Belpointe PREP, LLC: Form 10-Q for the period ended Sep 30, 2021

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, a Delaware limited liability company, its operating companies, Belpointe PREP OC, LLC, a Delaware limited company, and Belpointe PREP TN OC, LLC, a Delaware limited company (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 statement appearing in our prospectus filed with the U.S. Securities and Exchange Commission (the “SEC”) on October 1, 2021 (our “Prospectus”), a copy of which may be accessed here. As discussed in the section titled “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 Prospectus.

Overview

Belpointe is the first and only publicly traded qualified opportunity fund listed on a national securities exchange. We are a Delaware limited liability company and intend to operate in a manner that will allow us to qualify as a partnership for U.S. federal income tax purposes. We qualified as a qualified opportunity fund, as defined in the U.S. Internal Revenue Code of 1986, as amended (the “Code”), 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.

Belpointe is focused on identifying, acquiring, developing or redeveloping and managing commercial real estate located within “qualified opportunity zones.” We also anticipate identifying, acquiring, developing or redeveloping and managing a wide range of commercial real estate properties located throughout the United States and its territories, including, but not limited to, real estate-related assets, such as commercial real estate loans and mortgages, and debt and equity securities issued by other real estate-related companies, as well as making private equity acquisitions and investments, and opportunistic acquisitions of other qualified opportunity funds and qualified opportunity zone businesses, with the goal of increasing distributions and capital appreciation.

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”). Subject to certain restrictions and limitations, our Manager is responsible for managing our affairs on a day-to-day basis. A team of investment and asset management professionals acting through our Manager makes all decisions regarding the selection, negotiation, financing and disposition of our investments, subject to the limitations in our Amended and Restated Limited Liability Company Operating Agreement. Our Manager also provides asset management, marketing, investor relations and other administrative services on our behalf with the goal of maximizing our operating cash flow and preserving our invested capital.

Our Transaction with Belpointe REIT, Inc.

On April 21, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Belpointe REIT, Inc., a Maryland corporation (“Belpointe REIT”) and related party to our Sponsor. The purpose of the transaction was for us to acquire control of, and ultimately, the entire equity interest in, Belpointe REIT.

Pursuant to the terms of the Merger Agreement, we, through BREIT Merger, LLC, a Delaware limited liability company (“BREIT Merger”) and our wholly owned subsidiary, commenced an offer (the “Offer”) to exchange each outstanding share of common stock, par value $0.01 per share (the “Common Stock”), of Belpointe REIT validly tendered in the Offer for 1.05 Class A units (the “Class A Units”) representing limited liability company interests of the Company, with any fractional Class A Units rounded up to the nearest whole unit (the “Transaction Consideration”). The Offer expired on June 18, 2021. As of the expiration of the Offer 757,098 shares of Common Stock had been validly tendered, representing 63.62% of the issued and outstanding shares of Common Stock.

The Minimum Condition (as defined in the Merger Agreement) for the Offer was satisfied because the number of shares of Common Stock validly tendered in the Offer represented at least a majority of the aggregate voting power of the shares of Common Stock outstanding immediately following consummation of the Offer. In connection with the Offer and Merger (as defined in the Merger Agreement), we filed a registration statement on Form S-4, as amended (File No. 333-255427), with the SEC (the “Form S-4”). The Form S-4 was declared effective on September 13, 2021. On September 14, 2021, BREIT Merger accepted for exchange all of the shares of Common Stock validly tendered in the Offer and, effective September 14, 2021, Belpointe REIT completed the QOZB Sale (as defined in the Merger Agreement).

On October 1, 2021, Belpointe REIT completed the Conversion (as defined in the Merger Agreement), wherein each outstanding share of Common Stock was converted into a limited liability company interest (the “Interests”) of BREIT, LLC, a Maryland limited liability company (“BREIT”). All other conditions to the Merger (as defined in the Merger Agreement) having been satisfied, on October 12, 2021, pursuant to the terms of the Merger Agreement, BREIT merged with and into BREIT Merger, with BREIT Merger surviving. In the Merger, each Interest that was issued and outstanding immediately prior to the effective time of the Merger was converted into the right to receive the Transaction Consideration.

