UNITEDSTATES
SECURITIESAND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-K
ANNUAL REPORT
ANNUAL REPORT PURSUANT TO REGULATION A
OF THE SECURITIES ACT OF 1933
For the fiscal year ended December 31, 2019
Maryland (State or other jurisdiction of |
| 82-2026337 (I.R.S. Employer |
1306 MONTE VISTA AVE., NO. 5 (Address of principal |
| 91786 (Zip Code) |
(855-909-9294)
Registrant's telephone number, including area code
COMMON SHARES
(Title of each class of securities issued pursuant to RegulationA)
PART II
This Annual Report as filed on Form 1-K 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.
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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.
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 annual report on Form 1-K and the risk that actual results will differ materially from the expectations expressed in this annual report on Form 1-K 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 annual report on Form 1-K, 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 annual report on Form 1-K, 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 annual report on Form 1-K will be achieved.
Item 1 - The Business
Company Overview
RAD Diversified REIT, Inc. was formed as of May 11, 2017 as a Maryland corporation, and we intend to elect to be taxed as a REIT for federal income tax purposes. Our 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.
Our 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. We refer to our investments in real property as "Investments".
Qualification of Offering Pursuant to Regulation A
On November 1, 2019, the SEC issued a qualification letter for our Offering Circular dated October 24, 2019 (the "Offering Circular"). Pursuant to the Offering Circular, we are seeking to raise up to $50,000,000 through the sale of Common Stock under Regulation A (the "Offering"). The Offering Circular is available through the SEC's EDGAR site, www.sec.gov/edgar, and may also be obtained by contacting the Company.
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Principal Products and Services
We research available properties to identify suitable investments and attend tax deed auctions in various locations. We purchase suitable properties and receive a tax deed from the Tax Collector. As such, we typically purchase 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.
We rehabilitate 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, We do reclaim our purchase price, rehabilitation costs, associated fees, interest penalty, property management fees, insurance paid, and any other directly related property fees.
REIT Qualification
In order to qualify as a REIT, we must distribute to our stockholders at least 90% of our annual taxable income. We intend to make regular cash distributions to our stockholders out of our cash available for distribution, typically on an annual basis.
Distributions
Our board of directors will determine the amount of distributions to be distributed to our stockholders on an annual basis. The board's determination will be based on a number of factors, including funds available from operations, our capital expenditure requirements and the annual distribution requirements necessary to maintain our REIT qualification under the Code.
Our distribution rate and payment frequency may vary from time to time. Generally, our policy will be to pay distributions from cash flow from operations. However, our distributions may be paid from sources other than cash flows from operations, such as from the proceeds of this Offering, borrowings, advances from our Manager or from our Manager's deferral of its fees and expense reimbursements, as necessary.
Item 2. Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations
Initial Proceeds
The Company raised $668,520 during the last two months of 2019. Management believes this is an excellent beginning considering that a Notice of Qualification for its Offering Circular was issued by the SEC on November 1, 2019. As a result, 66,852 shares of common stock are now outstanding.
The Company also began acquiring real estate in accordance with its business model. By the end of Fiscal Year 2019, the Company had acquired 5 properties, which are enumerated in the table below. The table entitled "Real Estate Holdings End of 2019" also presents the acquisition price of these real estate holdings. Several of these properties have ongoing leases which are producing revenue in accordance with the Company's business model.
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Real Estate Holdings End of 2019
PROPERTY | ACQUISITION PRICE | MONTHLY RENT |
2627 23RD ST | $ 17,000 | $ 850 |
2000 S SALFORD UNIT 1 | $ 192,740 | $ 1,350 |
2000 S SALFORD UNIT 2 | $ 850 | |
6408 CARLTON | $ 43,000 | --- |
6661 CORNELIUS | $ 115,000 | $ 1,000 |
0 FM 1960 RD WEST | $ 20,000 | --- |
Fundraising in 2020
The Company's has demonstrated successful fundraising by utilizing face-to-face social events. The Company experienced significant early fundraising success after it received qualification of its Offering Circular. This, though, may not be indicative of future fundraising activities. In the past few weeks, the United States has found itself in an epoch battle against an invisible enemy - the coronavirus (a.k.a. "COVID-19"). This highly contagious virus may have an impact on the Company's ability to raise money in support of its business model.
