supervision of our Primary Offering and any other offerings we conduct, as well as other administrative responsibilities for the Company, including, without limitation, accounting services and investor relations services. As a result of these relationships, we are dependent upon our Manager and its affiliates, including our Sponsor. In the event that these companies are unable to provide us with the services we have engaged them to provide, we would be required to find alternative service providers.

Note 4 – Real Estate, Net

Acquisitions of Real Estate During 2022

On January 7, 2022, through an indirect wholly-owned subsidiary of our Operating Company, we completed the acquisition of a 1.1-acre site, located in Mansfield, Connecticut, for a purchase price of $0.3 million, inclusive of transaction costs of less than $0.1 million. Upon closing, the building was leased to the seller for a term of 12 months. This acquisition was deemed to be an asset acquisition and all direct transaction costs were capitalized. The purchase price was allocated to land and building of $0.1 million and $0.2 million, respectively. All related assets and liabilities, including identifiable intangibles, were recorded at their relative fair values based on the purchase price and acquisition costs incurred.

Depreciation expense was $0.2 million and less than $0.1 million for the three months ended March 31, 2022 and 2021, respectively, and is included in Depreciation and amortization expense on the unaudited consolidated statements of operations.

Real Estate Under Construction

The following table provides the activity of our Real estate under construction (amounts in thousands):

Note 5 – Intangible Assets and Liabilities

Intangible assets and liabilities are summarized as follows (amounts in thousands):

In-place lease, development right and ground lease purchase option intangible assets, noted above, are included in Intangible assets on the consolidated balance sheets. Below-market lease liabilities, noted above, are included in Below-market rent liabilities, net on the consolidated balance sheets.

During the three months ended March 31, 2022 and 2021, amortization of in-place lease intangible assets was $0.1 million and less than $0.1 million, respectively, and is included in Depreciation and amortization expense on the unaudited consolidated statements of operations.

During the three months ended March 31, 2022 and 2021, amortization of below-market lease liability was $0.1 million and less than $0.1 million, respectively, and is included in Rental revenue on the unaudited consolidated statements of operations.

Note 6 – Loans Receivable

On January 3, 2022, we provided a commercial mortgage loan in the principal amount of $30.0 million to Norpointe, an affiliate of our Chief Executive Officer. The Norpointe Loan is evidenced by a promissory note bearing interest at an annual rate of 5.0%, due and payable on December 31, 2022, and is secured by a first mortgage lien on the Norpointe Property. See “Note 3 – Related Party Arrangements” for additional details regarding the Norpointe transaction.

On February 23, 2022, through an indirect wholly-owned subsidiary, we provided a commercial mortgage loan in the principal amount of $5.0 million (the “Visco Loan”) to Visco Propco, LLC (“Visco”). Visco is the owner of certain real property located at 801 Visco Drive, Nashville, Tennessee 37210 (the “Visco Property”). The Visco Loan is evidenced by a promissory note bearing interest at an annual rate of 6.0%, due and payable on February 18, 2023, and is secured by a first lien deed of trust on the Visco Property.

On March 29, 2022, we entered into an agreement to extend the maturity date on a $3.5 million loan previously advanced to CMC Storrs SPV, LLC, on September 30, 2021, from March 29, 2022 to June 27, 2022.

Interest income from the loans receivable for the three months ended March 31, 2022 was approximately $0.5 million and is included in Interest income in our unaudited consolidated statement of operations. There was no interest income for the three months ended March 31, 2021.

Note 7 – Debt, Net

Debt, net consists of one non-recourse mortgage loan held with an unrelated third party (the “Acquisition Loan”), which is guaranteed by our Chief Executive Officer, and which is collateralized by the assignment of real property with a carrying value of $44.0 million at March 31, 2022. As of March 31, 2022, the Acquisition Loan had an outstanding balance of $10.8 million (excluding debt discount net of accumulated amortization of less than $0.1 million) and a fixed annual interest rate of 4.75%. As of the date of this report, the Acquisition Loan has been repaid. See “Note 11 – Subsequent Events” for additional details.

Note 8 – Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketplace participants at the measurement date under current market conditions (i.e., the exit price).

We categorize our financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1 – Quoted market prices in active markets for identical assets or liabilities.

Level 2 – Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs).

Level 3 – Valuation generated from model-based techniques that use inputs that are significant and unobservable in the market. These unobservable assumptions reflect estimates of inputs that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow methodologies or similar techniques, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.

The carrying value of our loans receivable totaled $38.4 million and $3.5 million as of March 31, 2022 and December 31, 2021, respectively, and had estimated fair values of $38.2 million and $3.5 million as of March 31, 2022 and December 31, 2021, respectively. We determined the estimated fair value of our loans receivable using a discounted cash flow model taking into account the investments liquidity, the strength of the loan collateral, quality of the credit profile of the obligor, term to maturity and the likelihood of a liquidity event, among other factors. These fair value measurements fall within Level 3 of the fair value hierarchy.

