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”) is focused
on identifying, acquiring, developing or redeveloping and managing commercial real estate located within “qualified opportunity
zones.” We were formed on January 24, 2020 as a Delaware limited liability company and qualify as a partnership and qualified opportunity
fund for U.S. federal income tax purposes.
At
least 90% of our assets consist of qualified opportunity zone property, and 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
On
May 9, 2023, the U.S. Securities and Exchange Commission (the “SEC”) declared effective our registration statement
on Form S-11, as amended (File No. 333-271262) (the “Follow-on Registration Statement”), registering the offer and sale of
up to $750,000,000 of our Class A units on a continuous “best efforts” basis by any method deemed to be an “at the
market” offering pursuant to Rule 415(a)(4) under the Securities Act of 1933, as amended (the “Securities Act”), including
by offers and sales made directly to investors or through one or more agents (our “Follow-on Offering”).
In
connection with the Follow-on Registration Statement, we entered into a non-exclusive dealer manager agreement with Emerson Equity LLC
(“Dealer Manager”), a registered broker-dealer, for the sale of our Class A units through the Dealer Manager. The Dealer
Manager will enter into participating dealer agreements and wholesale agreements with other broker-dealers, referred to as “selling
group members,” to authorize those broker-dealers to solicit offers to purchase our Class A units. We will pay our Dealer Manager
commissions of up to 0.25%, and the selling group members commissions ranging from 0.25% to 4.50%, of the principal amount of Class A
unit sold in the Follow-on Offering.
In
addition, the Follow-on Registration Statement constitutes a post-effective amendment to the registration statement on Form S-11, as
amended (File No. 333-255424), registering the offer and sale of our ongoing initial public offering of up to $750,000,000 of our Class
A units, declared effective by the SEC on September 30, 2021, of which $522,656,100 remained unsold as of May 9, 2023 (our “Primary
Offering” and, together with our Follow-on Offering, our “Public Offerings”).
The
purchase price for Class A units in the Public Offering will be the lesser of (i) the current net asset value (the “NAV”)
of our Class A units, and (ii) the average of the high and low sale prices of our Class A units on the NYSE American (the “NYSE”)
during regular trading hours on the last trading day immediately preceding the investment date on which the NYSE was open for trading
and trading in our Class A units occurred. As of May 9, 2023 the assumed NAV of our Class A units was equal to $100.00 per Class
A unit. Our Manager will calculate our NAV within approximately 60 days of the last day of each quarter (the “Determination Date”).
Any adjustment to our NAV will take effect as of the first business day following its public announcement. Our adjusted NAV will be equal
to our adjusted NAV as of the Determination Date (rounded to the nearest dollar) divided by the number of Class A units outstanding on
the Determination Date.
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting and conform to accounting
principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and Article
8 of Regulation S-X of the rules and regulations of the U.S. Securities and Exchange Commission.
In
the opinion of management, all adjustments considered necessary for a fair presentation of our financial position, results of operations
and cash flows have been included and are of a normal and recurring nature. The consolidated financial statements as of March 31, 2023,
and for the three months ended March 31, 2023 and 2022, are unaudited and may not include year-end adjustments necessary to make them
comparable to audited results. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated
financial statements as of and for the year ended December 31, 2022, 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 in controlled subsidiaries that are not attributable, directly or indirectly, to us are presented
in noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.
We
have evaluated our economic interest in entities to determine if they are deemed to be variable interest entities (“VIEs”)
and whether the entities should be consolidated. An entity is a VIE if it has any one of the following characteristics: (i) the entity
does not have enough equity at risk to finance its activities without additional subordinated financial support; (ii) the at-risk equity
holders, as a group, lack the characteristics of a controlling financial interest; or (iii) the entity is structured with non-substantive
voting rights. The distinction between a VIE and other entities is based on the nature and amount of the equity investment and the rights
and obligations of the equity investors. Fixed price purchase and renewal options within a lease, as well as certain decision-making
rights within a loan or joint-venture agreement, can cause us to consider an entity a VIE. Limited partnerships and other similar entities
that operate as a partnership will be considered VIEs unless the limited partners hold substantive kick-out rights or participation rights.
