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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended June 30, 2022

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from ____to ____

 

Commission File Number: 001-40911

 

 

 

Belpointe PREP, LLC

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   84-4412083

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

255 Glenville Road

Greenwich, Connecticut 06831

(Address or principal executive offices)

 

(203) 883-1944

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Class A units   OZ   NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐ No

 

As of August 5, 2022, the registrant had 3,413,449 Class A units, 100,000 Class B units and one Class M unit outstanding.

 

 

 

 
 

 

TABLE OF CONTENTS

 

    Page
     
PART I – FINANCIAL INFORMATION 1
     
Item 1. Financial Statements (Unaudited) 1
  Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 1
  Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021 2
  Consolidated Statements of Changes in Members’ Capital (Deficit) for the Three and Six Months Ended June 30, 2022 and 2021 3
  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 4
  Notes to Consolidated Financial Statement 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
     
PART II – OTHER INFORMATION 24
     
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 26
Item 4. Mine Safety Disclosures 26
Item 5. Other Information 26
Item 6. Exhibits 26
Signatures 27

 

 

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the current views of Belpointe PREP, LLC (together with its subsidiaries, the “Company,” “we,” “us,” or “our”) with respect to, among other things, our future results of operations and financial performance. In some cases, you can identify forward-looking statements by words such as “anticipate,” “approximately,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” and “would” or the negative of these words or other comparable words or statements that do not relate to historical or factual matters. By their nature, forward-looking statements speak only as of the date they are made, are not statements of historical fact or guarantees of future performance and are subject to risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or quantify, including those risks described under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, a copy of which may be accessed here, and, in particular, the risks and uncertainties created by the COVID-19 pandemic, escalating conflict between Russia and Ukraine, rising inflation rates, increasing energy costs, supply chain disruptions, labor shortages, general economic uncertainty, potential changes in the laws that we are subject to, and the projected impact of these and other events on our business, results of operations and financial performance.

 

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. There may be other factors that cause our actual results to differ materially from any forward-looking statements, including factors discussed in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. You should evaluate all forward-looking statements made in this Form 10-Q in the context of these risks and uncertainties. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. In light of the significant uncertainties inherent in these forward-looking statements, the inclusion of this information should not be regarded as a representation by us or any other person that our plans, strategies and objectives, which we consider to be reasonable, will be achieved. All forward-looking statements in this Form 10-Q apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this Form 10-Q and in other filings we make with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law. 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Belpointe PREP, LLC

Consolidated Balance Sheets

(in thousands, except unit and per unit data)

 

                 
    June 30, 2022     December 31, 2021  
    (Unaudited)        
Assets                
Real estate                
Land   $ 23,521     $ 22,116  
Building and improvements     16,731       16,256  
Intangible assets     9,925       9,672  
Real estate under construction     98,712       76,882  
Total real estate     148,889       124,926  
Accumulated depreciation and amortization     (985 )     (629 )
Real estate, net     147,904       124,297  
Cash and cash equivalents     147,127       192,131  
Loan receivable from affiliate     30,000        
Loans receivable from third parties     4,950       3,462  
Subscriptions receivable           20,295  
Other assets     7,262       1,241  
Total assets   $ 337,243     $ 341,426  
                 
Liabilities                
Debt, net   $     $ 10,790  
Due to affiliates     3,246       1,544  
Below-market rent liabilities, net     1,886       2,000  
Accounts payable     2,466       1,352  
Accrued expenses and other liabilities     3,848       1,865  
Total liabilities     11,446       17,551  
                 
Commitments and contingencies     -           
                 
Members’ Capital                
Class A units, unlimited units authorized, 3,413,449 and 3,382,149 units issued and outstanding at June 30, 2022 and December 31, 2021, respectively     322,544       323,683  
Class B units, 100,000 units authorized, 100,000 units issued and outstanding at June 30, 2022 and December 31, 2021            
Class M units, one unit authorized, one unit issued and outstanding at June 30, 2022 and December 31, 2021            
Total members’ capital excluding noncontrolling interests     322,544       323,683  
Noncontrolling interests     3,253       192  
Total members’ capital     325,797       323,875  
Total liabilities and members’ capital   $ 337,243     $ 341,426  

 

See accompanying notes to consolidated financial statements.

 

1

 

Belpointe PREP, LLC

Consolidated Statements of Operations (Unaudited)

(in thousands, except unit and per unit data)

 

                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2022     2021     2022     2021  
Revenue                                
Rental revenue   $ 312     $ 247     $ 641     $ 401  
Total revenue     312       247       641       401  
                                 
Expenses                                
Property expenses     924       96       1,831       167  
General and administrative     1,473       57       3,114       189  
Depreciation and amortization expense     266       137       550       207  
Total expenses     2,663       290       5,495       563  
                                 
Other income (loss)                                
Interest income     549             1,050        
Other income (expense)     (19 )     (23 )     (26 )     (39 )
Total other income (loss)     530       (23 )     1,024       (39 )
Loss before income taxes     (1,821 )     (66 )     (3,830 )     (201 )
Provision for income taxes     (111 )           (111 )      
Net loss     (1,932 )     (66 )     (3,941 )     (201 )
Net loss attributable to noncontrolling interests     46             39       7  
Net loss attributable to Belpointe PREP, LLC   $ (1,886 )   $ (66 )   $ (3,902 )   $ (194 )
                                 
Loss per Class A unit (basic and diluted)                                
Net loss per unit   $ (0.56 )   $ (660 )   $ (1.15 )   $ (1,940 )
Weighted-average units outstanding     3,387,838       100       3,385,009       100  

 

See accompanying notes to consolidated financial statements.

 

2

 

Belpointe PREP, LLC

Consolidated Statements of Changes in Members’ Capital (Deficit) (Unaudited)

(in thousands, except unit and per unit data)

 

                                                                         
    Class A units     Class B units     Class M unit    

Total
Members’

Capital

Excluding
Noncontrolling

   

Noncontrolling

   

Total

Members’

 
    Units     Amount     Units     Amount     Units     Amount    

Interests

    Interests     Capital  
Balance at January 1, 2022     3,382,149     $ 323,683       100,000     $       1     $     $ 323,683     $ 192     $ 323,875  
Offering costs           (20 )                             (20 )           (20 )
Net (loss) income           (2,016 )                             (2,016 )     7       (2,009 )
Balance at March 31, 2022     3,382,149     $ 321,647       100,000     $       1     $     $ 321,647     $ 199     $ 321,846  
Issuance of units     31,300       3,130                               3,130             3,130  
Acquisition of ownership in CMC Storrs SPV, LLC (Note 4)                                               3,100       3,100  
Offering Costs           (347 )                             (347 )           (347 )
Net loss           (1,886 )                             (1,886 )     (46 )     (1,932 )
Balance at June 30, 2022     3,413,449     $ 322,544       100,000     $       1     $     $ 322,544     $ 3,253     $ 325,797  

 

    Class A units     Class B units     Class M unit    

Total

Members’

Deficit

Excluding Noncontrolling

   

Noncontrolling

   

Total

Members’

 
    Units     Amount     Units     Amount     Units     Amount     Interest     Interest     Deficit  
Balance at January 1, 2021     100     $ (102 )         $           $     $ (102 )   $     $ (102 )
Contribution from noncontrolling interest                                               200       200  
Net loss           (128 )                             (128 )     (7 )     (135 )
Balance at March 31, 2021     100     $ (230 )         $           $     $ (230 )   $ 193     $ (37 )
Net loss           (66 )                             (66 )           (66 )
Balance at June 30, 2021   100     $ (296 )         $           $     $ (296 )   $ 193     $ (103 )

 

See accompanying notes to consolidated financial statements.