COVID-19

COVID-19 has and continues to pose serious threats and in certain cases severe disruptions to the U.S. and global economy, especially in light of variants that appear to spread more easily than the original virus, and there is continued uncertainty as to the duration of the economic impact caused by COVID-19, even with vaccines now available. Efforts by governmental and other authorities to contain the spread of the virus through lockdowns of cities, business closures, restrictions on travel and emergency quarantines, among others, and responses by businesses and individuals to reduce the risk of exposure to infection, including reduced travel, cancellation of meetings and events, and implementation of work-at-home policies, among others, have resulted in significant disruptions to global economic and market conditions and triggered a period of global economic slowdown.

While the economy has shown signs of recovery in large part because of the availability of COVID-19 vaccines, the continued uncertainty of COVID-19 variants may lead to renewed efforts by governmental and other authorities to contain the spread of the virus. Accordingly, COVID-19 continues to present material uncertainty and risk with respect to our future performance and future financial results, including the potential to negatively impact our costs of operations, the value of any investments we make and laws, regulations and governmental and regulatory policies applicable to us.

Given the evolving nature of the COVID-19 virus, the extent to which it may impact our future performance and future financial results will depend on future developments which remain highly uncertain at this time and as a result we are unable to estimate the impact that COVID-19 may have on our future financial results at this time. Our Manager continuously reviews our investment and financing strategies for optimization and to reduce our risk in the face of the rapid development and fluidity of this situation.

Our Investment Portfolio

As of September 30, 2021, our investment portfolio consisted of seven investments and two pending investments in three states. These investments include:

Our Investments

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. 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. The existing three-story office building will remain, and the new building will wrap around it.

1701-1710 Ringling Boulevard – Sarasota, Florida – 1701-1710 Ringling Boulevard (“1701-1710 Ringling”) is a 1.62-acre site, consisting of a six-story previously owner-occupied office building with parking lot, located in Sarasota, Florida. We currently anticipate that 1701-1710 Ringling will be renovated into a fully functioning office building, consisting of approximately 80,000 square feet of rentable space and approximately 128 parking spaces, with an existing tenant leasing back approximately 42,000 square feet for 20 years with several lease extensions.

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. 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 game room as well as 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. We currently anticipate that 900 First will remain a two-tenant retail building and that we will take the additional development rights and add them to 902-1020 First.

1900 Fruitville Road – Sarasota Florida – 1900 Fruitville Road (“1900 Fruitville”) is a 1.205-acre site, consisting of a fully leased retail building and parking lot located in Sarasota, Florida. The sole tenant in the building is scheduled to vacate in 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. 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, the building will have a fitness center, courtyard with a swimming pool and rooftop terraces as well as a leasing office. As of September 30, 2021 we have partially completed demolition of 900 8th Avenue South.

Storrs Road, Connecticut – Storrs Road (“Storrs Road”) is a 9-acre parcel of land located in Storrs, Connecticut. We currently anticipate holding Storrs Road for future multifamily development.

Our Pending Investments

901-909 Central Avenue North – St. Petersburg, Florida – 901-909 Central Avenue North (“901-909 Central”) is a fully leased single-story retail/office building consisting of 4 units located in St. Petersburg, Florida. We currently anticipate closing on 901-909 Central later this year.

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. 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. We anticipate that Nashville No. 2 will consist of two 7-story buildings with a 2-story approximately 533-space garage plus approximately 100 surface level parking spots, 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.

Results of Operations

Revenue

For the three and nine months ended September 30, 2021, revenue totaled approximately $278,000 and $679,000, respectively, and was primarily derived from lease revenues. There were no comparable revenues for the three and nine months ended September 30, 2020.

Expenses

Property

For the three and nine months ended September 30, 2021, property expenses totaled approximately $148,000 and $315,000, respectively, and consisted of property expenses, real estate taxes, utilities and insurance expenses incurred in relation to our investments. There were no comparable property expenses for the three and nine months ended September 30, 2020.