Significant
judgment is required to determine whether a VIE should be consolidated. We review all agreements and contractual arrangements to determine
whether (i) we or another party have any variable interests in an entity, (ii) the entity is considered a VIE, and (iii) which variable
interest holder, if any, is the primary beneficiary of the VIE. Determination of the primary beneficiary is based on whether a party
(a) has the power to direct the activities that most significantly impact the economic performance of the VIE, and (b) has the obligation
to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.
The
following table presents the financial data of the consolidated VIEs included in the consolidated balance sheets as of March 31, 2023
and December 31, 2022, respectively (amounts in thousands):
Schedule
of Carrying Value Net Assets
| |
March
31, 2023 | | |
December
31, 2022 | |
| |
(unaudited) | | |
| |
Assets | |
| | | |
| | |
Real estate | |
| | | |
| | |
Land | |
$ | 24,967 | | |
$ | 24,967 | |
Building and improvements | |
| 11,383 | | |
| 11,297 | |
Intangible assets | |
| 6,725 | | |
| 6,725 | |
Real
estate under construction | |
| 157,045 | | |
| 133,773 | |
Total real estate | |
| 200,120 | | |
| 176,762 | |
Accumulated
depreciation and amortization | |
| (1,045 | ) | |
| (672 | ) |
Real estate, net | |
| 199,075 | | |
| 176,090 | |
Cash and cash equivalents | |
| 99,424 | | |
| 124,159 | |
Other
assets | |
| 15,424 | | |
| 11,773 | |
Total
assets | |
$ | 313,923 | | |
$ | 312,022 | |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
Due to affiliates | |
$ | 4,029 | | |
$ | 4,399 | |
Lease liabilities | |
| 5,316 | | |
| 5,350 | |
Accounts payable | |
| 2,875 | | |
| 1,679 | |
Accrued
expenses and other liabilities | |
| 7,401 | | |
| 6,064 | |
Total
liabilities | |
$ | 19,621 | | |
$ | 17,492 | |
An
interest in a VIE requires reconsideration when an event occurs that was not originally contemplated. At each reporting period we will
reassess whether there are any events that require us to reconsider our determination of whether an entity is a VIE and whether it should
be consolidated.
Emerging
Growth Company Status
We
are an “emerging growth company,” as defined in the Jump Start Our Business Startups Act of 2012 (“JOBS Act”).
Under Section 107 of the JOBS Act, emerging growth companies are permitted to use an extended transition period provided in Section 7(a)(2)(B)
of the Securities Act, 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 amounts held in escrow on behalf of the company.
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):
Schedule
of Restricted Cash and Cash Equivalents
| |
March
31, 2023 | | |
December
31, 2022 | |
| |
(unaudited) | | |
| |
Cash and cash equivalents | |
$ | 115,676 | | |
$ | 143,467 | |
Restricted
cash (1) | |
| 6,595 | | |
| 1,500 | |
Total cash and cash
equivalents and restricted cash | |
$ | 122,271 | | |
$ | 144,967 | |
| (1) | Restricted
cash is included within Other assets on our consolidated balance sheets. |
Recently
Adopted Accounting Pronouncements
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13,
Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduces
a new model for estimating credit losses based on current expected credit losses for certain types of financial instruments, including
loans receivable, held-to-maturity debt securities, and net investments in direct financing leases, amongst other financial instruments.
ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding
an entity’s assumptions, models, and methods for estimating the allowance for losses. ASU 2016-13 does not apply to receivables
arising from operating leases, which are within the scope of ASU 2016-02, Leases (Topic 842).
We
adopted ASU 2016-13 on January 1, 2023 using the modified retrospective method. The adoption of this standard did not have a material
impact on our unaudited consolidated financial statements, and no cumulative-effect adjustment was recorded to retained earnings.
Note
3 – Leases
Lessor
Accounting
We
own rental properties which are leased to tenants under operating leases with current expirations ranging from 2023 to 2040, with options
to extend or terminate the leases. Revenues from such leases are reported as Rental revenue in our unaudited consolidated statements
of operations, and are comprised of (i) lease components, which includes fixed and variable lease payments and (ii) non-lease components
which includes reimbursements of property level operating expenses. We do not separate non-lease components from the related lease components
as allowed under the Accounting Standards Codification (“ASC”) 842 practical expedient, as the timing and pattern of transfer
are the same, and account for the combined component in accordance with ASC 842.