In an effort to quell the spread of COVID-19, most states have issued "shelter-in-place" orders. The Federal Government in the United States advises the population to "avoid social gatherings in groups of more than 10 people", see "The President's Coronavirus Guidelines for America" published on or about March 16, 2020. These guidelines further discourage discretionary travel, shopping trips, and social visits.
In response to the COVID-19 crisis, a "social distancing" tactic is being applied in order to slow the spread of the virus. Because of government mandates for social distancing, the Company is not able to raise money through traditional social gatherings, at least not for the next few months.
Being a forward thinking Company that adapts to change rather quickly, the Company has launched an online fundraising campaign. Through the use of webinars and other online education channels, the Company is regaining its fundraising capacity. Should the Company not be able to meet its fundraising objectives, it may not be able to meet its intended real estate purchase objectives for fiscal year 2020.
At the time of this writing, the Company believes it will be able to rekindle fundraising using face-to-face social events. New information suggests that a much wider swath of the population has been infected and has ultimately overcome the coronavirus. The Company believes that this new information, and the need to rebuild the American economy will lead to abated gathering restrictions in the near future. All of this said, the Company will rely on its new online fundraising capability until it can again utilize "meet and greet" fundraising techniques.
In light of the most recent scientific data, many states are beginning to lift the shelter-in-place orders. Social distancing guidelines will continue to be maintained, but this will allow the Company to rekindle its social-based fundraising strategies. The Company believes that, in conjunction with its new online fundraising campaign, such modified fundraising approaches will allow the Company to achieve its fundraising, and real estate acquisition goals.
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COVID-19 - No Impact on Revenue
COVID-19 is wreaking havoc with our nation's economy. However, because the Company invests mainly in residential real estate, it has not felt any impact as a result of shelter-in-place orders issued by state and local governments. The Company's real estate investments target middle and lower income families.
The company also believes that, as it continues to increase its real estate holdings, it will be relatively immune to economic factors attributable to COVID-19. This is primarily due to aggressive economic stimulus programs approved by the federal government. Even though low income families have been hard hit by layoffs in the workplace, they will still be capable of paying rent because of new economic stimulus measures.
These stimulus measures include an additional $600 per week in unemployment benefits above and beyond state allotments. Most taxpayers will also receive a one-time payment of $1,200 per person or $2,400 per couple, with an additional $500 for each qualifying child.
In light of Federal Government relief that is now flowing to the aid of lower and middle income residential tenants, the Company does not foresee any disruption in revenue during the upcoming 2020 Fiscal Year.
Liquidity
As shown on our audited financial statements, including our balance sheet, the Company had $205,422 in cash-on-hand at the end of Fiscal Year 2019. The Company continues to attract investors and is in the process of acquiring additional investments. New investments will be used to acquire additional real estate.
The Company has dedicated $153,000 as deposits on additional real estate. These acquisitions have not been full consummated. In the 3rd quarter of 2020, the Company will complete these purchases using an additional $92,000 of its cash-on-hand. Remaining cash-on-hand is sufficient to maintain operations through the end of Fiscal Year 2020.
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Item 3. DirectorsandOfficers
Company's Direct Managers
Name | Position | Age | Term of Office | Approximate hours per week for part-time employees |
Executive Officers: |
|
|
|
|
Mendenhall, Brandon | Chief Executive Officer, Acting Chief Financial Officer | 39 |
| FULL TIME |
Bowling, Randle | Chief Operating Officer | 41 |
| FULL TIME |
Vaugn, Amy | Chief Security Officer | 40 |
| FULL TIME |
|
|
|
|
|
Directors: |
|
|
|
|
Mendenhall, Brandon | Chairperson, Board Member | 39 |
| FULL TIME |
Bowling, Randle | Board Member | 41 |
| FULL TIME |
Vaugn, Amy | Board Member | 40 |
| FULL TIME |
Significant Employees: | The Company outsources all functions through its manager, RAD Management, LLC |
|
|
|
Brandon Mendenhall, Director and CEO
Brandon "Dutch" Mendenhall is a real estate investor and educator who specializes in the use of tax deeds and real estate leverage to invest in opportunities in the single-family residential housing market. He began his business career as an executive recruiter specializing in commercial real estate and banking. In 2008, Mr. Mendenhall started Tax Auction Investors, a real estate education platform where he has mentored thousands of students while coaching them through their real estate deals.
