Belpointe PREP LLC

BELPOINTE PREP, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 –Organization, Business Purpose and Capitalization

Organization and Business Purpose

Belpointe PREP, LLC (together with its subsidiaries, the “Company,” “we,” “us,” or “our”) 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 collectively, 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 (the “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. As of June 30, 2024, we have not sold any Class A units in connection with 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 $514,013,330 remained unsold as of June 30, 2024 (our “Primary Offering” and, together with our Follow-on Offering, our “Public Offerings”).

The purchase price for Class A units in the Public Offerings 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. Our Manager calculates our NAV within approximately 60 days of the last day of each quarter, and any adjustments take effect as of the first business day following its public announcement. On June 3, 2024, we announced that our NAV as of March 31, 2024 was equal to $99.59 per Class A unit.

Note 2 –Summary of Significant Accounting Policies

Basis of Presentation

The accompanying 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 SEC.

In the opinion of management, all adjustments considered necessary for a fair presentation of our financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The consolidated financial statements as of June 30, 2024, and for the three and six months ended June 30, 2024 and 2023, are unaudited and may not include year-end adjustments necessary to make them comparable to audited results. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2023 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 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 interests in entities to determine if they are deemed to be variable interest entities (“VIEs”) and whether the entities should be consolidated. An entity is a VIE if it has any one of the following characteristics: (i) the entity does not have enough equity at risk to finance its activities without additional subordinated financial support; (ii) the at-risk equity holders, as a group, lack the characteristics of a controlling financial interest; or (iii) the entity is structured with non-substantive voting rights. The distinction between a VIE and other entities is based on the nature and amount of the equity investment and the rights and obligations of the equity investors. Fixed price purchase and renewal options within a lease, as well as certain decision-making rights within a loan or joint-venture agreement, can cause us to consider an entity a VIE. Limited partnerships and other similar entities that operate as a partnership will be considered VIEs unless the limited partners hold substantive kick-out rights or participation rights.

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

The following table presents the financial data of the consolidated VIEs included in the consolidated balance sheets as of June 30, 2024 and December 31, 2023, respectively (amounts in thousands):

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

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jump Start Our Business Startups Act of 2012 (“JOBS Act”). Under Section 107 of the JOBS Act, emerging growth companies are permitted to use an extended transition period provided in Section 7(a)(2)(B) of the Securities Act 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, our 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 consolidated financial statements and the accompanying notes. Actual results could materially differ from those estimates.

Impairment of Long-Lived Assets

We evaluate our tangible and identifiable intangible real estate assets for impairment when events such as delays or changes in development, declines in a property’s operating performance, deteriorating market conditions, or environmental or legal concerns bring recoverability of the carrying value of one or more assets into question. When qualitative factors indicate the possibility of impairment, the total undiscounted cash flows of the property, including proceeds from disposition, are compared to the net book value of the property. If the carrying value of the asset exceeds the undiscounted cash flows of the asset, an impairment loss is recorded in earnings to reduce the carrying value of the asset to fair value, calculated as the discounted net cash flows of the property. In circumstances where the highest and best use of a property is the fee simple value of vacant land, we compare book value of the property to the appraised value of the land. If the carrying value of the asset exceeds the appraised value of the land, an impairment loss is recorded to reduce the carrying value to the appraised value.

Restricted Cash

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

Liquidity

Our future needs for liquidity will depend on a variety of factors, including, without limitation, our ability to generate cash flows from operations, the timing and availability of net proceeds from our Public Offerings and any future offerings that we may conduct, the timing and extent of our real estate acquisition and disposition activities, and the timing and extent our construction and development costs.

Economic uncertainty, fluctuating interest rates, volatility in the real estate markets, slowdowns in transaction volume, delays in financings from banks and other lenders and other negative trends may, in the future, adversely impact our ability to timely access potential sources of liquidity. If we are unable to raise additional capital when desired, or on terms that are acceptable to us, our business, financial condition and results of operations could be adversely affected.

We believe that our cash on-hand, the anticipated net proceeds from our Public Offerings, the projected cash flows from our real estate assets and our current and anticipated financing activities will be sufficient to meet our liquidity and capital resource requirements for the next 12 months and beyond.

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07,Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024, and requires single reporting entities to comply with the expanded reportable segment disclosures outlined in the ASU. The expanded reportable segment disclosures are intended to enhance certain disclosures surrounding significant segment expenses. We are currently evaluating the impact of the new standard on our consolidated financial statements.