 

3

 

Belpointe PREP, LLC

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

                 
    Six Months Ended June 30,  
    2022     2021  
Cash flows from operating activities                
Net loss   $ (3,941 )   $ (201 )
Adjustments to net loss                
Depreciation and amortization     550       207  
Accretion of rent-related intangibles and deferred rental revenue     (94 )     (45 )
(Decrease) increase in due to affiliates     (263 )     57  
Decrease (increase) in other assets     221       (5 )
Increase in accounts payable     135       7  
Increase in accrued expenses and other liabilities     438       228  
Net cash (used in) provided by operating activities     (2,954 )     248  
                 
Cash flows from investing activities                
Funding of loans receivable     (34,955 )      
Development of real estate     (16,694 )     (3,780 )
Acquisitions of real estate     (6,100 )     (26,347 )
Repayment of loan receivable     3,462        
Cash acquired from CMC (Note 4)     1,492        
Other investing activity     (72 )      
Net cash used in investing activities     (52,867 )     (30,127 )
                 
Cash flows from financing activities                
Proceeds from subscriptions receivable     20,295        
Repayment of debt     (10,800 )      
Proceeds from units issued     3,130        
Payment of offering costs     (426 )      
Other financing activities     (192 )      
Short-term loan from affiliate           39,000  
Net cash provided by financing activities     12,007       39,000  
                 
Net (decrease) increase in cash and cash equivalents and restricted cash     (43,814 )     9,121  
                 
Cash and cash equivalents and restricted cash, beginning of period     192,346       6,578  
Cash and cash equivalents and restricted cash, end of period   $ 148,532     $ 15,699  
                 
Cash paid during the period for interest, net of amount capitalized   $     $  

 

See accompanying notes to consolidated financial statements.

 

4

 

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. 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 June 30, 2022, and for the three and six months ended June 30, 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.

 

5

 

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 June 30, 2022 and December 31, 2021, respectively (amounts in thousands):

 

                 
    June 30, 2022     December 31, 2021  
    (unaudited)        
Assets                
Real estate                
Land   $ 9,747     $ 5,127  
Building and improvements     10,449       10,226  
Intangible assets     7,155       6,731  
Real estate under construction     98,393       76,332  
Total real estate     125,744       98,416  
Accumulated depreciation and amortization     (244 )     (35 )
Real estate, net     125,500       98,381  
Cash and cash equivalents     134,738       188,608  
Loan receivable from affiliate     30,000        
Other assets     6,164       503  
Total assets   $ 296,402     $ 287,492  
                 
Liabilities                
Debt, net   $     $ 10,790  
Due to affiliates     2,359       305  
Accounts payable     2,127       1,118  
Accrued expenses and other liabilities     2,509       822  
Total liabilities   $ 6,995     $ 13,035  

 

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.

 

6

 

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.

 

Restricted Cash

 

Restricted cash consists of amounts required to be reserved pursuant to contractual obligations and lender agreements for debt service. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the unaudited consolidated statements of cash flows (amounts in thousands):

 

                 
    June 30, 2022     December 31, 2021  
    (unaudited)        
Cash and cash equivalents   $ 147,127     $ 192,131  
Restricted cash (1)     1,405       215  
Total cash and cash equivalents and restricted cash   $ 148,532     $ 192,346  

 

(1) Restricted cash is included within Other assets on our consolidated balance sheets.

 

Risks and Uncertainties

 

Demand for multifamily and mixed-use rental properties is subject to uncertainty as a result of a number of factors, including, among others, increasing interest rates, higher rates of inflation, ongoing supply chain disruptions and labor shortages, and the continuing impact of COVID-19. The potential effect of these and other factors 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 government and regulatory policies applicable to us. We are closely monitoring the potential impact of these and other factors 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 was evidenced by a promissory note bearing interest at an annual rate of 5.0%, due and payable on December 31, 2022, and was secured by a first mortgage lien on the Norpointe Property.

 

On June 28, 2022, for purposes of complying with the qualified opportunity fund requirements, we restructured the Norpointe Loan through BPOZ 1000 First QOZB, LLC (“BPOZ 1000”), an indirect majority-owned subsidiary, whereby BPOZ 1000 provided a commercial mortgage loan in the principal amount of $30.0 million (the “QOZB Loan”) to Norpointe. Thereafter, on June 28, 2022, Norpointe repaid the Norpointe Loan in full. The QOZB Loan is evidenced by a promissory note bearing interest at an annual rate of 5.0%, due and payable on June 28, 2023 and is secured by a first mortgage lien on the Norpointe Property.

 

7

 

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):

 

                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2022     2021     2022     2021  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)  
Amounts included in the Consolidated Statements of Operations                                
Management fees   $ 640     $     $ 1,274     $  
Costs incurred by our Manager and its affiliates (1)     460       80       994       199  
Insurance     105             212        
Director compensation     20             40        
 Costs incurred by the manager and its affiliates   $ 1,225     $ 80     $ 2,520     $ 199  
                                 
Capitalized costs included in the Consolidated Balance Sheets                                
Development fee and reimbursements   $ 967     $ 1,534     $ 2,820     $ 1,582  
Insurance (2)     527             568        
 Other capitalized costs   $ 1,494     $ 1,534     $ 3,388     $ 1,582  

 

 

(1) Includes wage, overhead and other reimbursements to our Manager and its affiliates, including our Sponsor, which are included in General and administrative expenses on the unaudited Consolidated Statements of Operations.
(2) During the three and six months ended June 30, 2022, we incurred insurance premiums of less than $0.1 million and $4.6 million, respectively, pertaining to insurance policies with effective dates that commenced during the period, which was included in Other assets on our unaudited consolidated balance sheet. Of this amount, zero was unpaid as of June 30, 2022 and $0.6 million was amortized into Real estate under construction on our unaudited consolidated balance sheet.