Fixed
lease revenues represent the base rent that each tenant is required to pay in accordance with the terms of their respective leases reported
on a straight-line basis over the non-cancelable term of the lease. Variable lease revenues include payments based on (i) tenant reimbursements,
(ii) changes in the index or market-based indices after the inception of the lease, (iii) percentage rents, or (iv) the operating performance
of the property. Variable lease revenues are not recognized until the specific events that trigger the variable payments have occurred.
The
following table summarizes the components of lease revenues (amounts in thousands):
Schedule
of Components of Lease Revenues
| |
2023 | | |
2022 | |
| |
Three
Months Ended March 31, | |
| |
2023 | | |
2022 | |
Fixed lease revenues | |
$ | 266 | | |
$ | 212 | |
Variable
lease revenues (1) | |
| 81 | | |
| 70 | |
Lease
revenues (2) (3) | |
$ | 347 | | |
$ | 282 | |
| (1) | Includes
reimbursements for property taxes, insurance, and common area maintenance services. |
| (2) | Excludes
lease intangible amortization of $0.1 million for the three months ended March 31, 2023 and
2022. |
| (3) | Excludes
straight-line rent of less than $0.1 million for the three months ended March 31, 2023 and
2022. |
In
certain of our leases, the tenant is obligated to pay the real estate taxes, insurance, and certain other expenses directly to the vendor.
These obligations, which have been assumed by the tenants, are not reflected in our unaudited consolidated financial statements. To the
extent any such tenant defaults on its lease or if it is deemed probable that the tenant will fail to pay for such obligations, a liability
for such obligations would be recorded.
We
assess the collectability of substantially all lease payments due by reviewing a tenant’s payment history or financial condition.
Changes to collectability are recognized as a current period adjustment to rental revenue. We have assessed the collectability of all
recorded lease revenues as probable as of March 31, 2023.
Lessee
Accounting
Ground
Lease
We
are a lessee under a ground lease in Sarasota, Florida, which is classified as a financing lease. As of March 31, 2023, we have
exercised an option to acquire the underlying property, and the acquisition is expected to close in the third quarter of 2023.
Accordingly, finance lease liabilities of $5.1 million and $5.0 million are included in Lease liabilities in our consolidated
balance sheets as of March 31, 2023 and December 31, 2022, respectively, which represent our obligation to make payments
under this ground lease. During the three months ended March 31, 2023, we capitalized $0.1
million of interest related to this ground lease on one of our development investments which is included in Real estate under
construction in our unaudited consolidated balance sheet.
There
are no operating leases for which we are the lessee, therefore there are no related ROU assets or lease liabilities as of March 31,
2023 and December 31, 2022.
Note
4 – Related Party Arrangements
Our
Relationship with Our Manager and Sponsor
Our
Manager and its affiliates, including our Sponsor, will receive fees or reimbursements in connection with our Public Offerings 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):
Schedule of Non-Cash Activity to Related Party
| |
2023 | | |
2022 | |
| |
Three
Months Ended March 31, | |
| |
2023 | | |
2022 | |
| |
(unaudited) | | |
(unaudited) | |
Amounts included in the Consolidated Statements
of Operations | |
| | |
| |
Costs
incurred by our Manager and its affiliates (1) | |
$ | 670 | | |
$ | 534 | |
Management fees | |
| 661 | | |
| 634 | |
Insurance | |
| 106 | | |
| 107 | |
Director
compensation | |
| 20 | | |
| 20 | |
Costs incurred by the
manager and its affiliates | |
$ | 1,457 | | |
$ | 1,295 | |
| |
| | | |
| | |
Capitalized costs included
in the Consolidated Balance Sheets | |
| | | |
| | |
Development fee and reimbursements | |
$ | 977 | | |
$ | 1,853 | |
Insurance
(2) | |
| 517 | | |
| 41 | |
Other capitalized costs | |
$ | 1,494 | | |
$ | 1,894 | |
| (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 months ended March 31, 2023 and 2022, we incurred insurance premiums of $0.1 million
and $4.5 million, respectively, pertaining to insurance policies with effective dates that
commenced during the period. During the three months ended March 31, 2023 and 2022, $0.5
million and less than $0.1 million, respectively, was amortized into Real estate under construction
on our unaudited consolidated balance sheets. |
The
following table presents a summary of amounts included in Due to affiliates in the consolidated balance sheets (amounts in thousands):
Schedule of Due to Related Party
| |
March
31, 2023 | | |
December
31, 2022 | |
| |
(unaudited) | | |
| |
Due to affiliates | |
| | | |
| | |
Development
fees | |
$ | 3,347 | | |
$ | 4,256 | |
Employee
cost sharing and reimbursements (1) | |
| 1,641 | | |
| 866 | |
Management fees | |
| 661 | | |
| 661 | |
Director
compensation | |
| 40 | | |
| 20 | |
Due to affiliates | |
$ | 5,689 | | |
$ | 5,803 | |
| (1) | Includes
wage, overhead and other reimbursements to our Manager and its affiliates, including our
Sponsor. |
Public
Offering Expenses
Our
Manager and its affiliates, including our Sponsor, will be reimbursed, for offering expenses incurred in connection with our Public Offerings.