In March 2024, the SEC adopted final rules under Release No. 33-11275,The Enhancement and Standardization of Climate-Related Disclosures for Investors(the “Climate Rules”). The Climate Rules require quantitative and qualitative disclosure of certain climate-related information in registration statements and annual reports filed. These disclosures include financial statement footnote disclosure related to the effects of certain severe weather events and other natural conditions. In April 2024, the SEC issued an order staying the Climate Rules pending completion of a judicial review of certain petitions challenging their validity. If the stay is lifted, the effective dates remain unchanged and we remain a smaller reporting company, emerging growth company or non-accelerated filer, the Climate Rules will be effective for our fiscal year ending December 31, 2027. We are currently evaluating the impact of the Climate Rules on our consolidated financial statements.

Note 3 –Leases

Lessor Accounting

We own rental properties which are leased to tenants under operating leases with current expirations ranging from 2024 to 2040, with options to extend or terminate the leases. Revenues from such leases are reported as Rental revenue in our 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 the timing and pattern of transfer are the same, and account for the combined component.

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):

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 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 June 30, 2024.

Note 4 –Related Party Arrangements

Our Transaction with Belpointe Development Holding, LLC

On May 16, 2024, we entered into an agreement to borrow up to $3.0 million in principal amount from Belpointe Development Holding, LLC, an affiliate of our Chief Executive Officer, pursuant to the terms of a revolving credit facility agreement (the “BDH Facility”). The BDH Facility has a one year term and interest accrues at an annual rate of 5.0%, due and payable at maturity. Proceeds under the BDH Facility shall be used for general corporate purposes. As of June 30, 2024, the BDH Facility had an outstanding principal balance of $2.6 million.

Our Transaction with Lacoff Holding II, LLC

On December 29, 2023, we borrowed $4.0 million from Lacoff Holding II LLC, an affiliate of our Chief Executive Officer, pursuant to the terms of a promissory note (the “LH II Loan”). The LH II Loan was due and payable on April 1, 2024 and interest accrued on the LH II Note at an annual rate of 5.26%. The proceeds of the loan were used for general corporate purposes. On February 8, 2024, the LH II Loan, including accrued interest of less than $0.1 million, was repaid in full.

Our Relationship with Our Manager and Sponsor

Our Manager and its affiliates, including our Sponsor, 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 with such parties (amounts in thousands):

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

Other Operating Expenses

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

Pursuant to the terms of the employee and cost sharing agreement between us, our Operating Companies, our Manager and our Sponsor, we reimburse our Sponsor and our Manager for expenses incurred for our allocable share of the salaries, benefits and overhead of personnel providing services to us. During the three months ended June 30, 2024 and 2023, our Manager and its affiliates, including our Sponsor, incurred operating expenses of $0.5 million and $0.6 million, respectively, on our behalf. During the six months ended June 30, 2024 and 2023, our Manager and its affiliates, including our Sponsor, incurred operating expenses of $1.2 million and $1.3 million, respectively, on our behalf. The expenses are payable, at the election of the recipient, either in cash, by issuance of our Class A units at the then-current NAV, or through some combination of the foregoing. As of June 30, 2024, all expenses incurred since inception have been settled 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 in effect at the end of the quarter. For the three months ended June 30, 2024 and 2023, we incurred management fees of $0.7 million and $0.7 million, respectively, and $1.4 million and $1.3 million for the six months ended June 30, 2024 and 2023, respectively, which are included in Property expenses in our 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 June 30, 2024 and 2023, we incurred development fees earned during the construction phase of $0.7 million and $2.9 million, respectively. During the six months ended June 30, 2024 and 2023, we incurred development fees earned during the construction phase of $1.6 million and $3.6 million, respectively. Such development fees are included in Real estate under construction in our consolidated balance sheets. As of June 30, 2024 and December 31, 2023, $1.6 million and $6.1 million, respectively, remained due and payable to our affiliates for development fees.

During the three months ended June 30, 2024 and 2023, we incurred employee reimbursement expenditures to our affiliates acting as development managers of $0.2 million and $0.3 million, respectively, of which less than $0.1 million and $0.2 million, respectively, is included in Real estate under construction in our consolidated balance sheets, and $0.1 million and $0.1 million, respectively, is included in General and administrative expenses in our consolidated statements of operations. During the six months ended June 30, 2024 and 2023, we incurred employee reimbursement expenditures to our affiliates acting as development managers of $0.5 million and $0.7 million, respectively, of which $0.3 million and $0.5 million, respectively, is included in Real estate under construction in our consolidated balance sheets, and $0.2 million and $0.2 million, respectively, is included in General and administrative expenses in our consolidated statements of operations. As of June 30, 2024 and December 31, 2023, $0.6 million and $1.3 million, respectively, remained due and payable to our affiliates for employee reimbursement expenditures.