 

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

 

                 
    June 30, 2022     December 31, 2021  
    (unaudited)        
Due to affiliates                
Development fees   $ 2,223     $  
Management fees     640       634  
Employee cost sharing and reimbursements (1)     363       852  
Director compensation     20       20  
Acquisition fee           38  
 Due to affiliates   $ 3,246     $ 1,544  

 

 

(1) Includes wage, overhead and other reimbursements to our Manager and its affiliates, including our Sponsor.

 

8

 

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 expenses incurred by our Manager and its affiliates during the three and six months ended June 30, 2022. During the three and six months ended June 30, 2021, our Manager and its affiliates, including our Sponsor, incurred organization and Primary Offering expenses of $0.1 million and $0.5 million, respectively, as well as Transaction expenses of less than $0.1 million and $0.1 million, respectively, on our behalf, all of which have been fully repaid.

 

Other Operating Expenses

 

Pursuant to a management agreement by and among the Company, our 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 us.

 

Pursuant to an employee and cost sharing agreement by and among the Company, our Operating Companies, our Manager and our Sponsor, we reimburse our Sponsor and our Manager for expenses incurred for our allocable share of the salaries, benefits and overhead of personnel providing services to us. During the three and six months ended June 30, 2022, our Manager and its affiliates, including our Sponsor, incurred operating expenses of $0.4 million and $0.9 million, respectively, on our behalf. During the three and six months ended June 30, 2021, our Manager and its affiliates, including our Sponsor, incurred operating expenses of $0.2 million and $0.3 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 June 30, 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 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 and six months ended June 30, 2022, we incurred management fees of $0.6 million and $1.3 million, respectively, which are included in Property expenses in the unaudited consolidated statements of operations. There were no management fees incurred for the three and six months ended June 30, 2021.

 

Development Fees and Reimbursements

 

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, we commenced construction on one of our properties located in Sarasota, Florida, and in connection therewith, due to increases in scope of work and construction costs, we revised our construction budget. As a result of the revisions to our construction budget 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 will be earned throughout the project in accordance with the terms of the development management agreement. During the three and six months ended June 30, 2022, we incurred development fees earned during the construction phase of $0.6 million and $0.7 million, respectively. As of June 30, 2022 and December 31, 2021, $2.2 million and zero, respectively, remained due and payable to our affiliates for development fees.

 

9

 

During the three and six months ended June 30, 2022, we incurred employee reimbursement expenditures to our affiliates acting as development managers of $0.4 million and $0.7 million, respectively, of which $0.3 million and $0.6 million, respectively, is included in Real estate under construction in our unaudited consolidated balance sheet, and $0.1 million and $0.1 million, respectively, is included in General and administrative expenses in our unaudited consolidated statement of operations. During the three and six months ended June 30, 2021, we incurred employee reimbursement expenditures to our affiliates acting as development managers of $0.1 million and $0.1 million, respectively, of which $0.1 million and $0.1 million, respectively, is included in Real estate under construction in our unaudited consolidated balance sheet, and less than $0.1 million and less than $0.1 million, respectively, is included in General and administrative expenses in our unaudited consolidated statement of operations. As of June 30, 2022 and December 31, 2021, $0.1 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 and six months ended June 30, 2022 and 2021, since all investments acquired during these periods were, or will be, subject to payment of development fees.

 

Insurance

 

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 and six months ended June 30, 2022, we obtained insurance premiums in the aggregate amount of less than $0.1 million and $4.6 million, respectively, from which Belpointe Specialty Insurance earned commissions of less than $0.1 million and $0.4 million, respectively. During the three and six months ended June 30, 2022, Belpointe Specialty Insurance earned administration fees of zero and less than $0.1 million, respectively. Insurance premiums are prepaid and are included in Other assets on the unaudited consolidated balance sheets. With respect to our properties under development, for the three and six months ended June 30, 2022, $0.5 million and $0.6 million, respectively, were amortized into Real estate under construction on the unaudited consolidated balance sheet. As it pertains to our operating properties, for the three and six months ended June 30, 2022, $0.1 million and $0.2 million, respectively, were amortized into Property expenses on the unaudited consolidated statements of operations.

 

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.

 

10

 

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.

 

On May 9, 2022, through an indirect wholly-owned subsidiary of our Operating Company, we completed the acquisition of a 0.265-acre site, located in Sarasota, Florida, for a purchase price of $1.5 million, inclusive of transaction costs of $0.1 million. This acquisition was deemed to be an asset acquisition and all direct transaction costs were capitalized. The purchase price was allocated to land, building, and in-place lease intangible asset of $1.3 million, $0.1 million and less than $0.1 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.

 

On June 28, 2022, through an indirect wholly-owned subsidiary of our Operating Company, we acquired a 70.2% controlling interest in CMC Storrs SPV, LLC (“CMC”), a holding company for a 60-acre site located at 497-501 Middle Turnpike, Mansfield, Connecticut (“497-501 Middle”), for an initial capital contribution of $3.8 million. As part of the transaction, an unaffiliated joint venture partner (the “CMC JV Partner”) was deemed to have made an initial contribution of $3.1 million (a non-cash financing activity during the six months ended June 30, 2022). This acquisition was deemed to be an asset acquisition and all direct transaction costs were capitalized. All related assets and liabilities, including identifiable intangibles, were recorded at their relative fair values based on the purchase price and acquisition costs incurred. As a result of our controlling financial interest, we consolidate this development project. The purchase price was allocated as follows (amounts in thousands):

         
    As of June 28, 2022  
Assets        
Real estate        
Intangible assets   $ 424  
Real estate under construction     4,633  
Total real estate     5,057  
Accumulated depreciation and amortization      
Real estate, net     5,057  
Cash and cash equivalents     87  
Other assets (1)     2,105  
Total assets   $ 7,249  
         
Liabilities        
Accounts payable   $ 363  
Accrued expenses and other liabilities     16  
Total liabilities   $ 379  
         
Amounts attributable to noncontrolling interests (2)   $ 3,100  
         
Total net assets   $ 3,770  

 

 

(1) Includes restricted cash of $1.4 million.
(2) Represents a non-cash financing activity during the six months ended June 30, 2022.