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 Primary Offering expenses incurred by our Manager and its affiliates during the three months ended March 31, 2023 and 2022.
Other
Operating Expenses
Pursuant
to 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 the Employee and Cost Sharing Agreement, 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 months ended March 31, 2023 and 2022, our
Manager and its affiliates, including our Sponsor, incurred operating expenses of $0.6 million and $0.5 million, respectively, on our
behalf. The expenses are payable, at the election of the recipient, in cash, by issuance of our Class A units at the then-current NAV,
or through some combination of the foregoing. As of March 31, 2023, all expenses incurred since inception have been paid in cash.
Management
Fee
Subject
to the limitations set forth in our Amended and Restated Limited Liability Company Operating Agreement (our “Operating Agreement”)
and the oversight of our Board, our Manager is responsible for managing our 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. As of the quarter ended March 31, 2023, our assumed NAV was $100.00 per Class A unit. Our Manager
will calculate and announce our NAV within approximately 60 days of the last day of each quarter. Any adjustment to our NAV will take
effect as of the first business day following its public announcement. For the three months ended March 31, 2023 and 2022, we incurred
management fees of $0.7 million and $0.6 million, respectively, which are included in Property expenses in our unaudited consolidated
statements of operations.
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.
During
the three months ended March 31, 2023 and 2022, we incurred development fees earned during the construction phase of $0.7 million and
$1.6 million, respectively. As of March 31, 2023 and December 31, 2022, $3.3 million and $4.3 million, respectively, remained due and
payable to our affiliates for development fees.
During
the three months ended March 31, 2023 and 2022, we incurred employee reimbursement expenditures to our affiliates acting as development
managers of $0.4 million and $0.3 million, respectively, of which $0.3 million and $0.2 million, respectively, is included in Real estate
under construction in our unaudited consolidated balance sheets, and $0.1 million and $0.1 million, respectively, is included in General
and administrative expenses in our unaudited consolidated statements of operations. As of March 31, 2023 and December 31, 2022, $0.6
million and $0.3 million, respectively, remained due and payable to our affiliates for employee reimbursement expenditures.
Acquisition
Fees
We
will pay our Manager, Sponsor, or an affiliate of our Manager or Sponsor, an acquisition fee equal to 1.5% of the total value of any
acquisition transaction, including any acquisition through merger with another entity (but excluding any transactions in which our Sponsor,
or an affiliate of our Manager or Sponsor, would otherwise receive a development fee). We did not incur any acquisition fees during the
three months ended March 31, 2023 and 2022, 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 months ended March 31, 2023 and 2022, we obtained insurance premiums in the aggregate amount of $0.1 million and $4.5 million,
respectively, from which Belpointe Specialty Insurance earned commissions of less than $0.1 million and $0.4 million, respectively. For
each of the three months ended March 31, 2023 and 2022, Belpointe Specialty Insurance earned administration fees of less than $0.1 million.
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 months ended March 31, 2023 and 2022, $0.5 million and less than $0.1 million, respectively, were amortized
into Real estate under construction on the unaudited consolidated balance sheets. As it pertains to our operating properties, for the
three months ended March 31, 2023 and 2022, $0.1 million and $0.1 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.