Mr. Mendenhall presently acts as the chief executive officer and sponsor of DHI Holdings Texas, LLC, the general partner of DHI Holdings, LP, an investment partnership sponsored and formed by Mr. Mendenhall for the purpose of acquiring single family residential real estate on an opportunistic and value-added basis. He also serves as the chief executive officer and chief investment officer for DDH Capital Management, LLC, the general partner and sponsor of DDH Fund LP, a real estate investment partnership formed in early 2016 to similarly invest in single family residential real estate on an opportunistic and value added basis.
Randle J. Bowling, Director, COO
Mr. Bowling enlisted in the Army as an Intelligence Analyst and trained in South Carolina until he was deployed to South Korea where he served for two years. In 2001 he left the Army after having attained the rank of sergeant and enrolled at the Pan Am University Flight School and Embry-Riddle Aeronautical University where he majored in Professional Aeronautics and minored in Aviation Management.
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Upon graduation in 2004 Bowling worked as a First Officer at Colgan Air in West Virginia and, a year later, was promoted to Captain. Mr. Bowling is extensively involved in short sale education and commercial real estate education at Tax Auction Investors. Mr. Bowling also manages the day to day operations for Tax Auction Investors.
Mr. Bowling applies his knowledge of system development, which he acquired while serving in the Army, to implement investment automation systems.
He serves as director for the Company and also act as the Chief Operations Officer and Chief Investment Officer of each of our Company.
Amy Vaughn, Director and CSO
Amy Vaughn has been actively involved in real estate coaching for two decades. In 2008 she met Dutch Mendenhall & Randle Bowling and they combined their coaching and educational resources to develop what is now Tax Auction Investors.
Ms. Vaughn holds a Bachelor of Arts in Marketing and Business Management from Temple University, Philadelphia.
Compensation of Directors and Executive Officers
None of the named Directors and Executive Officers of our Company were paid money or granted equity in either of the last two fiscal years. As such, we have not included a Summary Compensation Table.
Our Company had projected it would pay salaries to its Executive Officers the 1st year after qualification of its Offering Circular. However, due in great part to the COVID-19 pandemic, this plan has been delayed until the beginning of 2021. Our Company projects it will pay each named Executive Officer a total of $107,000 in salary for Fiscal Year 2021.
Executive Officer | Fiscal Year | Base Salary |
Amy Vaughn | 2021 | $107,000 |
| 2022 | $184,069 |
| 2023 | $216,552 |
| 2024 | $249,034 |
| 2025 | $286,390 |
Brandon "Dutch" Mendenhall | 2021 | $107,000 |
| 2022 | $184,069 |
| 2023 | $216,552 |
| 2024 | $249,034 |
| 2025 | $286,390 |
Randle J. Bowling | 2021 | $107,000 |
| 2022 | $184,069 |
| 2023 | $216,552 |
| 2024 | $249,034 |
| 2025 | $286,390 |
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Our Company projects that it will pay each named Executive Officer a total salary of $184,069 in Fiscal Year 2022, $216,552 in Fiscal Year 2023, $249,034 in Fiscal Year 2024year, and $286,390 in the Fiscal Year 2025d. This represents a 15% increase per year in salary for each named Executive Officer.
Our Company does not plan to award any named Executive Officer an equity grant for compensation for their services in years one through five.
We will pay the listed amounts to our named Executive Officers. Our Manager will compensate its Executive Officers out of the fees we pay our Manager. We will not directly reimburse our Manager for any sums paid to its own executive officers.
Item 4. SecurityOwnershipofManagementandCertainSecurityholders
Individual or entities that own more than 10% of all outstanding shares are identified in the Beneficial Ownership Table, below.