 

11

 

Depreciation expense was $0.2 million and less than $0.1 million for the three months ended June 30, 2022 and 2021, respectively, and $0.3 million and $0.1 million for the six months ended June 30, 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 in the consolidated balance sheets (amounts in thousands):

 

   

June 30, 2022

   

December 31, 2021

 
    (unaudited)        
Beginning balance   $ 76,882     $ 15,101  
Capitalized costs (1) (2) (3)     16,638       8,991  
Land held for development (1) (4)     5,041       48,085  
Acquisition of construction in progress (1)           4,662  
Capitalized interest     151       43  
    $ 98,712     $ 76,882  

 

 

(1) Includes non-cash investing activity of $6.3 million (inclusive of land contributed by the CMC JV Partner) and $1.6 million for the six months ended June 30, 2022 and the year ended December 31, 2021, respectively.
(2) Includes development fees and employee reimbursement expenditures of $2.8 million and $2.7 million for the six months ended June 30, 2022 and the year ended December 31, 2021, respectively.
(3) Includes direct and indirect project costs to the construction and development of real estate projects, including but not limited to loan fees, property taxes and insurance, incurred of $0.9 million and $0.5 million for the six months ended June 30, 2022 and the year ended December 31, 2021, respectively.
(4) Includes ground lease payments and straight line adjustments incurred of $0.4 million and less than $0.1 million for the six months ended June 30, 2022 and the year ended December 31, 2021, respectively.

 

Note 5 – Intangible Assets and Liabilities

 

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

 

    June 30, 2022     December 31, 2021  
    Gross Carrying Amount     Accumulated Amortization     Net Carrying Amount     Gross Carrying Amount     Accumulated Amortization     Net Carrying Amount  
    (unaudited)     (unaudited)     (unaudited)                    
Finite-Lived Intangible Assets                                                
In-place leases   $ 3,194     $ (407 )   $ 2,787     $ 2,941     $ (383 )   $ 2,558  
Indefinite-Lived Intangible Assets                                                
Development rights     5,659             5,659       5,659             5,659  
Ground lease purchase option     1,072             1,072       1,072             1,072  
Total intangible assets   $ 9,925     $ (407 )   $ 9,518     $ 9,672     $ (383 )   $ 9,289  
                                                 
Finite-Lived Intangible Liabilities                                                
Below-market leases   $ (2,159 )   $ 273     $ (1,886 )   $ (2,159 )   $ 159     $ (2,000 )
Total intangible liabilities   $ (2,159 )   $ 273     $ (1,886 )   $ (2,159 )   $ 159     $ (2,000 )

 

In-place lease intangible assets recorded for 2022 acquisitions, noted above, are included in Intangible assets on the unaudited consolidated balance sheet and are being amortized over a weighted average lease term of approximately 10.9 years. 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.

 

Amortization of in-place lease intangible assets was $0.1 million and $0.1 million for the three months ended June 30, 2022 and 2021, respectively, and $0.2 million and $0.1 million for the six months ended June 30, 2022 and 2021, respectively, and is included in Depreciation and amortization expense on the unaudited consolidated statements of operations.

 

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Amortization of below-market lease liability was $0.1 million and less than $0.1 million for the three months ended June 30, 2022 and 2021, respectively, and $0.1 million and $0.1 million for the six months ended June 30, 2022 and 2021, respectively, and is included in Rental revenue on the unaudited consolidated statements of operations.

 

Note 6 – Loans Receivable

 

On January 3, 2022, through an indirect wholly owned subsidiary, 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 was evidenced by a promissory note bearing interest at an annual rate of 5.0%, was due and payable on December 31, 2022, and was secured by a first mortgage lien on the Norpointe Property. On June 28, 2022, the Norpointe Loan was repaid in full. See “Note 3 – Related Party Arrangements” for additional details regarding our transactions with Norpointe.

 

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 September 30, 2021, through an indirect wholly-owned subsidiary, we provided a commercial mortgage loan in the principal amount of $3.5 million (the “CMC Loan”) to CMC. The CMC Loan was evidenced by a secured promissory note bearing interest at an annual rate of 12.0%, and was due and payable at maturity on June 27, 2022. On June 28, 2022, the CMC Loan including accrued interest of $0.3 million was repaid in full.

 

On June 28, 2022, through an indirect majority-owned subsidiary, we provided a commercial mortgage loan in the principal amount of $30.0 million to Norpointe, an affiliate of our Chief Executive Officer. The QOZB Loan is evidenced by a promissory note bearing interest at an annual rate of 5.0%, due and payable on June 28, 2023, and is secured by a first mortgage lien on the Norpointe Property. See “Note 3 – Related Party Arrangements” for additional details regarding our transactions with Norpointe.

 

Interest income from the loans receivable for the three and six months ended June 30, 2022 was $0.6 million and $1.1 million, respectively, and is included in Interest income in our unaudited consolidated statements of operations. There was no interest income for the three and six months ended June 30, 2021.

 

Note 7 – Debt, Net

 

Debt, net consisted of one non-recourse mortgage loan held with an unrelated third party (the “Acquisition Loan”), which was guaranteed by our Chief Executive Officer. The Acquisition Loan, including outstanding interest of less than $0.1 million, was repaid in full on April 22, 2022.

 

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.

 

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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 $35.0 million and $3.5 million as of June 30, 2022 and December 31, 2021, respectively, and had estimated fair values of $34.3 million and $3.5 million as of June 30, 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 June 30, 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, in most cases without the approval of our 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. During the three and six months ended June 30, 2022, we issued 31,300 Class A units and 31,300 Class A units, respectively. There were no units issued during the three and six months ended June 30, 2021. As of June 30, 2022, there were 3,413,449 Class A units, 100,000 Class B units and one Class M unit issued and outstanding. As of 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. Holders of our 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 the election of directors, by a plurality) of the votes entitled to be cast.

 

Holders of our 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 our Class A units are entitled to receive our remaining assets available for distribution.

 

Class B units

 

All of our Class B units are currently held by our Manager and were issued on September 14, 2021. Holders of our Class B units are not entitled to preemptive, redemption or conversion rights. Holders of our 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 the election of directors, by a plurality) of the votes entitled to be cast.

 

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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 the holders of our Class B units. In addition, our Manager, or any other holder of our Class B units, will continue to hold the Class B units even if our Manager 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 currently held by our Manager and was issued on September 14, 2021. The holder of our Class M unit is not entitled to preemptive, redemption or conversion rights. The holder of our 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 June 30, 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 and six months ended June 30, 2022, the basic and diluted weighted-average units outstanding was 3,387,838 and 3,385,009, respectively. For the three and six months June 30, 2022, net loss attributable to Class A units was $1.9 and $3.9 million, and the loss per basic and diluted unit was $0.56 and $1.15, respectively.

 

For the three and six months ended June 30, 2021, the basic and diluted weighted-average units outstanding was 100. For the three and six months June 30, 2021, net loss attributable to Class A units was $0.1 million and $0.2 million, and the loss per basic and diluted unit was $660 and $1,940, respectively.

 

Note 10 – Commitments and Contingencies

 

As of June 30, 2022, we are not subject to any material litigation nor are we aware of any material litigation threatened against us.

