UNITEDSTATES
SECURITIESAND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-SA
SEMIANNUAL REPORT PURSUANT TO REGULATION A
OF THE SECURITIES ACT OF 1933
For the fiscal year ended June 30, 2020
Maryland (State or other jurisdiction of
incorporation or organization) | | 82-2026337 (I.R.S. Employer
Identification No.) |
1306 MONTE VISTA AVE., NO. 5
UPLAND, CA (Address of principal
executive offices) | | 91786 (Zip Code) |
(909-437-8390)
Registrant's telephone number, including area code
COMMON SHARES
(Title of each class of securities issued pursuant to RegulationA)
This Semi Annual Report as filed on Form 1-SA contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the use of words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "could," "seeks," "projects," "predicts," "intends," "plans," "estimates," "anticipates" or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties, including those described under the section entitled "Risk Factors" in our Offering Statement on Form 1-A dated October 24, 2019, filed with the Securities and Exchange Commission ("SEC"), as such factors may be updated from time to time in our periodic filings and prospectus supplements filed with the SEC, which are accessible on the SEC's website at www.sec.gov.
Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in our filings with the SEC. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
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Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not place undue reliance on any forward-looking statements included in this annual report. All forward-looking statements are made as of the date of this semi-annual report on Form 1-SA and the risk that actual results will differ materially from the expectations expressed in this semi-annual report on Form 1-SA will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this semi-annual report on Form 1-SA, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this semi-annual report on Form 1-SA, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this semi-annual report on Form 1-SA will be achieved.
Item 1 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Background
RAD Diversified REIT, Inc. was formed as of May 11, 2017 as a Maryland corporation, and intends to elect taxation as a REIT for federal income tax purposes. The Company's objective is to acquire and then reposition (if required), renovate (if required), lease and manage income-producing single family residential, multi-family residential, and mixed use residential-commercial properties across primary and secondary markets throughout the United States. Initially, we will concentrate on acquiring a portfolio of properties in Pennsylvania, Texas, California and Florida, where the principals of our Manager have significant investing and property management experience.
The Company's primary intent is to purchase single-family residential, multi-family residential, and mixed use residential-commercial properties at below-market-price. Below-market-price purchases may be made at foreclosure auctions, Real-Estate-Owned ("REO") property sales, and tax-deed auctions. Our investments in real property are referred to as "Investments".
The Company researches available properties to identify suitable investments and attend tax-deed auctions in various locations. The Company purchases suitable properties and receives a tax-deed from the Tax Collector. As such, The Company typically purchases properties at these auctions for significantly less than their full market value because the back taxes will usually be less than the full market value of the property.
The Company rehabilitates properties to livable and safe conditions during redemption periods. During the redemption period, the former owner of the property can "redeem" / get back the property by paying the Company the back taxes, any associated fees, interest penalty, renovation costs, eviction, or standard property management fees. This means that, should the former owner redeem the property, the Company reclaims the purchase price, rehabilitation costs, associated fees, interest penalty, property management fees, insurance paid, and any other directly related property fees.
Operating Results
The Company began operations only a few months before the world was shrouded in a global pandemic. During the last quarter of 2019, the Company raised capital and began acquiring real estate. As January 2020 rolled into March 2020, the Company continued to raise money. Additional rental properties came online because management chose to invest raised capital by purchasing properties that were already occupied by good-paying tenants. Thanks to quick action in the form of coronavirus ("Covid") relief by the US and state governments, tenants continued to make their rent payments to the Company.
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Management became slightly concerned as the economy in the United States began to "shut down". Even though it quickly became apparent that government coronavirus relief would support the rental market,the Company's management believed it was necessary to provide prospective and current investors with the ability to withdraw their funds from the REIT.The Company's board of directors ("BOD") considered many options and settled on a financially viable solution intended to promote continued investment in its REIT. In furtherance of this objective, the Company's BOD declared a minimum distribution during the remainder of the 2020 fiscal year. The declared minimum distribution achieved its intended purpose and allowed the Company to continue raising money despite growing uncertainty in the US economy. For further description, see "Declaration of Distributions", below.
As reported in our year-end report for 2019, the Company dedicated $153,000 as deposits on additional real estate. These acquisitions have been consummated. In the first and second quarters of 2020, the Company purchased additional properties using the deposits made in 2019 augmented with an additional $92,000 of its cash-on-hand. These and prior acquisitions are enumerated in the table below, which is entitled "Real Estate Holdings End of 2Q2020". Thus far, the Company has been able to acquire real estate for a total purchase price $1,016,740. The "as is" fair market value for these properties is estimated at $1,466,500. Accordingly, the Company has to its credit approximately $450,000 inunrealized gains. The company also purchased a property at auction for $79,000 and immediately resold it for $84,925.25 to yield a gross profit of $5,925.25.