Beneficial Ownership Table
Title of Class | Name and address of beneficial owner (1) | Amount and nature of beneficial ownership | Amount and nature of beneficial ownership acquirable (2) | Percent of class (3) |
COMMON SHARES | C. ADKINS | 12,500 SHARES | NONE | 18.68% |
COMMON SHARES | G. LI | 8,000 SHARES | NONE | 11.96% |
COMMON SHARES | J. YUWEN | 10,000 SHARES | NONE | 14.95% |
Item 5. InterestofManagementandOthersinCertainTransactions
Management has no interest in any financial transaction requiring disclosure.
Item 6. OtherInformation
The Company has timely filed all necessary current reports on Form 1-U prior to this filing. The Company has no other information to report at this time.
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Item 7. FinancialStatements
RAD Diversified REIT, Inc.
Audited Financial Statements December 31, 2019
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RAD DIVERSIFIED REIT, INC.
TABLE OF CONTENTS
(FINANCIAL STATEMEMTS)
11 | |
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FINANCIAL STATEMENTS |
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Balance Sheet, December 31,2019 |
|
13 | |
14 | |
Statement of Operations for the year ended December 31, 2019 | 15 |
Statement of Equity for the year ended December 31,2019 | 16 |
Statement of Cash Flows for the year ended December 31,2019 | 17 |
18 | |
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Independent Auditor's Report
To the Board of Directors
RAD Diversified REIT, Inc.
Report on the Financial Statements
WehaveauditedtheaccompanyingfinancialstatementsofRADDiversifiedREIT,Inc.(aMarylandcorporation)(the"Company"),whichcomprisethebalancesheetasofDecember31,2019,andtherelatedstatementsof operations,equityandcashflowsfortheyearendedDecember31,2019,andtherelatednotestothefinancial statements.
Management's Responsibility for the Financial Statements
Managementisresponsibleforthepreparationandfairpresentationofthefinancialstatementsinaccordance with accounting principles generally accepted in the United States of America; this includes the design, implementation,andmaintenanceofinternalcontrolrelevanttothepreparationandfairpresentationoffinancial statements that are free from material misstatement, whether due to fraud orerror.
Auditor's Responsibility
Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudit.Weconductedouraudit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of materialmisstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financialstatements.Theproceduresselecteddependontheauditor'sjudgment,includingtheassessmentof theriskofmaterialmisstatementofthefinancialstatements,whetherduetofraudorerror.Inmakingthoserisk assessments,theauditorconsidersinternalcontrolrelevanttotheentity'spreparationandfairpresentationof thefinancialstatementsinordertodesignauditproceduresthatareappropriateinthecircumstances,butnot forthepurposesofexpressinganopinionontheeffectivenessoftheentity'sinternalcontrols.Accordingly,we expressnosuchopinion.Anauditalsoincludesevaluatingtheappropriatenessofaccountingpoliciesusedandthereasonablenessofthesignificantaccountingestimatesmadebymanagement,aswellasevaluatingthe overall presentation of the financialstatements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
(Continued)
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To the Board of Directors of RAD Diversified REIT, Inc.
Independent Auditor's Report
Page 2
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial positionofRADDiversifiedREIT,Inc.asofDecember31,2019,andtheresultsofitsoperationsanditscash flowsfortheyearendedDecember31,2019inaccordancewithaccountingprinciplesgenerallyacceptedintheUnited States of America.
Report on Supplementary Information
Ourauditwasconductedforthepurposeofforminganopiniononthebasicfinancialstatementsasawhole. Schedule1-OperatingExpensesispresentedforpurposesofadditionalanalysisandisnotarequiredpartof thebasicfinancialstatements.Suchinformationistheresponsibilityofmanagementandwasderivedfromand relatesdirectlytotheunderlyingaccountingandotherrecordsusedtopreparethefinancialstatements.The informationhasbeensubjectedtotheauditingproceduresappliedintheauditofthefinancialstatementsand certainadditionalprocedures,includingcomparingandreconcilingsuchinformationdirectlytotheunderlying accounting and other records used to prepare the financial statements or to the financial statements themselves,andotheradditionalproceduresinaccordancewithauditingstandardsgenerallyacceptedinthe UnitedStatesofAmerica.Inouropinion,theinformationisfairlystatedinallmaterialrespectsinrelationtothe financial statements as awhole.