 

During the six months ended June 30, 2022, we entered into a construction management agreement in connection with the redevelopment of one of our commercial real estate properties. As of June 30, 2022, we had an unfunded capital commitment of $158.9 million (excluding capitalized interest, development fees and indirect project costs) under the terms of this agreement. We expect to incur this capital commitment incrementally over the course of the next 24 months. As of June 30, 2022, $2.5 million is outstanding and payable in connection with this redevelopment.

 

Note 11 – Subsequent Events

 

Management has evaluated subsequent events to determine if events or transactions occurring after the balance sheet date through the date the unaudited consolidated financial statements were available for issuance require potential adjustment to or disclosure in the unaudited consolidated financial statements and has concluded that all such events or transactions that would require recognition or disclosure have been recognized or disclosed.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

In this Quarterly Report on Form 10-Q (this “Form 10-Q”), unless context otherwise requires, references to “we,” “us,” “our” “Belpointe” or the “Company” refer to Belpointe PREP, LLC, its operating companies, Belpointe PREP OC, LLC, and Belpointe PREP TN OC, LLC (each an “Operating Company” and, together, the “Operating Companies”), and each of the Operating Companies’ subsidiaries, taken together.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 (our “Annual Report”) filed with the U.S. Securities and Exchange Commission on March 11, 2022, a copy of which may be accessed here. As discussed in the section entitled “Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section entitled “Risk Factors” included our Annual Report.

 

Overview

 

We are the first and only publicly traded qualified opportunity fund listed on a national securities exchange. We are a Delaware limited liability company formed on January 24, 2020, and we 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 held by, and all of our operations are conducted through, one or more of our Operating Companies, either directly or indirectly through their 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 in our Class A units on a continuous 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.

 

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Prior to and in connection with the Offer and Merger, 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.

 

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 subject to uncertainty as a result of a number of factors, including, among others, increasing interest rates, higher rates of inflation, ongoing supply chain disruptions and labor shortages, and the continuing impact of COVID-19. The potential effect of these and other factors 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 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.

 

Our Investments

 

As of June 30, 2022, our investment portfolio consisted of the following properties:

 

Investments in Multifamily and Mixed-Use Rental Properties

 

1700 Main Street – Sarasota, Florida – 1700 Main Street (“1700 Main”) is a 1.3-acre site, consisting of a former gas station, a three-story office building with parking lot and a three-story retail building, located in Sarasota, Florida, which we acquired for an aggregate purchase price of $6.9 million, inclusive of transaction costs. We currently anticipate that 1700 Main will be redeveloped into a 168-apartment home community consisting of one-bedroom, two-bedroom and three-bedroom apartments, with approximately 7,000 square feet of retail space located on the first two levels. We anticipate that 1700 Main will consist of a 10-story podium style building with a 3-story, 360-space garage and 7-stories of apartments above, including a clubroom, fitness center, courtyards with a swimming pool and rooftop terraces as well as a leasing office. We have placed the development of 1700 Main on hold pending re-zoning by the City of Sarasota. We have engaged an architectural firm for conceptual studies so that we can prepare a design to present to the City of Sarasota for approval once the re-zoning is complete.

 

1701, 1702 and 1710 Ringling Boulevard – Sarasota, Florida – 1701 Ringling Boulevard (“1701 Ringling”) and 1710 Ringling Boulevard (“1710 Ringling”) make up a 1.62-acre site, consisting of a six-story previously owner-occupied office building and a parking lot, located in Sarasota, Florida, which we acquired for an aggregate purchase price of $7.0 million, inclusive of transaction costs. We currently anticipate that 1701 Ringling will be renovated into a fully functioning office building, consisting of approximately 80,000 square feet of rentable space, with 1710 Ringling consisting of an approximately 128 space parking lot. The existing tenant at 1701 Ringling has leased back approximately 42,000 square feet of the building for 20 years with several lease extensions. Renovations to 1701 Ringling will include creation of a glass front lobby area, the conversion of the existing freight elevator into an oversized passenger elevator and the reinstallation of windows into the façade.

 

1702 Ringling Boulevard (“1702 Ringling”) is a 0.265-acre site consisting of a fully leased single-story 1,546 gross square foot single-tenant office building and associated parking lot, which we acquired for an aggregate purchase price of $1.5 million, inclusive of transaction costs. We currently anticipate holding 1702 Ringling for future multifamily development and density and massing studies are underway for conceptual design.

 

902-1020 First Avenue North and 900 First Avenue North – St. Petersburg, Florida – 902-1020 First Avenue North (“902-1020 First”) consists of several parcels, comprising 1.6-acres of land, located in St. Petersburg, Florida, which we acquired for an aggregate purchase price of $12.1 million, inclusive of transaction costs. We currently anticipate that 902-1020 First will be developed into a high-rise apartment featuring approximately 266-apartment homes consisting of one-bedroom, two-bedroom and three-bedroom apartments, with approximately 22,100 square feet of retail space located on the first level and a four-level parking garage. We anticipate that 902-1020 First will consist of two 15-story high-rise buildings and will have a clubroom, fitness center, courtyard with a swimming pool, shared working space and a leasing office.

 

900 First Avenue North (“900 First”) is a parcel of land with a two-tenant retail building, located in St. Petersburg, Florida, which we acquired for an aggregate purchase price of $2.5 million, inclusive of transaction costs. 900 First will remain a two-tenant retail building and we have taken the additional development rights and added them to 902-1020 First.

 

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1900 Fruitville Road – Sarasota Florida – 1900 Fruitville Road is a 1.205-acre site, consisting of a retail building and parking lot located in Sarasota, Florida, which we acquired for an aggregate purchase price of $4.7 million, inclusive of transaction costs. The sole tenant in the building vacated in January 2022 and the property will be used as a future development site.

 

900 8th Avenue South – Nashville, Tennessee – 900 8th Avenue South (“900 8th Avenue South”) is a 3.17-acre land assemblage, consisting of a few small buildings, parking lots and open lots, located in Nashville, Tennessee, which we acquired for an aggregate purchase price of $19.7 million, inclusive of transaction costs.

 

As part of our acquisition of 900 8th Avenue South, on February 24, 2021, an indirect wholly owned subsidiary of our Operating Company and an unaffiliated third party (the “JV Partner”) entered into a limited liability company agreement (the “LLC Agreement”) for BPOZ 900 Eighth QOZB, LLC (the “BPOZ 900 Eighth QOZB”), an indirect holding company for 900 8th Avenue South. Pursuant to the LLC Agreement, the JV Partner assigned the purchase and sale agreement for 900 8th Avenue South together with a previously paid property deposit of $0.4 million to BPOZ 900 Eighth QOZB in exchange for the JV Partner’s deemed initial capital contribution of $0.2 million and a promissory note (the “900 Eighth Promissory Note”) from 900 Eighth, LP, the direct holding company for 900 8th Avenue South, in the amount of $0.2 million. The 900 Eighth Promissory Note earned interest at the greater of (i) 1% per annum, or (ii) the short-term adjusted applicable federal rate for the current month for purposes of Section 1288(b) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), and was repaid in full in April 2022.