Real Estate Holdings End of 2Q2020
PROPERTY | ACQUISITION PRICE | CURRENT ANNUAL REVENUE | PROJECTED ANNUAL REVENUE |
2627 23RD ST | $ 17,000 | $ 10,200 | |
2000 S SALFORD | $ 192,740 | $ 26,400 | |
6408 CARLTON | $ 43,000 | | $ 14,400 |
6661 CORNELIUS | $ 115,000 | $ 12,000 | |
0 FM 1960 RD WEST(1) | $ 20,000 | | |
2120 SPENCER | $ 130,000 | $ 19,800 | |
2737 EYRE | $ 40,000 | $ 6,600 | |
4243 LEIDY | $ 40,000 | | $ 9,600 |
4509 20TH | $ 50,000 | | $ 9,600 |
5056 SUMMER ST | $ 50,000 | | $ 9,600 |
1318 BURNWOOD | $ 60,000 | | $ 14,400 |
917 ALMOND ST | $ 180,000 | $ 19,200 | |
(1) 0 FM 1960 RD WEST is a vacant lot that was purchased for speculation.
Liquidity and Capital Resources
As indicated on the balance sheet presented below, the Company, despite the ongoing pandemic, has achieved moderate success through its fundraising campaigns. The Company now has $45,229.05 in cash. The company also has $4,665,572.85 in short-term notes receivable, which the Company intends to redeem at the end of its 2020 fiscal year. These short-term notes receivable will be used to acquire real estate assets from three independent real estate holding funds, which are managed by the Company's Manager.
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It should be appreciated that the short-term notes receivable were received from DHI Fund, LP, DHI Hodings, LP and DDH Fund, LP as part of a two-stage process to acquire property using the Company's own stock. From that perspective, even though the notes receivable will be used to acquire real estate from these three funds. These notes also have a specific cash value. Should the Company need additional cash, the Company may decide to sell these notes receivable at a discount. For additional information on the two-stage process, please refer to Item 2, "Acquisition of Properties from Real Estate Holding Partnerships".
Trend Information
Using new money raised through the Company's current offering, the Company continues to purchase real estate. Because of the lockdown, the usual venues for acquiring real estate, those being live, real estate tax-deed auctions, were not operating at full capacity. As a result, the Company could not acquire real estate as quickly as it was raising money. Although this sounds like a good problem, it actually represents stagnation with respect to generating revenue.
Accordingly, the Company consulted with its Manager and concluded that certain properties, which are owned by separate and distinct real estate funds managed by the Company's Manager, were financially healthy and would make excellent additions to the Company's real estate holdings. On February 2, 2020, international travel was restricted in order to arrest escalation of coronavirus infections in the United States. This was a critical signal that caused the Company to begin a two-stage process to acquire real estate from these three funds.
Although Covid is wreaking havoc with our nation's economy, the Company has not felt any appreciable impact on cash-flow as a result of nationwide shelter-in-place orders. Because the Company invests mainly in residential real estate targeted at middle and lower income families, its tenants are able to make rent payments because of stimulus measures affected by federal and state governments.
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Item 2. Other Information
Use of Company Stock to Acquire Real Estate
Initially, the Company had no intention to use its own shares for purchasing real estate. However, in light of the Covid pandemic, the Company believes it is appropriate to acquire real estate using its own company stock because individuals were less likely to invest in a REIT during nationwide lockdowns. Because the Company's Manager also manages three separate and distinct real estate investment funds, it seems appropriate and prudent to acquire properties from these real estate investment funds. These three funds include DHI Fund, LP ("DHIF"), DHI Hodings, LP ("DHIH") and DDH Fund, LP ("DDHF").
On February 2, 2020, the Company sold shares to each of the three funds. The Company received a note in exchange for the shares issued to each of these three funds. In turn, each fund will use these shares to buy back its own equity from the various limited partners participating in each fund. As a result of the first step of these transactions, the Company now holds notes payable from each of the funds for the shares that were purchased by those funds. Exhibits 16A - 16C, inclusive, present the three notes, which the Company holds as current assets. The distribution of shares is being held in abeyance until the notes are satisfied.
During the second half of the fiscal year, the Company intends to purchase real estate from each of the funds using the debt owed to the Company by each respective fund. Accordingly, the notes are in essence a bridge loan to effect the transition of property from each fund into RAD Diversified REIT, Inc. Once all properties are recorded in the name of RAD Diversified REIT, Inc., the debt owed by each fund will be extinguished. Any interest due to the company will also be duly paid.