On April 25, 2023, each of the indirect majority-owned subsidiaries for our Nashville investments entered into development management agreements with certain development entities in which immediate family members of our Chief Executive Officer have a passive indirect minority beneficial ownership interest (collectively, the “Nashville DMAs”). The aggregate development fees payable under the Nashville DMAs are equal to 55% of 4.5% of the development budget or hard costs, as applicable. During the year ended December 31, 2023, we incurred $0.4 million of development fees related to the Nashville DMAs, which were capitalized to Real estate under construction in our consolidated balance sheets, with the remaining development fees payable upon our achieving various milestones throughout the development of our Nashville investments. As of June 30, 2024, $0.4 million in development fees related to the Nashville DMAs remained outstanding and payable.

Acquisition Fees

We will pay our Manager, Sponsor, or an affiliate of our Manager or Sponsor, an acquisition fee equal to 1.5% of the total value of any acquisition transaction, including any acquisition through merger with another entity (but excluding any transactions in which our Sponsor, or an affiliate of our Manager or Sponsor, would otherwise receive a development fee). We did not incur any acquisition fees during the three and six months ended June 30, 2024 and 2023.

Insurance

Certain family members of our Chief Executive Officer hold a non-controlling beneficial 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.

During the three months ended June 30, 2024 and 2023, and we obtained insurance premiums in the aggregate amount of $1.7 million and $2.3 million, respectively, from which Belpointe Specialty Insurance earned commissions and administrative fees of $0.2 million and $0.2 million, respectively. During the six months ended June 30, 2024 and 2023, we obtained insurance premiums in the aggregate amount of $1.9 million and $2.4 million, respectively, from which Belpointe Specialty Insurance earned commissions and administrative fees $0.2 million and $0.2 million, respectively. Insurance premiums are prepaid and are included in Other assets on the consolidated balance sheets.

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 Public Offerings 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 our Manager and its affiliates 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

Real Estate Under Construction

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

Placed into Service

During the six months ended June 30, 2024 certain phases of our 1991 Main Street, Sarasota, Florida (“1991 Main”) development project reached substantial completion, and as a result, we reclassified the related real estate under construction to their respective fixed asset accounts.

Non-cash Disclosures

Real estate under construction includes non-cash investing activity of $16.2 million for the six months ended months ended June 30, 2024 (inclusive of unpaid development fees of $1.0 million and unpaid employee cost sharing and reimbursements of $0.4 million) and $27.6 million for the year ended December 31, 2023 (inclusive of unpaid development fees of $6.1 million and unpaid employee cost sharing and reimbursements of $1.3 million).

Depreciation Expense

Depreciation expense was $0.6 million and $0.2 million for the three months ended June 30, 2024 and 2023, respectively, and $0.8 million and $0.4 million for the six months ended June 30, 2024 and 2023, respectively, and is included in Depreciation and amortization on the consolidated statements of operations.

Note 6 –Intangible Assets and Liabilities

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

In-place leases and development rights 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 less than $0.1 million and $0.5 million for the three months ended June 30, 2024 and 2023, respectively, and $0.1 million and $0.8 million for the six months ended June 30, 2024 and 2023, respectively, and is included in Depreciation and amortization in the consolidated statements of operations.

Amortization of below-market lease liabilities was less than $0.1 million and $0.4 million for the three months ended June 30, 2024 and 2023, respectively, and $0.1 million and $0.6 million for the six months ended June 30, 2024 and 2023, respectively, and is included in Rental revenue in the consolidated statements of operations.

Note 7 –Debt, Net

2024 Debt Transactions

On June 28, 2024, our indirect majority-owned subsidiary entered into a variable-rate construction loan agreement for up to $104.0 million in principal amount (the “1000 First Construction Loan”) with various lenders.

On June 26, 2024, our indirect majority-owned subsidiary entered into a fixed-rate loan agreement for $10.0 million in principal amount (the “900 8th Land Loan”) with KHRE SMA Funding, LLC.

On January 31, 2024, our indirect majority-owned subsidiary entered into a fixed-rate mezzanine loan agreement for up to $56.4 million in principal amount (the “1991 Main Mezzanine Loan”) with Southern Realty Trust Holdings, LLC.

2023 Debt Transactions

On May 12, 2023, our indirect majority-owned subsidiary entered into a variable-rate construction loan agreement for up to $130.0 million in principal amount (the “1991 Main Construction Loan”) with Bank OZK.

The following table details our Debt, net (dollars in thousands):

The following table summarizes the scheduled future principal payments under our debt arrangements as of June 30, 2024 (amounts in thousands):

Interest paid, net of capitalized interest for the six months ended June 30, 2024 and 2023, was $1.8 million andzero, respectively.