 

We currently anticipate that 900 8th Avenue South will be redeveloped into an approximately 266-apartment home community consisting of one-bedroom, two-bedroom and three-bedroom apartments, with approximately 14,100 square feet of retail space located on the first level. We anticipate that 900 8th Avenue South will consist of a 7-story building with a 2-story approximately 400-space garage, a fitness center, courtyard with a swimming pool and rooftop terraces as well as a leasing office. As of the date of this Form 10-Q, we have completed the demolition of 900 8th Avenue South.

 

Storrs RoadStorrs, Connecticut – Storrs Road (“Storrs Road”) is a 9-acre parcel of land located in Storrs, Connecticut, which we acquired for an aggregate purchase price of $0.1 million, inclusive of transaction costs. We currently anticipate holding Storrs Road for future multifamily development.

 

Nashville No. 2 – Nashville, Tennessee – Our second investment in Nashville, Tennessee (“Nashville No. 2”) is an approximately 8-acre site, consisting of two industrial buildings and associated parking, which we acquired for an aggregate purchase price of $21.0 million, inclusive of transaction costs. We currently anticipate that Nashville No. 2 will be redeveloped into an approximately 412-apartment home community consisting of one-bedroom, two-bedroom and three-bedroom apartments. The buildings will have a fitness center, game room, co-working spaces, outdoor heated saltwater swimming pool, riverfront courtyards and rooftop terraces as well as a leasing office.

 

Nashville No. 3 – Nashville, Tennessee – Our third investment in Nashville, Tennessee (“Nashville No. 3”) is an approximately 1.66-acre site consisting of a single-story 10,000 square foot retail building and associated parking lot, which we acquired for an aggregate purchase price of $2.1 million, inclusive of transaction costs. Upon closing, the building was leased to the seller through November 2022, with the ability to continue month to month thereafter.

 

1991 Main Street – Sarasota, Florida – 1991 Main Street (“1991 Main”) is a 5.2-acre site located in Sarasota, Florida, which was originally acquired for an aggregate purchase price of $20.7 million, inclusive of transaction costs and deferred financing fees. A portion of the aggregate purchase of 1991 Main was funded by a $10.8 million secured loan from First Foundation Bank (the “Acquisition Loan”). On April 22, 2022 we repaid the Acquisition Loan in full.

 

We currently anticipate that 1991 Main will be redeveloped into an approximately 418-apartment home community consisting of one-bedroom, two-bedroom and three-bedroom apartments, and four-bedroom townhome-style penthouse apartments, with approximately 51,000 square feet of retail space located on the first level. We anticipate that 1991 Main will consist of two high-rise buildings with 7-stories in the front and 10-stories in the rear, and approximately 721 parking spaces including 590 from an existing parking garage, currently subject to a parking garage easement agreement, 104 new underground spaces, and 27 new street level spaces.

 

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During the six months ended June 30, 2022, we entered into a construction management agreement for the redevelopment of 1991 Main. The construction management agreement contains terms and conditions that are customary for a project of this type and will be subject to a guaranteed maximum price. We currently anticipate that the remaining funding for construction and soft costs associated with the redevelopment will be a minimum of $209.9 million, and are building to an unlevered yield of greater than 6%. The redevelopment is currently under construction and we expect to begin leasing units in the fourth quarter of 2023, with construction completed by the second quarter of 2024.

 

901-909 Central Avenue North – St. Petersburg, Florida – 901-909 Central Avenue North is a 0.129-acre site consisting of a fully leased single-story 5,328 gross square foot retail/office building comprised of 4 units located in St. Petersburg, Florida, which we acquired for an aggregate purchase price of $2.6 million, inclusive of transaction costs.

 

Cedar Swamp Road – Mansfield, Connecticut – Cedar Swamp Road is a 1.1-acre site located in Mansfield, Connecticut, which we acquired for a purchase price of $0.3 million, inclusive of transaction costs, and upon closing leased back to the seller for a term of 12 months. We currently anticipate holding Cedar Swamp Road for future multifamily development.

 

497-501 Middle TurnpikeMansfield, Connecticut – 497-501 Middle Turnpike (“497-501 Middle”) is an approximately 60-acre site located in Mansfield, Connecticut, consisting of an approximately 30-acre former golf course and approximately 30 acres of undeveloped hiking and biking trails surrounding wetlands. We acquired a majority ownership interest in CMC Storrs SPV, LLC (“CMC”), the holding company for 497-501 Middle, for an initial capital contribution of $3.8 million.

 

We currently anticipate that 497-501 Middle will be developed into an approximately 250-apartment home community and that amenities will include a leasing office, clubhouse with a demonstration kitchen, fitness center, game room, study/lounge area, meeting rooms, and an outside AstroTurf meadow.

 

Investments in Commercial Real Estate Loans

 

Norpointe Secured Loan – 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 was evidenced by a promissory note bearing interest at an annual rate of 5.0%, due and payable on December 31, 2022, and was secured by a first mortgage lien on the Norpointe Property. Given our excess cash on hand as of the year ended December 31, 2021, management viewed the Norpointe transaction as an opportunity to earn a strong rate of return on that cash by making a low risk—due to the low loan-to-value ratio and first priority mortgage interest—short-term loan rather than depositing the funds in a lower yielding account pending investment in future developments.

 

On June 28, 2022, for purposes of complying with the qualified opportunity fund requirements, we restructured the Norpointe Loan through BPOZ 1000 First QOZB, LLC (“BPOZ 1000”), our indirect majority-owned subsidiary, whereby BPOZ 1000 provided a commercial mortgage loan in the principal amount of $30.0 million (the “QOZB Loan”) to Norpointe. Thereafter, on June 28, 2022, Norpointe repaid the Norpointe Loan in full. The QOZB Loan is evidenced by a promissory note bearing interest at an annual rate of 5.0%, due and payable on June 28, 2023 and is secured by a first mortgage lien on the Norpointe Property.

 

Visco Secured Loan – 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.