Acquisition of Properties from Real Estate Holding Partnerships
In order to acquire properties from DHIF, DHIH, and DDHF, the Company's Board of Directors established a policy whereby the Company could use its own stock to acquire real estate. Accordingly, the Company set out, and is in the process of acquiring numerous properties from these other real estate investment funds.
As already disclosed in ouroffering circular, the Company's manager manages three real estate investment funds including: a) DDH Fund, LP; b) DHI Fund, LP; and c) DHI Holdings, LP. Each of these individual real estate holding companies is managed by the Company's Manager. Each of these limited partnerships includes a general partner and numerous limited partners. In order to acquire real properties from each of these funds, the Company's Manager contacted the various limited partners in order to ascertain the possibility of acquiring the bulk of each funds' real estate holdings.
Based on discussions with the limited partners, a vast majority of those investors holding equity in these three funds indicated they would appreciate an immediate exit. These investors had realized returns on their original investments. But in the light of the Covid pandemic, these investors expressed interest in redeeming their investments according to their limited partnership agreements. Substantially all of these limited partners indicated that they would accept the Company's stock in exchange for their equity holdings in each respective fund.
Because the stakeholders in each of DHIF, DHIH, and DDHF wanted to acquire shares in the Company, the Company allowed each fund to purchase a block quantity of shares on February 2, 2020. The Company entered into contracts with each of these funds for the purpose of selling shares to these funds and enumerating real estate to be purchased by the Company.
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The Company sold shares to each fund on February 2, 2010 in exchange for unsecured notes, which is allowed under Maryland law. The notes in turn will be used to acquire real estate from these funds. These contracts are attached as Exhibits 16A, 16B and 16C.
Resignation of CFO, Amy Vaughn
On April 9, 2020, the Company received a formal resignation from its CFO, Amy Vaughn. Amy Vaughn will no longer serve as the chief financial officer ("CFO") for RAD Diversified REIT, Inc. Since an informal notice received on February 27, 2020, Brandon Mendenhall has been serving as interim CFO. A replacement has not yet been identified. Amy Vaughn continues to serve on the Company's Board of Directors.
Declaration of Distributions
On March 31, 2020 and in light of the ongoing coronavirus pandemic, the Company's Board of Directors prospectively declared a quarterly distribution of 1.25% of its total capitalization through the last quarter of 2020. In the event that profits during 2020 are not sufficient to support the distribution, the distributions will still be made and any shortfall will be declared a return of shareholder capital during fiscal year 2020. These distributions will be made on all outstanding stock up to $10,000,000 in total capitalization. The distributions shall be made for fiscal quarters April 1 - June 30, 2020, July 31 - September 30, 2020, and October 31 - December 31, 2020. This shall be known as the "distribution period".
Also on March 31, 2020, the Board of Directors agreed not to exceed a total capitalization of $10,000,000 during the distribution period. The Board of Directors has made this decision to ensure it is able to meet its 2020 distribution commitments.
Resignation of CFO, Amy Vaughn
On June 9, 2020, the Company received a formal resignation from its Chief Investment Officer, Randle J. Bowling. A replacement has not yet been identified.
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Item 2. Financial Statements
RAD DIVERSIFIED REIT, INC.
TABLE OF CONTENTS
| |
FINANCIAL STATEMENTS | |
Balance Sheet, for the year ended December 31, 2019 | |
ASSETS | 8 |
LIABILITIES AND STOCKHOLDERS' EQUITY | 9 |
Balance Sheet, for 2020 as of June 30, 2020 | |
ASSETS | 10 |
LIABILITIES AND STOCKHOLDERS' EQUITY | 11 |
Statement of Operations for the year ended December 31, 2019 | 12 |
Statement of Operations for 2020 as of June 30, 2020 | 13 |
Statement of Equity for the year ended December 31,2019 | 14 |
Statement of Equity for 2020 as of June 30, 2020 | 15 |
Statement of Cash Flows for the year ended December 31,2019 | 16 |
Statement of Cash Flows for 2020 as of June 30, 2020 | |
Notes to Financial Statements | 18 |
| |
| |
Notes that appear at the end of this section are applicable to this reporting period and to the prior year. There was no corresponding period from the prior year. For the sake of convenience, the Company includes financial statements from year end, 2019.
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RAD DIVERSIFIED REIT, INC.