Amortization of deferred financing costs for the three months ended June 30, 2024 and 2023, was $0.4 million and $0.1 million, respectively, of which $0.2 million and $0.1 million was capitalized, respectively. Amortization of deferred financing costs for the six months ended June 30, 2024 and 2023 was $0.8 million and $0.1 million, respectively, of which $0.5 million and $0.1 million was capitalized, respectively.

Guarantees and Covenants

Each of our indebtedness agreements are secured by the individual underlying real estate investments serving as collateral. In connection with certain agreements, we provided completion guarantees, which, among other things, guarantee completion of the work at each individual construction project, as well as carveout guarantees pursuant to which we guarantee the borrowers obligations with respect to certain non-recourse carveout events, such as “bad acts,” environmental conditions, and violations of certain provisions of the loan documents. We also provided a customary environmental indemnity agreement to the certain lenders pursuant to which we agreed to protect, defend, indemnify, release and hold harmless such lenders from and against certain environmental liabilities related to the real estate investments for which they apply.

We are subject to various financial and operational covenants which includes, but is not limited to, maintaining liquid assets of no less than $20.0 million and a net worth of no less than $130.0 million. As of June 30, 2024, we were in compliance with all of our loan covenants.

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.

Except as described below, we estimated that our other financial assets and liabilities had fair values that approximated their carrying values as of June 30, 2024 and December 31, 2023.

Recurring Fair Value Measurements

Our interest rate caps are measured at fair value on a recurring basis (see Note 9 – Derivative Instruments for further details). The valuation of our interest rate caps are prepared by an independent third-party and are classified as Level 2 in the fair value hierarchy, as the valuation is approximated using market values of similar instruments in active markets.

The following table sets forth the carrying value and estimated fair value of our debt arrangements as of June 30, 2024 and December 31, 2023, respectively (amounts in thousands):

Note 9 –Derivative Instruments

In connection with our variable rate loan agreements (Note 7 – Debt, Net), we were required to obtain and maintain interest rate protection in the form of interest rate caps during the term of the loans to effectively limit the impact of increases in the one-month SOFR. We are subject to credit risk by the counterparty of these derivative instruments in the event of non-performance under the derivative contracts, however we believe the amounts to be minimal.

The following table details our derivative financial instruments as of June 30, 2024 (amounts in thousands):

The following table details the fair value of our derivative financial instruments (amounts in thousands):

The following table details the effect of our derivative financial instruments on our consolidated statements of operations (amounts in thousands):

Note 10 –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, and 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 anunlimited number of Class A units,100,000 Class B units andone Class M unit.

During the three months ended June 30, 2024 and 2023, we issued zero and 43,403 Class A units, respectively. During the six months ended June 30, 2024 and 2023, we issued 9,304 and 43,403 Class A units, respectively. As of June 30, 2024 and December 31, 2023, there were 3,631,703 and 3,622,399 Class A units, respectively,100,000 Class B units andone 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 June 30, 2024 and 2023, the basic and diluted weighted-average units outstanding were 3,631,703 and 3,526,511, respectively. For the three months ended June 30, 2024 and 2023, net loss attributable to Class A units was $4.7 million and $4.1 million, respectively, and the loss per basic and diluted unit was $1.30 and $1.16, respectively.

For the six months ended June 30, 2024 and 2023, the basic and diluted weighted-average units outstanding were 3,631,617 and 3,524,988, respectively. For the six months ended June 30, 2024 and 2023, net loss attributable to Class A units was $8.7 million and $6.9 million, respectively, and the loss per basic and diluted unit was $2.40 and $1.95, respectively.

Note 11 –Commitments and Contingencies

As of June 30, 2024, we were not subject to any material litigation nor were we aware of any material litigation threatened against us.

In connection with the development of our investment at 1000 First Avenue North, St. Petersburg, Florida (“1000 First”) and 1991 Main, we have entered into separate construction management agreements for each asset which contain terms and conditions that are customary for the related scope of work. As of June 30, 2024, we have an aggregate unfunded commitment of $109.1 million under these two development projects. As of June 30, 2024, $24.5 million, inclusive of retainage of $13.7 million, is outstanding and payable in connection with these developments.

Note 12 –Subsequent Events

Management has evaluated subsequent events to determine if events or transactions occurring after the balance sheet date through the date the consolidated financial statements were issued require potential adjustment to or disclosure in the 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.

Through the date of this Form 10-Q, we drew down an additional $6.5 million on the 1991 Main Construction Loan.

On August 8, 2024, additional phases of our 1991 Main development project, totaling approximately $37 million in capitalized cost, reached substantial completion and were placed into service.