 

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Results of Operations

 

    Three Months Ended June 30,     $            Six Months Ended June 30,     $         
    2022     2021     Change     % Change     2022     2021     Change     % Change  
Revenue                                                                
Rental revenue   $ 312     $ 247     $ 65       26 %   $ 641     $ 401     $ 240       60 %
Total revenue     312       247       65       26 %     641       401       240       60 %
                                                                 
Expenses                                                                
Property expenses     924       96       828       863 %     1,831       167       1,664       996 %
General and administrative     1,473       57       1,416       2484 %     3,114       189       2,925       1548 %
Depreciation and amortization expense     266       137       129       94 %     550       207       343       166 %
Total expenses     2,663       290       2,373       818 %     5,495       563       4,932       876 %
                                                                 
Other income (loss)                                                                
Interest income     549             549       100 %     1,050             1,050       100 %
Other income (expense)     (19 )     (23 )     4       (17 )%     (26 )     (39 )     13       (33 )%
Total other income (loss)     530       (23 )     553       (2404 )%     1,024       (39 )     1,063       (2726 )%
Loss before income taxes     (1,821 )     (66 )     (1,755 )     2659 %     (3,830 )     (201 )     (3,629 )     1805 %
Provision for income taxes     (111 )           (111 )     100 %     (111 )           (111 )     100 %
Net loss     (1,932 )     (66 )     (1,866 )     2827 %     (3,941 )     (201 )     (3,740 )     1861 %
Net loss attributable to noncontrolling interests     46             46       100 %     39       7       32       457 %
Net loss attributable to Belpointe PREP, LLC   $ (1,886 )   $ (66 )   $ (1,820 )     2758 %   $ (3,902 )   $ (194 )   $ (3,708 )     1911 %

 

Revenue

 

Rental Revenue

 

For the three and six months ended June 30, 2022, as compared to the same periods in 2021, rental revenue increased by $0.1 million and $0.2 million, respectively, primarily due to an increase in lease revenues as a result of properties acquired subsequent to June 30, 2021 as well as two operating properties acquired during the six months ended June 30, 2021.

 

Expenses

 

Property Expenses

 

For the three and six months ended June 30, 2022, property expenses consisted of management fees, property expenses, real estate taxes, and utilities and insurance expenses incurred in relation to our acquired investments. For the three months and six months ended June 30, 2021 property expenses consisted of property expenses, real estate taxes, and utilities and insurance expenses incurred in relation to our acquired investments. For the three and six months ended June 30, 2022, as compared to the same period in 2021, property expenses increased by $0.8 million and $1.7 million, respectively, primarily due to management fees incurred and properties acquired subsequent to June 30, 2021 as well as three properties acquired during the six months ended June 30, 2021.

 

General and Administrative

 

For the three and six months ended June 30, 2022, general and administrative expenses primarily consisted of employee cost sharing expenses (pursuant to our management agreement and employee and cost sharing agreement), marketing expenses, legal, audit and accounting fees. For the three and six months ended June 30, 2021, general and administrative expenses primarily consisted of employee cost sharing expenses (pursuant to our management agreement and employee and cost sharing agreement).

 

Depreciation and Amortization

 

For the three and six months ended June 30, 2022, as compared to the same periods in 2021, depreciation and amortization increased by $0.1 million and $0.3 million, respectively, primarily due to operating properties acquired during 2022 and 2021.

 

20

 

Other Income (Loss)

 

Interest Income

 

For the three months ended June 30, 2022, interest income was $0.5 million and is primarily related to interest earned on the Norpointe Loan of $0.4 million, interest earned on the CMC Loan of $0.1 million, and interest earned on the Visco Loan of $0.1 million. For the six months ended June 30, 2022, interest income was $1.1 million and is primarily related to interest earned on the Norpointe Loan of $0.7 million, interest earned on the CMC Loan of $0.2 million, and interest earned on the Visco Loan of $0.1 million. For additional details regarding our commercial real estate loans, see “—Our Investments—Commercial Real Estate Loans.” There was no comparable activity for the three and six months ended June 30, 2021.

 

Other Income (Expense)

 

For the three and six months ended June 30, 2022, other income (expense) primarily relates to tax fees, sales tax in connection with the 1991 Main parking garage easement agreement and interest expense on the 900 Eighth Promissory Note. For the three and six months ended June 30, 2021, other income (expense) relates to Belpointe PREP’s interest expense on the Secured Notes.

 

Provision for Income Taxes

 

For the three and six months ended June 30, 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.

 

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.

 

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, make distributions to the holders of our units and pay interest on any outstanding indebtedness that we incur.

 

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 three and six months ended June 30, 2022. During the three and six months ended June 30, 2021, our Manager and its affiliates, including our Sponsor, incurred organization and Primary Offering expenses of $0.1 million and $0.5 million, respectively. During the three and six months ended June 30, 2022, our Manager and its affiliates, including our Sponsor, incurred operating expenses of $0.4 million and $0.9 million, respectively, on our behalf. During the three and six months ended June 30, 2021, our Manager and its affiliates, including our Sponsor, incurred operating expenses of $0.2 million and $0.3 million, respectively, on our behalf.

 

A portion of the initial acquisition costs of 1991 Main were funded by an Acquisition Loan payable in consecutive monthly payments of interest only, with the outstanding principal balance plus any accrued and unpaid interest due and payable on May 6, 2022. The Acquisition Loan bore interest at a fixed annual rate of 4.75% and was guaranteed by our Chief Executive Officer. The Acquisition Loan, including outstanding interest of less than $0.1 million, was repaid in full on April 22, 2022. For additional details regarding our acquisition of 1991 Main and the Acquisition Loan, see “—Our Investments—Investments in Multifamily and Mixed-Use Rental Properties—1991 Main Street - Sarasota Florida.”

 

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During the six months ended June 30, 2022, our indirect wholly owned subsidiary entered into a construction management agreement for the redevelopment of 1991 Main. 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 June 30, 2022, we had an unfunded capital commitment of $2.5 million under the terms of this agreement. We currently anticipate that the remaining funding for construction and soft costs associated with the redevelopment will be a minimum of $209.9 million.

 

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 “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds—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.

 

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):

 

    Six Months Ended June 30,  
    2022     2021  
Cash flows (used in) provided by operating activities   $ (2,954 )   $ 248  
Cash flows used in investing activities     (52,867 )     (30,127 )
Cash flows provided by financing activities     12,007       39,000  
Net (decrease) increase in cash and cash equivalents and restricted cash   $ (43,814 )   $ 9,121  

 

As of June 30, 2022 and 2021, cash and cash equivalents and restricted cash totaled approximately $148.5 million and $15.7 million, respectively.

 

Cash flows used in operating activities for the six months ended June 30, 2022 primarily relates to the payment of management fees and employee cost sharing expenses as well as payments for legal, marketing, and accounting fees. These outflows were partially offset by interest received on our Norpointe Loan and CMC Loan during the period. Cash flows provided by operating activities for the six months ended June 30, 2021 primarily relates to operating properties acquired.

 

22

 

Cash flows used in investing activities for the six months ended June 30, 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 Loan during the period as well as cash acquired as part of the acquisition of CMC (Note 4). Cash flows used in investing activities for the six months ended June 30, 2021 primarily relates to three properties acquired during the period as well as development costs incurred.