BALANCE SHEET DECEMBER 31, 2019
ASSETS
Real estate assets, net of accumulated depreciation of $3,772(Note 3) | $ 383,968 |
Cash on hand and in banks | 205,422 |
Accounts receivable | 1,161 |
Other receivables | 32,474 |
Prepaid expenses | 2,057 |
Escrows and acquisition deposits | 153,000 |
| |
Totalassets | $ 778,082 |
| |
See notes to financial statements.
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RAD DIVERSIFIED REIT, INC.
BALANCE SHEET DECEMBER 31, 2019
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES | | |
Accounts payable | | $ 32,737 |
Related party payable(Note 4) | | 26,129 |
Prepaid rents | | 850 |
Other payables | | 115,000 |
Security deposits | | 3,050 |
| | |
Liabilities | | 177,766 |
COMMITMENTS AND CONTINGENCIES(Note 5) | | - |
Totalliabilities | | 177,766 |
| | |
STOCKHOLDERS' EQUITY | | |
Capital stock, $.001 par value,
100,000,000 shares authorized,
66,852 shares issued and outstanding | $ 67 | |
Additional paid-in capital | 668,453 | |
Accumulated Deficit | (68,204) | |
| | |
Total stockholders' equity | | 600,316 |
| | |
Total liabilities and stockholders' equity | | $ 778,082 |
See notes to financial statements.
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RAD DIVERSIFIED REIT, INC.
BALANCE SHEET JUNE 30, 2020
ASSETS
Real estate assets, net of accumulated depreciation of $3,772(Note 3) | $ 933,968 |
Cash on hand and in banks | 45,229 |
Accounts receivable | 146,452 |
Other receivables | 4,665,573 |
Prepaid expenses | 786 |
Escrows and acquisition deposits | 128,000 |
| |
Totalassets | $ 5,920,008 |
| |
See notes to financial statements.
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RAD DIVERSIFIED REIT, INC.
BALANCE SHEET JUNE 30, 2020
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES | | |
Accounts payable | | $ 18,028 |
Related party payable(Note 4) | | 444,677 |
Prepaid rents | | 850 |
Other payables | | 32 |
Security deposits | | 3,050 |
| | |
Liabilities | | 466,637 |
COMMITMENTS AND CONTINGENCIES(Note 5) | | - |
Totalliabilities | | 466,637 |
| | |
STOCKHOLDERS' EQUITY | | |
Capital stock, $.001 par value,
100,000,000 shares authorized,
503,465 shares issued and outstanding | $ 503 | |
Additional paid-in capital | 5,502,479 | |
Accumulated Deficit | (49,611) | |
| | |
Total stockholders' equity | | 5,453,371 |
| | |
Total liabilities and stockholders' equiy | | 5,920,008 |
See notes to financial statements.
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RAD DIVERSIFIED REIT, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2019
OPERATINGREVENUE | $ 67 |
| |
OPERATING EXPENSES(Schedule1) | 84,887 |
| |
Lossfromoperations | (68,202) |
| |
PROVISION FORINCOME TAXES | - |
| |
Net Loss | $ (68,202) |
| |
See notes to financial statements.
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RAD DIVERSIFIED REIT, INC.
STATEMENT OF OPERATIONS
FOR FISCAL YEAR 2020 AS OF JUNE 30, 2020
OPERATINGREVENUE | 319,176 |
| |
OPERATING EXPENSES(Schedule1) | 300,583 |
| |
Incomefromoperations | 18,593 |
| |
PROVISION FORINCOME TAXES | - |
| |
Net Profit | $ 18,593 |
| |
See notes to financial statements.
In the opinion of management, all adjustments necessary in order to make the interim financial
statements not misleading have been included.
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RAD DIVERSIFIED REIT, INC.
STATEMENT OF EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2019
| CommonStock | | | | | | |
| Shares | | Value | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Total |
Balance,
January 1, 2019 | 100 | | $ - | | $ 1,000 | | $ (2) | | $ 998 |
Capital contribution | 66,752 | | 67 | | 667,453 | | - | | 667,520 |
Net loss | | | - | | - | | (68,202) | | (68,202) |
Ending balance,
December 31, 2019 | 66,852 | | $ 67 | | $ 668,453 | | $ (68,204) | | $ 600,316 |
See notes to financial statements.
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RAD DIVERSIFIED REIT, INC.