General and Administrative

For the three and nine months ended September 30, 2021, general and administrative expenses totaled approximately $176,000 and $365,000, respectively, and were primarily comprised of employee cost sharing expenses (pursuant to the management agreement with our Manager). There were no comparable general and administrative expenses for the three and nine months ended September 30, 2020.

Depreciation and Amortization

For the three and nine months ended September 30, 2021, depreciation and amortization expense totaled approximately $163,000 and $370,000, respectively, and was related to depreciation and amortization incurred on properties acquired. There were no comparable depreciation and amortization expenses for the three and nine months ended September 30, 2020.

Other income

Gain on Redemption of Equity Investment

For the three and nine months ended September 30, 2021, gain on redemption of equity investment increased by approximately $251,000 and is related to CMC’s redemption of BPOZ 497’s preferred equity interest as discussed in “Note 7 – Loans Receivable” to the unaudited consolidated financial statements included elsewhere in this Form 10-Q.

Other Income

For the three months ended September 30, 2021, other income increased by approximately $91,000 and is primarily related to interest earned on the BI Secured Note of approximately $56,000, discussed in “Note 7 – Loans Receivable” to the unaudited consolidated financial statements included elsewhere in this Form 10-Q. The remaining increase is related to the elimination of interest expense on the Secured Notes during the three months ended September 30, 2021, as a result of the Exchange Offer, discussed in “Note 2 – Exchange Offer” to the unaudited consolidated financial statements. There was no comparable other income for the three months ended September 30, 2020.

For the nine months ended September 30, 2021, other income increased by approximately $52,000 and is primarily related to interest earned on the BI Secured Note of approximately $56,000, discussed in “Note 7 – Loans Receivable” to the unaudited consolidated financial statements included elsewhere in this Form 10-Q. There was no comparable other income for the nine months ended September 30, 2020.

Liquidity and Capital Resources

Long-Term Liquidity

We filed a registration statement on Form S-11, as amended (File No. 333-255424), with the SEC to register a continuous primary offering of up to $750,000,000 in our Class A Units (the “Primary Offering”). We are offering our Class A Units on a “best efforts” basis directly to investors and not through any underwriters, dealer-managers or other agents who would be paid commissions by us or any of our affiliates. In the future, however, we may engage the services of one or more underwriters, dealer-managers or other agents to participate in our Primary Offering.

Our Primary Offering was declared effective on September 30, 2021. We plan to undertake closings in our Primary Offering on a rolling basis on the last business day of each calendar quarter, we may, however, in our sole discretion, choose to conduct more frequent closings.

We set the initial offering price in our Primary Offering 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 Unit outstanding on the Determination Date. 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 are dependent on the net proceeds from our Primary Offering to fund our operations. We expect to obtain the liquidity and capital resources required to pay our Primary Offering and operating fees and expenses, fund our investments, make distributions to holders of our units and pay interest on any outstanding indebtedness that we incur, from the proceeds of the Primary Offering and any future offerings we may conduct, from the advancement of reimbursable 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 our operations.

In addition to making investments in accordance with our investment objectives and strategy, we expect our Primary Offering and operating fees and expenses will include, among other things, the management fee that we will pay to our Manager, legal, audit and valuation fees and expenses, federal and state filing fees, printing expenses, administrative fees, transfer agent fees, marketing and distribution fees, and expenses related to acquiring, financing, appraising and managing our commercial real estate properties. We do not have any office or personnel expenses as we do not have any employees. We will reimburse our Manager and its affiliates, including our Sponsor, for certain out-of-pocket expenses incurred in connection with our organization and operations. 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.

If we are unable to raise substantial offering proceeds in our Primary Offering, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments we make and the value of an investment in us will fluctuate with the performance of the specific assets we acquire. Further, we will have certain fixed operating expenses, including certain expenses associated with our qualification as a publicly traded partnership, regardless of whether we are able to raise substantial funds in our Primary Offering. Our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and limiting our ability to make investments and distributions.