We estimated that our other financial assets and liabilities had fair values that approximated their carrying values as of March 31, 2022 and December 31, 2021.

Note 9 – Members’ Capital (Deficit)

Our Amended and Restated Limited Liability Company Operating Agreement (our “Operating Agreement”) generally authorizes our Board to issue an unlimited number of units and options, rights, warrants and appreciation rights relating to such units for consideration or for no consideration and on the terms and conditions as determined by our Board, in its sole discretion, without the approval of any members. These additional securities may be used for a variety of purposes, including in future offerings to raise additional capital and acquisitions. Our Operating Agreement currently authorizes the issuance of an unlimited number of Class A units, 100,000 Class B units and one Class M unit. As of March 31, 2022 and December 31, 2021, there were 3,382,149 Class A units, 100,000 Class B units and one Class M unit issued and outstanding.

As of December 31, 2021, there were 202,952 units issued by the Company pursuant to subscription agreements which had not yet settled. All of these funds were received during January 2022.

Class A units

Upon payment in full of any consideration payable with respect to the initial issuance of our Class A units, the holder thereof will not be liable for any additional capital contributions to the Company. Holders of Class A units are not entitled to preemptive, redemption or conversion rights. Class A units are entitled to one vote per unit on all matters submitted to a vote of our members. Matters must generally be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast.

Holders of Class A units share ratably in any distributions we make, subject to any statutory or contractual restrictions on distributions and to any restrictions on distributions imposed by the terms of any preferred units we issue.

Upon our dissolution, liquidation or winding up, after payment of all amounts required to be paid to creditors and holders of preferred units, if any, holders of Class A units are entitled to receive our remaining assets available for distribution.

Class B units

All of our Class B units are held by our Manager and were issued on September 14, 2021. Class B units are not entitled to preemptive, redemption or conversion rights. Class B units are entitled to one vote per unit on all matters submitted to a vote of our members. Matters must generally be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast.

Holders of our Class B units are entitled to share ratably as a class in 5% of any gains recognized by or distributed to the Company or recognized by or distributed from our Operating Companies or any subsidiary or other entity to the Company, regardless of whether the holders of our Class A units have received a return of their capital. The allocation and distribution rights that the holders of our Class B units are entitled to may not be amended, altered or repealed, and the number of authorized Class B units may not be increased or decreased, without the consent of our Manager. In addition, our Manager will continue to hold the Class B units even if it is no longer our manager.

Upon our dissolution, liquidation or winding up, after payment of all amounts required to be paid to creditors and holders of preferred units, if any, holders of Class B units will be entitled to receive any accrual of gains or distributions otherwise distributable pursuant to the terms of the Class B units, regardless of whether the holders of our Class A Units have received a return of their capital.

Class M unit

The Class M unit is held by our Manager and was issued on September 14, 2021. The Class M unit is not entitled to preemptive, redemption or conversion rights. The Class M unit is entitled to that number of votes equal to the product obtained by multiplying (i) the sum of the aggregate number of outstanding Class A Units plus Class B units, by (ii) 10, on matters on which the Class M unit has a vote. Our Manager will continue to hold the Class M unit for so long as it remains our manager.

The holder of our Class M unit does not have any right to receive ordinary, special or liquidating distributions.

Preferred units

Under our Operating Agreement, our Board may from time to time establish and cause us to issue one or more classes or series of preferred units and set the designations, preferences, rights, powers and duties of such classes or series.

Subscriptions Receivable

Subscriptions receivable consists of units that have been issued with subscriptions that have not yet settled. As of March 31, 2022 and December 31, 2021, there was zero and $20.3 million, respectively, in subscriptions that had not yet settled. Subscriptions receivable are carried at cost which approximates fair value.

Basic and Diluted Loss Per Class A Unit (Unaudited)

For the three months ended March 31, 2022, the basic and diluted weighted-average units outstanding was 3,382,149. For the three months March 31, 2022, net loss attributable to Class A units was $2.0 million and the loss per basic and diluted unit was $0.60.

For the three months ended March 31, 2021, the basic and diluted weighted-average units outstanding was 100. For the three months March 31, 2021, net loss attributable to Class A units was $0.1 million and the loss per basic and diluted unit was $1,280.

Note 10 – Commitments and Contingencies

As of March 31, 2022, we are not subject to any material litigation nor are we aware of any material litigation threatened against us.

During the three months ended March 31, 2022, we entered into a construction management agreement in connection with the redevelopment of one of our commercial real estate properties. As of March 31, 2022, we had an unfunded capital commitment of $3.8 million under the terms of this agreement.