STATEMENT OF EQUITY
FOR THE FISCAL YEAR OF 2020 AS OF JUNE 30, 2020
| Common Stock | | | |
| Shares | Value | Additional Paid-In Capital | Accumulated Deficit | Total |
Balance, JANUARY 1, 2020 | 66,852 | 668,520.00 | 668,520.00 | (68,203.48) | 600,316.52 |
Capital Contributions | 436,613 | 4,834,462.23 | 4,834,462.23 | | 4,834,462.23 |
Net Profit / (Loss) | | | | 18,592.25 | 18,592.25 |
| | | | | |
Ending Balance, JUNE 30, 2020 | 503,465 | 5,502,982.23 | 5,502,982.23 | (49,611.23) | 5,453,371.00 |
See notes to financial statements.
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RAD DIVERSIFIED REIT, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES | |
Net loss | | | $ (68,202) |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization expense | $ 3,772 | | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | (1,161) | | |
Other receivables | (32,474) | | |
Related party receivable/payable | 26,129 | | |
Prepaid expenses | (2,057) | | |
Escrows and acquisition deposits | (153,000) | | |
Accounts payable | 32,737 | | |
Prepaid rents | 850 | | |
Other payables | 115,000 | | |
Security deposits | 3,050 | | (7,154) |
Net cash used in operating activities | | | (75,356) |
CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Cash paid for purchase of real estate assets | (387,740) | | |
Net cash used in investing activities | | | (387,740) |
CASH FLOWS FROM FINANCING ACTIVITIES Capital contribution | 667,520 | | |
Net cash provided by financing activities | | | 667,520 |
Net increase in cash | | | 204,424 |
CASH ON HAND AND IN BANKS -
JANUARY 1, 2019 | | | 998 |
CASH ON HAND AND IN BANKS -
DECEMBER 31, 2019 | | | $ 205,422 |
See notes to financial statements.
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RAD DIVERSIFIED REIT, INC.
STATEMENT OF CASH FLOWS
FOR FISCAL YEAR 2020 AS OF JUNE 30, 2020
| Total |
OPERATING ACTIVITIES | |
Net Income | 18,592.25 |
Adjustments to reconcile Net Income to Net Cash provided by operations: | |
Accounts Receivable (A/R) | (106,390.50) |
Deposits With Vendors | 25,000.00 |
Deposits With Vendors:DDH Fund LP | 0.00 |
Deposits With Vendors:DHI Fund LP | 0.00 |
Deposits With Vendors:DHI Holdings LP | 0.00 |
Notes Receivable: DDH Fund LP | (2,085,790.97) |
Notes Receivable: DHI Fund LP | (1,531,184.81) |
Notes Receivable:DHI Holdings LP | (1,048,597.07) |
Prepaid Expenses:Prepaid Insurance | 1,271.16 |
Accounts Payable (A/P) | 282,444.60 |
Total Adjustments to reconcile Net Income to Net Cash provided by operations: | $ (4,463,247.59) |
Net cash provided by operating activities | $ (4,444,655.34) |
INVESTING ACTIVITIES | |
Investment Properties:Pennsylvania Properties:2120 W SPENCER ST | (130,000.00) |
Investment Properties:Pennsylvania Properties:2737 W EYRE | (40,000.00) |
Investment Properties:Pennsylvania Properties:4243 LEIDY | (40,000.00) |
Investment Properties:Pennsylvania Properties:4509 20TH STREET | (50,000.00) |
Investment Properties:Pennsylvania Properties:5056 SUMMER STREET | (50,000.00) |
Investment Properties:Texas Properties:1318 BURNWOOD ST | (60,000.00) |
Investment Properties:Texas Properties:19918 GREAT ELM DR. CYPRESS, TX | 0.00 |
Investment Properties:Texas Properties:917 ALMOND | (180,000.00) |
See notes to financial statements.
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RAD DIVERSIFIED REIT, INC.
STATEMENT OF CASH FLOWS
FOR FISCAL YEAR 2020 AS OF JUNE 30, 2020
(CONCLUDED)
Net cash provided by investing activities | $ (550,000.00) |
FINANCING ACTIVITIES | |
Net cash provided by financing activities | $ 4,834,462.23 |
Net cash increase for period | $ (160,193.11) |
Cash at beginning of period | 205,422.16 |
Cash at end of period | $ 45,229.05 |
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RAD DIVERSIFIED REIT, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2020
Note 1 - General
RADDiversifiedREIT,Inc.(the"Company")wasincorporatedonMay11,2017intheStateofMaryland.The Company'sobjectiveistoacquireandthenreposition(ifrequired),leaseandmanageincomeproducingsingle- familyresidential,multi-familyresidentialandmixed-useresidential/commercialpropertiesacrossprimaryandsecondarymarketsthroughouttheUnitedStates.Initially,theCompanywillconcentrateonacquiringaportfolio of properties in Pennsylvania, Texas, California and Florida, where the principals of management have significant investing and property managementexperience.