KHO & PATEL
San Dimas, California
April 12, 2020
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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 |
|
|
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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, | $ 67 |
|
Additional paid-in capital | 668,453 |
|
Accumulated Deficit | (68,204) |
|
|
|
|
Total stockholders' equity |
| 600,316 |
|
|
|
Total liabilities and stockholders' equ |
| $ 778,082 |
See independent auditor's report and accompanying notes to financial statements.
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) |
|
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RAD DIVERSIFIED REIT, INC.
STATEMENT OF EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2019
| CommonStock |
|
|
|
|
|
| ||
| Shares |
| Value |
| Additional |
| Accumulated |
| Total |
Balance, | 100 |
| $ - |
| $ 1,000 |
| $ (2) |
| $ 998 |
Capital contribution | 66,752 |
| 67 |
| 667,453 |
| - |
| 667,520 |
Net loss |
|
| - |
| - |
| (68,202) |
| (68,202) |
Ending balance, | 66,852 |
| $ 67 |
| $ 668,453 |
| $ (68,204) |
| $ 600,316 |
See independent auditor's report and accompanying notes to financial statements.
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 - |
|
| 998 |
CASH ON HAND AND IN BANKS - |
|
| $ 205,422 |
See independent auditor's report and accompanying notes to financial statements.
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RAD DIVERSIFIED REIT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019
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
DECEMBER 31, 2019
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
DECEMBER 31, 2019
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
DECEMBER 31, 2019
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 December 31, 2019 consists of the following:
Land | $ 56,774 |
Buildings | 330,966 |
Less: accumulated depreciation | (3,772) |
Real estate assets, net | $ 383,968 |
The depreciation expense of real estate assets was $3,772 for the year ended December 31, 2019.
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RAD DIVERSIFIED REIT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019
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.
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 December 31, 2019.
Property management fees | $ 411 |
Asset management fees | 5,129 |
Professional fees | 22,015 |
Acquisition fees | 5,000 |
As of December 31, 2019 the related party payable to RAD Management, LLC was $26,129.
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.
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RAD DIVERSIFIED REIT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019
Note 6 - Concentration of Credit Risk (concluded)
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.
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 December 31, 2019, non-cancelable operating leases provide for future minimum rental income from continuing operations as follows:
2020 | $ 29,230 |
2021 | 720 |
| $ 29,950 |
Certainleasesmaybeexcludedasthetermsaregenerallyforoneyearorless.Rentalincomeundermostof theseleasesincreaseinfutureyearsbasedonagreed-uponpercentagesorinsomeinstances,changesinthe Consumer PriceIndex.
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Note 8 - Cash Flow Information
TheCompanyconsidersallshort-terminvestmentswithanoriginalmaturityofthreemonthsorlesstobecash equivalents.
Cash paid for interest and income tax during the period were as follows:
Interest $ -
Income tax $ -
Note 9 - Subsequent Events
TheCompanyevaluateditsDecember31,2019financialstatementsforsubsequenteventsthroughthedate the financial statements were issued. As a result of the spread of the COVID-19 coronavirus, economic uncertaintieshavearisenwhichcouldpotentiallyhaveanegativefinancialimpactthoughsuchpotentialimpactis unknown at thistime.
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SUPPLEMENTARY INFORMATION SCHEDULE 1 - OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 2019
Acquisition fees | $ 5,033 |
Advertising | 6,287 |
Asset management fees | 5,129 |
Auction supplies | 63 |
Automobile expenses | 806 |
Bank fees | 370 |
Computer expenses | 211 |
Depreciation and amortization | 3,772 |
Dues and subscriptions | 260 |
Meals and entertainment | 202 |
Office expenses | 85 |
Professional fees | 41,420 |
Property foreclosure costs | 10,000 |
Property management fees | 411 |
Real estate expenses | 3,732 |
Referral fees | 6,400 |
Taxes and licenses | 606 |
Utilities | 100 |
|
|
Total Operating Expenses | $ 84,887 |
See independent auditor's report and accompanying notes to financial statements.
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Item 8. 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 11:Auditor Consent
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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 April 29, 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, | April 29, 2020 |
/s/ Randle J. Bowling | Chief Security Officer | April 29, 2020 |
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