 

Cash flows provided by financing activities for the six months ended June 30, 2022 primarily relates 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 six months ended June 30, 2021 relates to Secured Notes funded by Belpointe REIT.

 

Critical Accounting Policies

 

The unaudited consolidated financial statements in this Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these unaudited 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,” in our unaudited consolidated financial statements in this Form 10-Q. There have been no changes to our significant accounting policies and estimates during the six months ended June 30, 2022 as compared to those disclosed in “Note 3 – Summary of Significant Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2021 (our “Annual Report”), a copy of which may be accessed here.

 

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 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K, and as a result are not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and implemented, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective controls system, misstatements due to error or fraud may occur and not be detected.

 

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated, as of the end of the period covered by this Form 10-Q, the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of June 30, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.

 

23

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our “internal control over financial reporting,” as defined in Rule 13a-15(f) of the Exchange Act, during the six months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time we may be involved in various claims and legal actions arising in the ordinary course of business. As of June 30, 2022, neither we nor any of our subsidiaries were subject to any material legal proceedings nor were we aware of any material legal proceedings threatened against us or any of our subsidiaries.

 

Item 1A. Risk Factors

 

There have been no material changes to the risk factors disclosed in Part I, Item 1A under the heading “Risk Factors” in our Annual Report, a copy of which may be accessed here. You should carefully consider the risk factors set forth in our Annual Report and be aware that these risk factors and other information may not describe every risk facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Unregistered Sales of Securities

 

In connection with our formation, on February 11, 2020, we issued 100 common units representing all of the issued and outstanding limited liability company interests of the Company to our Sponsor for an aggregate purchase price of $10,000.00. No sales commission or other consideration was paid in connection with the sale. The offer and sale was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), in reliance on Section 4(a)(2) thereof, as a transaction by an issuer not involving any public offering. Effective October 30, 2020, our Sponsor sold one common unit to Belpointe Capital Management, LLC, an affiliate of our Sponsor, for an aggregate purchase price of $100.00, in reliance upon the exemption from registration set forth in Section 4(a)(1) of the Securities Act, as a transaction by a person other than an issuer, underwriter or dealer not involving any public offering.

 

Effective September 13, 2021, we (i) amended and restated our Limited Liability Company Operating Agreement, (ii) reclassified all of our outstanding common units into an equivalent number of Class A units, and (iii) issued 100,000 Class B units and one Class M unit to our Manager. The Class B units were issued in consideration of services rendered and to be rendered by the Manager pursuant to the terms of our management agreement, and the Class M unit was issued in furtherance of the power and authority delegated to the Manager under the terms of the management agreement. No sales commission or other consideration was paid in connection with the issuance of the Class B units or the Class M unit. The issuance of the Class B units and Class M unit was exempt from the registration requirements of the Securities Act, in reliance on Section 4(a)(2) thereof, as transactions by an issuer not involving any public offering.

 

As of June 30, 2022, we have not sold any other equity securities that were not registered under the Securities Act.

 

Use of Proceeds from Registered Sales of Securities

 

On September 30, 2021, the Registration Statement covering our Primary Offering of up to $750,000,000 of Class A units was declared effective by the SEC. We set our initial 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 offering price effective as of the first business day following its public announcement. The adjusted 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.

 

24

 

Our Board, taking into consideration factors such as the investments we hold and the timing of our ability to generate cash flows, may determine that it is appropriate for us to begin calculating NAV on a quarterly basis prior to the first quarter following the December 31, 2022 year end. We will file a prospectus supplement with the SEC if we determine to calculate NAV prior to the first quarter following the December 31, 2022 year end and prospectus supplements disclosing quarterly determinations of our NAV per Class A unit for each fiscal quarter thereafter. If a material event occurs in between quarterly updates of NAV that would cause our NAV to change by 10% or more from the most recently disclosed NAV, we will disclose the updated price and the reason for the change in prospectus supplement as promptly as reasonably practicable.

 

From the period of October 7, 2021, the date of the first closing held in connection with our Primary Offering, through December 31, 2021, we issued 2,132,039 Class A units in our Primary Offering, raising net offering proceeds of $212.6 million. For the six months ending June 30, 2022, we issued 31,300 Class A units in connection with our Primary Offering, raising net offering proceeds of $2.8 million. Together with the gross proceeds raised in Belpointe REIT’s prior offerings, as of June 30, 2022, we have raised aggregate gross offering cash proceeds of $335.3 million.

 

The following tables summarize certain information about the Primary Offering proceeds and our use of proceeds, including direct or indirect payments to our directors, officers, affiliates or to any person owning 10% or more of any class of our equity securities as of June 30, 2022:

 

Offering proceeds

 

Class A units sold     2,163,339  
Gross offering proceeds   $ 216,333,900  
Selling commissions      
Offering costs (1) (2)     1,012,680  
Net offering proceeds   $ 215,321,220  

 

 

(1) Includes $0.3 million of reimbursements to an affiliate for costs incurred on our behalf.
(2) Direct or indirect payments of $0.7 million have been made to others, including payments for legal, accounting, transfer agent, FINRA, and filing fees, as of June 30, 2022.

 

Uses of net offering proceeds

 

Funding of loans receivable (1)   $ 34,955  
Purchases and development of real estate (2)     19,023  
Working capital (3) (4)     3,547  
    $ 57,525  

 

 

(1) Includes direct payment of $30.0 million to Norpointe, an affiliate of our Chief Executive Officer. Please see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Investments—Investments in Commercial Real Estate Loans—Norpointe Secured Loan” for additional detail regarding the Norpointe Loan.
(2) Includes direct or indirect payments of $5.2 million to directors, officers and affiliates as of June 30, 2022 predominantly for insurance premiums and employee reimbursement expenditures.
(3) Includes direct or indirect payments of $2.8 million to directors, officers and affiliates as of June 30, 2022 for management fees, insurance premiums and employee cost sharing expenses (pursuant to our management agreement and employee and cost sharing agreement). Please see “Note 3 – Related Party Arrangements” in our unaudited consolidated financial statements in this Form 10-Q for additional information regarding fees incurred on our behalf by, and expenses reimbursable to, our Manager and its affiliates.
(4) Includes direct or indirect payments of $0.8 million to others, including payments for legal, accounting, marketing, transfer agent and filing fees, as of June 30, 2022.

 

25

 

Item 3. Defaults Upon Senior Securities

 

Not Applicable.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

        Incorporated by Reference
Exhibit Number   Description   Form  

File

Number

  Exhibit   Filing Date
3.1   Certificate of Formation.   S-11   333-255424   3.1   September 30, 2021
3.2   Amended and Restated Limited Liability Company Operating Agreement.   S-11   333-255424   3.2   September 30, 2021
4.1   Subscription Agreement (included in Appendix B).   S-11   333-255424   4.1   September 30, 2021
10.1