TheCompany'sprimaryintentistopurchasesingle-familyresidential,multi-familyresidentialandmixed-use residential/commercial properties at below-market-prices. Below-market-price purchases may be made at foreclosure auctions, Real-Estate-Owned property sales and tax-deedauctions.
Note 2 - Summary of Significant Accounting Policies
This summary of significant accounting policies of the Company is presented to assist in understanding the Company's financial statement. The financial statement and notes are representations of the Company's management who is responsible for their integrity and objectivity. These accounting policies conform to generallyacceptedaccountingprinciplesintheUnitedStatesofAmericaandhavebeenconsistentlyappliedin the preparation of the financialstatement.
Basis of Presentation
Thefinancialstatementshavebeenpreparedontheaccrualbasisofaccountinginaccordancewithaccounting principles generally accepted in the United States of America (USGAAP).
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the date of acquisition to be cash equivalents. There were no cash equivalents as of December 31, 2019.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents an estimate by the Company's management of specific accounts deemed uncollectible. As of December 31, 2019, the Company had $0 in allowance for doubtful accounts.
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RAD DIVERSIFIED REIT, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2020
Note 2 - Summary of Significant Accounting Policies(continued)
Income Properties, Real Estate and Depreciation
The Company depreciate buildings on a straight-line basis over estimated useful lives, generally 27.5 or 39 years depending on intended use of the property. The Company will capitalize all capital improvements associated with replacements, improvements or major repairs to real property that extend its useful life and depreciate them using the straight-line method over their estimated useful lives ranging from 3 to 30 years. Although no development projects are currently in progress, the Company will capitalize costs incurred in connectionwithourdevelopmentprojects,interestincurredonborrowingobligationsandotherinternalcosts during periods in which qualifying expenditures have been made and activities necessary to get the developmentprojectsreadyfortheirintendeduseareinprogress.Capitalizationofthesecostsbeginswhen theactivitiesandrelatedexpenditurescommenceandceaseswhentheprojectissubstantiallycompleteand readyforitsintendeduse,atwhichtimetheprojectisplacedintoserviceanddepreciationcommences.
TheCompanychargesmaintenanceandrepaircoststhatdonotextendanasset'susefullifetoexpenseas incurred.
The Company will periodically evaluate the net realizable value of its properties and provide a valuation allowance when it becomes probable there has been a permanent impairment of value.
Revenue Recognition
RevenueisrecognizedwhenitisprobablethattheeconomicbenefitwillflowtotheCompanyandtherevenue canbereliablymeasured.Revenueismeasuredatthefairvalueoftheconsiderationreceivedorreceivable. Rental income from operating leases is recognized over the life of the leaseagreements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the UnitedStatesofAmericarequiresmanagementtomakeestimatesandassumptionsthataffectthereported amountsofassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenues and expenses during the reported period. Management believes that the estimates utilized in preparing our financial statements are reasonable and prudent. Actual results could differ from thoseestimates.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are equal or approximate to their fair values due to the short-term maturity of those instruments.
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RAD DIVERSIFIED REIT, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2020
Note 2 - Summary of Significant Accounting Policies(continued)
Income Taxes
The Company will elect to be taxed as a Real Estate Investment Trust ("REIT") under the Internal Revenue ServiceCodebeginningwiththetaxableyearendedDecember31,2019.AsaREIT,theCompanygenerallyis notsubjecttofederalincometaxonincomethatisdistributedtoitsshareholders.IftheCompanyfailstoqualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at the regular Corporationtaxrate.TheCompanybelievesitisorganizedandwilloperateinsuchamannerastoqualifytobe taxedasaREITandintendstooperatesoastoremainqualifiedasaREITforfederalincometaxpurposes. Under the Internal Revenue Service Code, a REIT is subject to numerous organizational and operational requirements, including a requirement that it annually distribute at least 90% of its REIT taxable income (determined without regard to the deduction for dividends paid and excluding net capital gain) to its shareholders.Thereareadditionalspecificrequirementswhichmustbemetinordertobequalified,suchas organizational, income source and other requirements. Potentially significant monetary penalties, primarily keyed to taxable income, may be imposed on a REIT that fails to meet all relevantrequirements.
The Company, in accordance with FASB ASC 740 Topic, Income Taxes, performs the evaluation of tax positions taken or expected to be taken in the course of preparing the Company's tax returns to determine whether the tax positions are "more likely than not" of being sustained by the applicable tax authority. Tax positionsnotdeemedtomeetthemorelikelythannotthresholdwouldbederecognizedandrecordedasatax benefit or expense in the current year. However, the Company's conclusions regarding these uncertain tax positionswillbesubjecttoreviewandmaybeadjustedatalaterdatebasedonfactorsincluding,butnotlimited to, ongoing analysis of tax laws, regulations and interpretationsthereof.
