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