Note
5 – Real Estate, Net
Acquisitions
of Real Estate During 2023
On
June 28, 2022, through an indirect majority-owned subsidiary of our Operating Company, we acquired a 70.2% controlling interest (the
“CMC Interest”) in CMC Storrs SPV, LLC (“CMC”), a holding company for an approximately 60-acre site located in
Mansfield, Connecticut. As part of the transaction two unaffiliated joint venture partners (the “CMC JV Partners”) were deemed
to have made initial capital contributions to CMC. Following our acquisition of the CMC Interest, we discovered that one of the CMC JV
Partners had misappropriated cash from the other’s cash account. Accordingly, the CMC JV Partner forfeited $1.0 million, or 29.8%,
of their noncontrolling interest in CMC on March 24, 2023 (a non-cash financing activity during the three months ended March 31, 2023).
As a result of the forfeiture, we indirectly own a 100% controlling interest in CMC.
Depreciation
expense was $0.2 million for each of the three months ended March 31, 2023 and 2022, 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):
Schedule of Real Estate Under Construction
|
March
31, 2023 |
|
December
31, 2022 |
|
(unaudited) |
|
|
Beginning
balance |
$ 133,898 |
|
$ 76,882 |
Capitalized
costs (1) (2) |
23,102 |
|
45,907 |
Land
held for development (3) |
91 |
|
10,958 |
Capitalized
interest |
103 |
|
151 |
Ending balance |
$ 157,194 |
|
$ 133,898 |
| (1) | Includes
development fees and employee reimbursement expenditures of $1.0 million and $5.6 million
for the three months ended March 31, 2023 and the year ended December 31, 2022, respectively. |
| (2) | 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 $0.6 million
and $2.2 million for the three months ended March 31, 2023 and the year ended December 31,
2022, respectively. |
| (3) | Includes
ground lease payments and straight-line rent adjustments incurred of zero and $0.8 million
for the three months ended March 31, 2023 and the year ended December 31, 2022, respectively. |
Real
estate under construction includes non-cash investing activity of $9.7 million for the three months ended March 31, 2023 (inclusive of
unpaid development fees of $0.7 million, and unpaid employee cost sharing and reimbursements of $0.3 million) and $13.9 million for the
year ended December 31, 2022.
Note
6 – Intangible Assets and Liabilities
Intangible
assets and liabilities are summarized as follows (amounts in thousands):
Schedule of Intangible Assets And Liabilities
| |
March
31, 2023 | | |
December
31, 2022 | |
| |
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 | |
$ | 3,836 | | |
$ | (1,094 | ) | |
$ | 2,742 | | |
$ | 3,836 | | |
$ | (791 | ) | |
$ | 3,045 | |
Indefinite-Lived Intangible
Assets | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Development rights | |
| 5,659 | | |
| — | | |
| 5,659 | | |
| 5,659 | | |
| — | | |
| 5,659 | |
Total intangible assets | |
$ | 9,495 | | |
$ | (1,094 | ) | |
$ | 8,401 | | |
$ | 9,495 | | |
$ | (791 | ) | |
$ | 8,704 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Finite-Lived Intangible
Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Below-market leases | |
$ | (2,517 | ) | |
$ | 552 | | |
$ | (1,965 | ) | |
$ | (2,517 | ) | |
$ | 411 | | |
$ | (2,106 | ) |
Total intangible liabilities | |
$ | (2,517 | ) | |
$ | 552 | | |
$ | (1,965 | ) | |
$ | (2,517 | ) | |
$ | 411 | | |
$ | (2,106 | ) |
In-place
lease and development right intangible assets, noted above, are included in Intangible assets on the consolidated balance sheets. Below-market
lease liabilities, noted above, are included in Lease liabilities on the consolidated balance sheets.
Amortization
of in-place lease intangible assets was $0.3 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively,
and is included in Depreciation and amortization expense on the unaudited consolidated statements of operations.
Amortization
of below-market lease liabilities was $0.1 million and $0.1 million for each of the three months ended March 31, 2023 and 2022 and is
included in Rental revenue on the unaudited consolidated statements of operations.
Note
7 – Loans Receivable
On
September 30, 2021, we lent approximately $3.5 million to CMC pursuant to the terms of a secured promissory note bearing interest at
an annual rate of 12.0% and due and payable on June 27, 2022 (the “CMC Loan”). On June 28, 2022, the CMC Loan was repaid
in full, including accrued interest of $0.3 million.