Recent Accounting Standards
Standards Adopted
ASU2016-02,Leases(Topic842).Thisstandardamendsexistingleaseaccountingstandardsforbothlessees andlessors.Lesseesmustclassifymostleasesaseitherfinanceoroperatingleases.Forleasecontracts,or contracts with an embedded lease, with a duration of more than one year in which we are the lessee, the presentvalueoffutureleasepaymentsarerecognizedonourconsolidatedbalancesheetsasaright-of-use assetandacorrespondingleaseliability.LessorsLeasecontractscurrentlyclassifiedasoperatingleasesare accounted for similarly to priorguidance.
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RAD DIVERSIFIED REIT, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2020
Note 2 - Summary of Significant Accounting Policies(continued)
However, lessors are required to account for each lease and non-lease component, such as common area maintenance or tenant service revenues, of a contract separately. In July 2018, the FASB issued 2018-11, Leases(Topic842)-TargetedImprovements("ASU2018-11"),whichprovideslessorsoptionaltransitionrelieffromimplementingthisaspectofASU2016-02ifthefollowingcriteriaaremet:(1)bothcomponentshavethe sametimingandpatternofrevenueand(2)ifaccountedforseparately,bothcomponentswouldbeclassified as an operatinglease.
Recent Accounting Standards
Also,underASU2016-02,onlyincrementalcostsorinitialdirectcostsofexecutingaleasecontractqualifyfor capitalization, while prior accounting standards allowed for the capitalization of indirect leasingcosts.
WeadoptedthenewstandardasofJanuary1,2019.Theadoptionofthenewstandarddidnothaveamaterialimpact on our financialstatements.
Date of Management's Review
Management has evaluated subsequent events through April 12, 2020, the date on which the financial statements were available to be issued.
Note 3 - Real Estate Assets
Real estate assets at June 30, 2020 consists of the following:
Land | $ 119,744 |
Buildings | 817,966 |
Less: accumulated depreciation | (3,772) |
Real estate assets, net | $ 933,968 |
The depreciation expense of real estate assets was $0.00 for the financial year 2020 as of June 30, 2020.
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RAD DIVERSIFIED REIT, INC
. NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2020
Note 4 - Certain Relationships and Related Transactions
OneoftheCompany'scurrentstockholdersalsocontrolsthelimitedliabilitycompany,RADManagement,LLC. Inamanagementagreementcommencingwiththefirstcalendarquarterof2018,RADManagement,LLCwill performtheroleoftheManagerandadvisoroftheCompany.TheManagerwilloverseeday-to-dayoperations andmakeallinvestmentdecisions.Theagreementshallremainineffectfor10years,unlessterminatedearly bymutualwrittenconsent.Theagreementcontainsanassetmanagementfeeandapropertymanagementfee.
AssetManagementFee.Beginninginthefirstcalendarquarterof2018,RADManagement,LLCwillreceivea quarterlyassetmanagementfee,payableinarrears,equaltoanannualizedrateof2.00%oftheCompany's combined net assetvalue.
Note 4 - Certain Relationships and Related Transactions(concluded)
PropertyManagementFee.TheCompanyshallpaytoManageranannualpropertymanagementfee,of4.0% ofthemonthlygrossrevenuegeneratedbyalloftherealestateassets.TheCompanyshallpaytheproperty management fee in arrears on a monthly basis with the arrear amount split into 12 equalpayments.
The following summarizes expenses incurred with RAD Management, LLC as of June 30, 2020.
Property management fees | $ 1,440 |
Asset management fees | 12,425 |
Professional fees | 67,382 |
Acquisition fees | 8,000 |
As of June 30, 2020 the related party payable to RAD Management, LLC was $87,386
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Note 5 - Commitments and Contingencies
Legal
TheCompany,fromtimetotime,couldbeinvolvedinordinaryroutinelitigationincidentaltotheconductofits business. The Company believes that no presently pending litigation matters are likely to have a material adverse effect on the Company's financial statements or results of operations, taken as awhole.
Note 6 - Concentration of Credit Risk
The Company maintains its cash balance at a bank located in Florida. These accounts are insured by the FederalDepositInsuranceCorporationuptoabalanceof$250,000.TheCompanymaintainsitscashinbank depositaccounts,which,attimes,mayexceedfederallyinsuredlimits.TheCompanyhasnotexperiencedanylossesinsuchaccounts.TheCompanybelievesitisnotexposedtoanysignificantcreditriskoncashandcash equivalents.