Short-Term Liquidity

Our Manager and its affiliates, including our Sponsor, have funded our liquidity and capital resources on a short-term basis by advancing us substantially all of our organization and Primary Offering and other operating expenses which we will reimburse to our Manager and its affiliates, including our Sponsor, pursuant to the terms of the management agreement and employee cost sharing agreement. As of September 30, 2021 and December 31, 2020, our Manager and its affiliates, including our Sponsor, have incurred organization and Primary Offering expenses of approximately $636,000 and $199,000, respectively, on our behalf. As of September 30, 2021 and December 31, 2020, our Manager and its affiliates, including our Sponsor, have incurred operating expenses of approximately $457,000 and $31,000, respectively, on our behalf. We expect our Manager and its affiliates, including our Sponsor, to continue to fund our short-term liquidity and capital resource needs through advancement of reimbursable expenses until such time as we have sufficient capital resources to pay such expenses on our own behalf.

Leverage

We intend to 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.

Capital Resources

On October 28, 2020, we entered into a secured loan transaction with Belpointe REIT pursuant to which we borrowed $35,000,000 from Belpointe REIT evidenced by a secured promissory note (the “First Secured Note”) bearing interest at a rate of 0.14% and secured by all of our assets. On February 16, 2021, we entered into a second secured loan transaction with Belpointe REIT whereby Belpointe REIT advanced us an additional $24,000,000 evidenced by a second secured promissory note (the “Second Secured Note”) on the same terms as the First Secured Note. On May 28, 2021, we entered into a third secured loan transaction with Belpointe REIT whereby Belpointe REIT advanced us an additional $15,000,000 evidenced by a third secured promissory note (the “Third Secured Note” and, together with the First Secured Note and Second Secured Note, the “Secured Notes”) on the same terms as the First Secured Note and Second Secured Note.

Upon consummation of the Merger, effective October 12, 2021, we entered into a Release and Cancellation of Indebtedness agreement with BREIT Merger, the surviving entity in the 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.

Cash Flows

The following table provides a breakdown of the net change in our cash and cash equivalents and restricted cash (amounts in thousands):

As of September 30, 2021 and 2020, cash and cash equivalents and restricted cash totaled approximately $23,879,000 and $10,000, respectively.

Cash flows provided by operating activities for the nine months ended September 30, 2021 and 2020 primarily relate to the operating properties acquired. There were no cash flows from operating activities for the nine months ended September 30, 2020.

Cash flows used in investing activities for the nine months ended September 30, 2021 relate 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 the cash acquired in connection with the Offer (see “Note 2 – Exchange Offer”). There were no cash flows from investing activities for the nine months ended September 30, 2020.

Cash flows provided by financing activities for the nine months ended September 30, 2021 and 2020 primarily relate to the Secured Notes funded by Belpointe REIT and the private offering proceeds received from our Sponsor and affiliate, respectively.

Emerging Growth Company

We are an “emerging growth company,” as defined in the Jump Start Our Business Startups Act of 2012. As an emerging growth company, we are exempt from various reporting and disclosure requirements that are applicable to other public companies, including, without limitation, not being subject to the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, and, if we were to internalize management, not being required to include certain disclosures regarding executive compensation in our periodic reports and proxy statements, and not being required to seek member approval of executive compensation and golden parachute compensation arrangements pursuant to Sections 14A(a) and (b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As an emerging growth company, we will also delay adopting new or revised accounting standards until those standards apply to private companies.

We will remain an emerging growth company for up to five years, or until the earliest of: (i) the last date of the fiscal year during which we had total annual gross revenues of $1.07 billion or more; (ii) the date on which we have, during the previous three-year period, issued more than $1.07 billion in non-convertible debt; or (iii) the date on which we are deemed to be a “large accelerated filer” as defined under Rule 12b-2 under the Exchange Act.

Critical Accounting Policies

Our unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted 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.

There have been no changes to our significant accounting policies and estimates during the nine months ended September 30, 2021 as compared to those disclosed in “Note 2 – Summary of Significant Accounting Policies” to our audited consolidated financial statements for the year ended December 31, 2020, in our Prospectus filed with the SEC on October 1, 2021, 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.

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.

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 the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, 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 Exchange Act. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of September 30, 2021, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the nine months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We are a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, and as a result are not required to provide the information required by this Item.