On
January 3, 2022, we provided a $30.0 million commercial mortgage loan to Norpointe, LLC (“Norpointe”), an affiliate of our
Chief Executive Officer, pursuant to the terms of a secured promissory note bearing interest at an annual rate of 5.0% and due and payable
on December 31, 2022 (the “Norpointe Loan”). On June 28, 2022, for purposes of complying with the qualified opportunity fund
requirements under the Code and related Treasury Regulations, we restructured the Norpointe Loan through an indirect majority owned subsidiary
(the “Restructured Norpointe Loan”). The Restructured Norpointe Loan was evidenced by a secured promissory note bearing interest
at an annual rate of 5.0%, due and payable on June 28, 2023. On December 13, 2022, the Restructured Norpointe Loan was repaid in full,
including accrued interest of less than $0.1 million.
On
February 23, 2022, we provided an approximately $5.0 million commercial mortgage loan to Visco Propco, LLC (“Visco”) pursuant
to the terms of a secured promissory note bearing interest at an annual rate of 6.0% and due and payable on February 18, 2023 (the “Visco
Loan”). On December 2, 2022, the Visco Loan was repaid in full, including accrued interest of $0.2 million.
Interest
income from loans receivable was zero and $0.5 million for the three months ended March 31, 2023 and 2022, respectively, and is included
in Interest income in our unaudited consolidated statements of operations.
Note
8 – Fair Value of Financial Instruments
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
marketplace participants at the measurement date under current market conditions (i.e., the exit price).
We
categorize our financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1)
and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different
levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the
instrument.
Financial
assets and liabilities recorded on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as
follows:
Level
1 – Quoted market prices in active markets for identical assets or liabilities.
Level
2 – Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical
or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield
curves, and market-corroborated inputs).
Level
3 – Valuation generated from model-based techniques that use inputs that are significant and unobservable in the market. These
unobservable assumptions reflect estimates of inputs that market participants would use in pricing the asset or liability. Valuation
techniques include use of option pricing models, discounted cash flow methodologies or similar techniques, which incorporate management’s
own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management
judgment or estimation.
We
estimated that our financial assets and liabilities had fair values that approximated their carrying values as of March 31, 2023 and
December 31, 2022.
Note
9 – Members’ Capital
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.
There
were no units issued during the three months ended March 31, 2023 and 2022. As of March 31, 2023 and December 31, 2022, there were 3,523,449
Class A units, 100,000 Class B units and one Class M unit issued and outstanding.
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.
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 related 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.
Basic
and Diluted Loss Per Class A Unit
For
the three months ended March 31, 2023, the basic and diluted weighted-average units outstanding were 3,523,449. For the three months
ended March 31, 2023, net loss attributable to Class A units was $2.8 million, and the loss per basic and diluted unit was $0.80.
For
the three months ended March 31, 2022, the basic and diluted weighted-average units outstanding were 3,382,149. For the three months
ended March 31, 2022, net loss attributable to Class A units was $2.0 million, and the loss per basic and diluted unit was $0.60.
Note
10 – Commitments and Contingencies
As
of March 31, 2023, we were not subject to any material litigation nor were we aware of any material litigation threatened against us.
During
the three months ended March 31, 2022, we entered into a construction management agreement in connection with the development of one
of our commercial real estate properties. As of March 31, 2023, we had an unfunded capital commitment of $128.8 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 15 months. As of March 31, 2023, $8.8 million, inclusive of retainage of $3.3 million, is outstanding
and payable in connection with this development.
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, except as set forth below, all such events or transactions that would require recognition or disclosure have been recognized
or disclosed.
In
April 2023, we entered into a construction management agreement in connection with the development of one of our commercial real estate
properties. 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 of $48.6 million.
In
May 2023, BPOZ 1991 Main, LLC, an indirect wholly-owned subsidiary of our Operating Company, entered into a variable-rate
construction loan agreement for $130.0
million (the “1991 Main Construction Loan”). The 1991 Main Construction Loan bears interest equal to 1-month term
Secured Overnight Financing Rate plus 345 basis points subject to a minimum all-in per annum interest rate of 8.51%,
and is for an initial term of four years, with a one-year extension option. In connection with the 1991 Main Construction Loan, we
purchased an interest rate cap with a strike price of 5.07%
to hedge our variable-rate interest exposure.