Concentrationsofmarket,interestrateandcreditriskmayexistwithrespecttotheCompany'sinvestmentsanditsotherassetsandliabilities.MarketriskisapotentiallosstheCompanymayincurasaresultofchangesin thefairvalueofitsinvestments.TheCompanymayalsobesubjecttoriskassociatedwithconcentrationsof investmentsingeographicregionsandindustries.Interestrateriskincludestheriskassociatedwithchangesin prevailing interest rates. Credit risk includes the possibility that a loss may occur from the failure of counterparties or issuers to make payments according to the terms of acontract.
The Company's investments are also subject to valuation and liquidity risk, financing risk, development financing risk and diversification risk.
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RAD DIVERSIFIED REIT, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2020
Note 6 - Concentration of Credit Risk(concluded)
The real estate market is cyclical in nature. Investment values are affected by, among other things, the availability of capital, vacancy rates, rental rates, interest rates, and inflation rates. Determining real estate values involves many assumptions that may be subjective. As a result, amounts ultimately realized from the real estate investments may vary significantly from the estimates presented and the differences could be material to the financial statements.
Note 7 - Leases
Leasing as a Lessor - Future minimum rental income
As of June 30, 2020, non-cancelable operating leases provide for future minimum rental income from continuing operations as follows:
2020 | $ 47,700 |
2021 | 39750 |
| $ 87,450 |
Certainleasesmaybeexcludedasthetermsaregenerallyforoneyearorless.Rentalincomeundermostof theseleasesincreaseinfutureyearsbasedonagreed-uponpercentagesorinsomeinstances,changesinthe Consumer PriceIndex.
Note 8 - Cash Flow Information
TheCompanyconsidersallshort-terminvestmentswithanoriginalmaturityofthreemonthsorlesstobecash equivalents.
Cash paid for interest and income tax during the period were as follows:
Interest $ -
Income tax $ -
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RAD DIVERSIFIED REIT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019
Note 9 - Subsequent Events
TheCompanyevaluateditsJune 30, 2020financialstatementsforsubsequenteventsthroughthedate the financial statements were issued. As a result of the spread of the COVID-19 coronavirus, economic uncertaintieshavearisenwhichcouldpotentiallyhaveanegativefinancialimpactthoughsuchpotentialimpactis unknown at thistime.
SUPPLEMENTARY INFORMATION SCHEDULE 1 - OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 2019
Total Acquisition Costs | $ 10 |
ACQUISITION FEES | $ 8,000 |
Advertising & Marketing | $ 6,838 |
AUCTION EXPENSES | $ 2,562 |
AUDIT FEES | $ 15,000 |
Bank Charges & Fees | $ 410 |
COMPUTER AND INTERNET EXPENSES | $ 28,070 |
Dues & subscriptions | $ 178 |
Legal & Professional | $ 134,462 |
Asset Management Fees | $ 12,425 |
Property Insurance | $ 1,271 |
Property Management Fees | $ 1,440 |
Property Taxes | $ 54 |
REPAIRS TO PROPERTIES | $ 4,475 |
REFERRAL FEES | $ 4,000 |
SHAREHOLDER GOODWILL | $ 445 |
Taxes & Licenses | $ 1,625 |
Utilities | $ 318 |
Total Expenses | $ 221,584 |
See independent auditor's report and accompanying notes to financial statements.
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Item 4. Exhibits
Please find Exhibits as enumerated below:
Exhibit 2A:Charter of Company
Exhibit 2B:Bylaws of Company
Exhibit 3: Stock Certificate of Company with Legend
Exhibit 4:Subscription Agreement
Exhibit 6C:Management Agreement
Exhibit 8:Escrow Agreement
Exhibit 10:Legality of Shares
Exhibit 16A:Subscription Agreement / Real Estate Purchase DHI Fund, LP
Exhibit 16B:Subscription Agreement / Real Estate Purchase DHI Holdings, LP
Exhibit 16C:Subscription Agreement / Real Estate Purchase DDH Fund, LP
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SIGNATURES
Pursuant to the requirements of RegulationA, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RAD Diversified REIT, Inc.
By: /s/ Brandon Mendenhall November 3, 2020
Brandon Mendenhall, Chief Executive Officer
Pursuant to the requirements of RegulationA, this report has been signed below by the followingpersons on behalf of the issuer and in the capacities and on the dates indicated.
Signature | Title | Date |
/s/ Brandon Mendenhall | Chief Executive Officer,
Acting Chief Financial Officer | November 3, 2020 |
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